How to Invest in Craft Beer

How to Invest in Craft Beer

If you’ve been to a bar or liquor store in the last decade or two, you’ve probably noticed some changes in the beer selection. Craft beer has been on the rise as thousands of brewers opened for business in the past few decades. As fans of the small-batch brews like to tell it: In the dark ages (the 1980s), there was only Bud and Bud Light and maybe Michelob, if you were lucky. But a boom in small-scale (a.k.a. craft) brewers saved the taste buds of drinkers across the nation by promoting styles such as India pale ales, sours, and porters, which have since become commonplace in bars and liquor stores.

Today, the craft beer industry has gone mainstream, and many popular brands have been bought out by large brewers like Constellation Brands (NYSE:STZ) or joined the Craft Brew Alliance (NASDAQ:BREW), a consortium of craft brewers. Sam Adams parent Boston Beer (NYSE:SAM) is a rare stock that makes the bulk of its sales from craft beer, and is one of the pioneers in the industry, but it is seen as too mainstream by some consumers.

In this in-depth look at the craft beer market, we’ll explore what makes a craft beer, where the industry stands today, and examine what individual stocks in the craft beer industry have to offer investors.

What is craft beer?

The definition of craft beer is much simpler than it sounds. It’s not determined by a particular style, flavor, or set of ingredients. Whether or not a beer can be called “craft” largely depends on the size of the brewer and who owns it.

The Brewers Association, a trade group representing over 7,200 independent brewers, defines craft brewers as small, independent, and traditional. Annual production of beer must be 6 million barrels or less, the equivalent of about 1.5 billion pints, according to the Brewers Association, and beer must represent a majority of a craft brewer’s alcohol production — flavored malt beverages, like hard iced tea or lemonade, don’t count. To be considered craft, a brewery also cannot give up more than a 25% ownership or controlling stake to an alcoholic beverage company that isn’t a craft brewer.

Macrobrews, by contrast, produce a much higher volume than 6 million barrels. In 2016, there were 33.8 million barrels of Bud Light sold in the U.S. alone, making it the top-selling beer in the country. Because of the way craft beer is defined, craft brands that are bought by larger brewers like AB InBev (NYSE:BUD) or Molson Coors Brewing (NYSE:TAP) are no longer defined as craft beer even though they may be thought of that way by the drinking public.

Growth of craft brewing

In 1978, there were just 89 breweries in the United States, but President Carter’s deregulation of the beer industry a year later created opportunities for new companies. The number of brewers began climbing in the late ’80s — around the time Boston Beer opened its doors — and by 1990, there were 284 brewers in the country. The industry grew rapidly over the next decade, though, bringing the total to 1,564 domestic breweries in 1999. Growth then slowed in part due to the tech bubble bursting, but it took off rapidly beginning in 2010 marking craft beer’s transition to the mainstream. As of last year, there were 6,372 breweries in the U.S.

The chart below shows the category’s growth since 2012. As you can see, the number of breweries have nearly tripled since then.

The Brewers Association classifies craft brewers in four different categories: regional brewery, microbrewery, brewpub, and contract brewery.

Where craft beer is today

According to the Brewers Association, craft beer sales grew 5% last year, compared to a 1% drop in overall beer sales, and craft now makes up 12.7% of the market by volume. However, in terms of dollar sales, craft beer is nearly 25% of the market, making up $26 billion of $111.4 billion domestic beer sales, as the small brands command a higher price point at bars and liquor stores.

Craft beer may have passed its peak as the market appears to be maturing and growth has slowed from the double-digit pace seen earlier in the decade. Bart Watson, chief economist at Brewers Association, said, “Growth for the craft brewing industry is adapting to the new realities of a mature market landscape. Beer lovers are trending toward supporting their local small and independent community craft breweries. At the same time, as distribution channels experience increased competition and challenges, craft brewer performance was more mixed than in recent years, with those relying on the broadest distribution facing the most[…]

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