Why Big Beer is Struggling in the Age of the Hipster Craft Beer



Note to Big Beer: Beware the affronted beard!

MillerCoors, the joint venture between SABMiller plc (SBMRY) and Molson Coors Brewing Company (TAP), is facing a class-action lawsuit from craft beer enthusiasts for having the audacity to imply that Blue Moon—one of the fastest-growing beer brands in America—was a craft beer.

Given the affection that hipsters have for all things vintage, retro, and old-man chic, I’m a little surprised the lead plaintiff didn’t slap the MillerCoors marketing director with a white riding glove and demand satisfaction with pistols at dawn. Such was the offense taken.

I personally like Blue Moon, and I expect the suit to eventually be thrown out and groundless. But the plaintiffs do raise interesting points when they claim that MillerCoors went to “great lengths to disassociate Blue Moon beer from the MillerCoors name.”

We see this all the time in marketing. General Motors (GM) doesn’t exactly go out of its way in its Cadillac Escalade ads to point out that it also makes the everyman’s Chevy Silverado pickup truck. And I could find no mention of parent company Swatch Group (SWGAY), maker of the kitschy plastic Swatch watches, on the website for it upscale Omega watches. Image is the core of marketing, and MillerCoors is simply playing the game.


But in the case of craft beer, with its focus on small-batch and local brewing, association with a megabrewer is the kiss of death. And this is a major problem for Big Beer, as this is the only corner of the American beer market that is really growing these days. Overall beer sales were flat last year (up a measly 0.5%) and actually fell by 2% the year before. Yet craft beer sales are growing at 17.6% per year and now make up a sizable (and profitable) chunk of the market. Craft beer accounts for 11% of volume yet 19% of dollar sales. Spend any time in a pub frequented by beer snobs, and you’ll notice the price difference in your bar tab very quickly.

Late last year, I wrote about the challenges Anheuser-Busch InBev’s (BUD) faced in its attempts to buy its way into the craft beer market. There are essentially two issues at play. The first is image. Craft beer is a luxury good subject to the changing whims of fashion. A sense of uniqueness or exclusivity is needed to convince drinkers to pay a premium over domestic Bud Light, and that is a tough act for a megabrewer to pull off.

The second issue is economies of scale. The beauty of Big Beer operations is their massive and efficient production and distribution. But this goes completely out the window when you buy a locally-produced microbrew. Mass producing it and selling it nationally—or globally—kills the “buy it local” vibe that made it popular to begin with. But keeping it local neutralizes Big Beer’s marketing and distribution power.

So, what is Big Beer to do?

While the megabrewers are in a tough spot, I would argue that their strategy is broadly the right one. Miller, Bud and Heineken (HEINY) will never be able to please the true hipster beer snob because the essense of hipsterism is the ability to one-up your friends by name dropping obscure references. Blue Moon is already far too popular to satisfy the thirst of a true hipster. (For a good–if somewhat crude–laugh at craft beer’s expense, enjoy this comedy skit by Nacho Punch: “Hipsters Love Beer.”)

But this subsector of the beer-drinking population is also small minority. MillerCoors is going after a much broader market: Higher-income casual drinkers looking to order a beer or two after work. It’s essentially the Sam Adam’s Boston Beer (SAM) crowd.


Boston Beer is actually an interesting case study. You could call Sam Adams the vanguard of the craft beer revolution, and SAM stock has been one of the best growth plays of the past decade. Sam Adams drinkers like a good, premium beer, but their tastes are still pretty mainstream. Big Beer can compete well in this space with brands like Blue Moon.

I’m somewhat wary of the entire beer sector right now based on price. Boston Beer trades hands at 35 times trailing earnings, and this is after the recent share-price correction. Molson Coors and Heineken each trade at 27 times trailing earnings, and Anheuser-Busch InBev at 22. I would consider all to be worthy candidates on substantial pullbacks, but I’d avoid putting new money into them at current prices.

Disclosures: Long HEINY

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

This piece first appeared on InvestorPlace. Photo credit: Quinn Dombrowski

Sober Up: The American Beer Market is Flat

Constellation Brands (NYSE:$STZ) shot up 37% yesterday and Anheuser-Busch InBev (NYSE:$BUD) rose a not-too-shabby 5% on speculation that the U.S. Department of Justice might let AB Inbev acquire  Grupo Modelo (Pink:GPMCF) after a few small revisions to the deal were made.

The Department of Justice torpedoed the original deal last month on fears that it would give AB Inbev nearly half the U.S. market and the monopoly pricing power that would come with it.

This is a big deal for Constellation for the reasons I gave earlier this month: Whisky and Beer Still Better Long-Term Bets than Wine.

