Craft Beer Boom Generates Unique Challenges

BMI View: Production of craft beer in the US has risen strongly in recent years, a trend that will continue as consumers continue to move away from mainstream varieties. This part of the market has attracted interest from small brewers and multinationals alike; however, growth will not be without challenges. US brewers could face a rise in the price of hops - a key input that adds flavour - as hops are typically used in much greater amounts in craft beer production compared with mainstream beer.

We recently published an article examining why the mainstream US beer market outperforms the UK market in terms of profitability ( see 'Framework Shows Why US Beer Industry Is More Profitable Than UK,' May 2). We also observed how per capita beer consumption in the US has been on the decline for a number of years. This is driven by two key factors: 1) an ongoing craft beer boom that has fuelled a growing indifference towards mainstream beer; 2) strong growth momentum in spirits, particularly whisky, among young Americans. The US craft beer industry is worth about USD14bn in sales per year, according to the Financial Times, representing about 18% of the consolidated beer market based on our value sales data for the US.

As the chart below illustrates, the production of craft beer has gone through the roof over the past few years, and we expect the pace of growth to remain strong over our forecast period to 2018. Beer drinkers are increasingly looking for authenticity, more flavour and sometimes more alcohol content in their beer, having grown tired of mainstream processed beer that is made on an enormous scale. This is a trend we do not believe is going away.

Production Growth To Remain Strong
Mid-Year Craft Production Volume (mn barrels), 2009-2013

BMI View: Production of craft beer in the US has risen strongly in recent years, a trend that will continue as consumers continue to move away from mainstream varieties. This part of the market has attracted interest from small brewers and multinationals alike; however, growth will not be without challenges. US brewers could face a rise in the price of hops - a key input that adds flavour - as hops are typically used in much greater amounts in craft beer production compared with mainstream beer.

We recently published an article examining why the mainstream US beer market outperforms the UK market in terms of profitability ( see 'Framework Shows Why US Beer Industry Is More Profitable Than UK,' May 2). We also observed how per capita beer consumption in the US has been on the decline for a number of years. This is driven by two key factors: 1) an ongoing craft beer boom that has fuelled a growing indifference towards mainstream beer; 2) strong growth momentum in spirits, particularly whisky, among young Americans. The US craft beer industry is worth about USD14bn in sales per year, according to the Financial Times, representing about 18% of the consolidated beer market based on our value sales data for the US.

As the chart below illustrates, the production of craft beer has gone through the roof over the past few years, and we expect the pace of growth to remain strong over our forecast period to 2018. Beer drinkers are increasingly looking for authenticity, more flavour and sometimes more alcohol content in their beer, having grown tired of mainstream processed beer that is made on an enormous scale. This is a trend we do not believe is going away.

Production Growth To Remain Strong
Mid-Year Craft Production Volume (mn barrels), 2009-2013

The emergence of the craft beer segment has prompted a rapid increase in breweries in recent years. Defined loosely as breweries producing fewer than 6mn barrels a year, craft brewers traditionally focus on high quality ingredients and innovative flavouring. Although associated with small, private producers, a flurry of multinational interest in the segment is a clear indication of craft beer's promise as mainstream volumes continue to slide. SABMiller's ownership of the Blue Moon and Leinenkugel brands (via its MillerCoors unit) and AB InBev's purchase of Chicago-based Goose Island in 2011 highlight a continued drive by the mainstream giants to get in on the action. These major companies are likely to continue focusing on key brands within their craft portfolios as they look to scale them up and put significant marketing and advertising dollars behind them.

One of the key challenges that will be faced by craft beer companies in the US is a potential rise in the price of hops - a key input that adds flavour. Hops are typically used in much greater amounts in craft beer production compared with mainstream beer. Hops producers have been struggling to keep up with the enormous rise in procurement from craft beer producers. The procurement abilities of microbrewers are generally less developed than the larger craft beer companies so they have much less ability to enter into forward contracts to lock in prices for their hops inventory.

Waning Interest In Mainstream Beer Responsile For Declines
US - Per Capita Beer Consumption (litres)

The Boston Beer Company is the biggest US craft-beer focused company; it has grown tremendously over the past few years, with annual sales growth over its past five financial years averaging more than 10%. As the third chart shows, its shares trade at a significant premium to AB InBev's and SABMiller's. The latter two admittedly operate on a totally different scale as the biggest beer companies in the world; however, in our view the comparison underlines the premium investors have been willing to pay for exposure to craft beer.

The Craft Beer Premium
Select Beer Companies - Price/Book Ratio

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Related sectors of this article: Food & Drink, Drink
Geography: United States
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