The emergence of craft beers and microbrewers is changing the industry landscape.
According to this article, some executives in the the beer industry seem concerned that the beer business may eventually be dominated by local producers. In other words, sort of go the way of the wine industry.
The article has some useful information about how the global beer business has been changing:
- The four largest beer companies now have 55% of the beer market compared to 17% in 1999.
- Not surprisingly, operating margins have doubled for them with the added scale and reduced competition.
That's the good news. Here's the challenge:
- Consumer tastes in the U.S. & U.K. are changing in favor of craft brewers.
- Craft brewers have grown volumes by 9.8% per year over 5 years in the U.S., now have 6% market share.
- Mainstream beers volumes have been going the opposite direction...dropping more like 1.9% annually.
- The three biggest craft brewers command 35% of the craft beer market (excluding the craft brewers owned by the big players).
4 largest Beer Companies*
Anheuser-Busch InBev (BUD)
Anheuser-Busch InBev, the biggest among these four, has a market cap of ~ $ 140 billion, revenue of ~ $ 40 billion, profit margin of 18 percent or so, and sells at roughly 20x current earnings.
It's a business that has a substantial economic moat but, unfortunately, not a cheap valuation.
Molson Coors (TAP) is smaller than the four above especially when compared to AB InBev. Its market cap is just under $ 8 billion but has less than 1/10th the earnings of AB InBev.
Molson Coors sells for a much more reasonable valuation but offers a narrower economic moat.
The article suggests all these changes are likely to put downward pressure on operating margins. Maybe so.
The big beer companies will have to respond to the changing industry dynamics and, at times, it may even be somewhat of a challenge for the big players to adapt. Buying the best of the microbreweries or developing more of their own craft beers in-house seems probable.
Having more brands may mean more costs for the but beer remains a business about scale and dominant distribution. So, considering the big picture from an investors perspective, I doubt this will end up putting a meaningful dent in the core long-term economics of the biggest industry players. I'd be surprised if they didn't produce very impressive returns on capital over the long haul.
I just wish their valuations would become a bit more attractive again.
The growth prospects may exist among the craft brewers and the best of them might even do more than just okay. Boston Beer Company (SAM) seems to have a pretty good shot at developing a nicely sustainable economic moat but the shares are far from inexpensive.
They may lack exciting growth prospects, but long run core economics of the widest moat big beer companies probably shouldn't be underestimated.
Consider that, before prohibition, the number of breweries in the U.S. peaked at 1,751 breweries.
By 1980, that number had fallen to less than 100 breweries.
In 2011, there were 1940 craft brewers according to the Brewers Association. So the changes to the industry have been pretty dramatic.
No position in the above stocks
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