Getting access to Modelo’s highly-recognizable brands like Corona and Negro Modelo is good for Constellation’s long-term future.  But investors need to sober up: the U.S. beer market is flatter than a week-old keg of Budweiser.

American domestic beer sales rose slightly in 2012 after falling for three straight years.  And within the domestic beer space, the growth is in high-end microbrews.  The big beer brands you are used to seeing in Superbowl commercials—such as AB InBev’s Bud Light or Molson Coors’ (NYSE:$TAP) Coors Light—are having a hard time getting the attention of drinkers.

Part of this is due to a bad economy; young blue-collar men got hit worse than anyone in the Great Recession.  But a bigger issue—and one that won’t improve with a recovering economy—is changing demographics.  The Baby Boomers are well past the heavy drinking stage of life, and Generation Y (made up of current 20-somethings and early 30-somethings) tends to prefer flavored cocktails over beer.

Generation X—my generation—still likes a good beer.  But we’re a small lot and we prefer microbrews when we can get them.

Big Beer knows that the domestic market is dead, which is why AB InBev, SABMiller (Pink: SBMRY) and Heineken (Pink:HEINY) have gone on an emerging market buying spree over the past decade.

AB Inbev has the best brand portfolio in Latin America, but the best growth potential today is in Africa, where SABMiller and Heineken are the best-positioned.  This was my rationale for recommending Heineken in the Sizemore Investment Letter and why I continue to hold it today.  Heineken already gets more than a fifth of its profits from Africa, and SABMiller gets well over a third.  This will only rise as African living standards continue to improve.

So, if you buy beer stocks, make sure you’re buying for the right reasons.  The large mega brewers are long-term plays on the rise of the emerging market consumer.  Just don’t expect too much from the domestic American market.

And on that note, I’m off to crack open a Shiner Bock, which is, alas, not a publicly-traded company.

Disclosures: Sizemore Capital is long HEINY.

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Whiskey and Beer Still Better Long-Term Bets than Wine

Constellation Brands (NYSE:$STZ), the world’s largest publically-trading winery, took an absolute beating yesterday when the U.S. Department of Justice torpedoed the Grupo Modelo (OTC:$GPMCF)Anheuser-Busch InBev (NYSE:$BUD) merger on anti-competitive grounds.

Kruk: Switched to whiskey.
Kruk: Switched to whiskey.

Given the wide variety of alcoholic beverage choices, the government’s move seems a little absurd.  Yes, roughly 80% of all beer drunk in the United States is sold by just four mega-brewers.  But I hardly see this as being risky or detrimental to the wellbeing of American consumers.  It reminds me of a (perhaps apocryphal) quote from the baseball player John Kruk.  When told by his doctor that he needed to stop drinking so much beer, Kruk smiled and said he would switch to whiskey.

If beer became too expensive due to monopolistic pricing, U.S. consumers might do the same.

But whatever you think of the government’s decision, Constellation was the biggest loser here.  Under the planned merger, Constellation would have had exclusive distribution and marketing rights for Corona and Modelo’s other beer brands in the United States (Anheuser-Busch InBev would have acted as the supplier).

Constellation needed this.  As I wrote in July of last year when the deal was initially announced, Whiskey and Beer are Better Long-Term Bets than Wine.

While wine is more popular than ever among American drinkers, it’s not the best business to be in at the mass-market level.  Think about it.  Off the top of your head, how many beer brands can you name?  A dozen or more without even having to strain?

Now…how many wine labels can you name?

Unless you are a true connoisseur, you would have a hard time naming more than one or two.  Outside of the elite Château Lafite Rothschilds of the world, the vast majority of wines have very little in the way of name recognition.

As I wrote in July,“Outside of, say, Coca-Cola (NYSE: $KO), beer and spirits are probably the most recognizable and valuable brand names in existence.  Not surprisingly, premium beer and spirits businesses tend to enjoy high margins and high returns on equity relative to their peers. [As a case in point, Diageo (NYSE:$DEO) enjoys a return on equity roughly double that of Constellation.]

“Wine is a different story.  The attractiveness of a given vineyard varies from year to year, and few have national or international brand awareness.  Wine connoisseurs know their favorite vintages, but there is little brand loyalty at the mass-market level.  For a company of Constellation’s size, wine is a much harder business to operate.”

After yesterday’s 17% drubbing, Constellation trades for 15 times earnings and 2 times sales.  This is not expensive by today’s market standards, but it’s far from cheap.

Constellation Brands (NYSE:STZ)
Constellation Brands (NYSE:STZ)

Before the Modelo-Bud merger was announced last summer, Constellation was a $20 stock.  The merger announcement caused the stock to nearly double in the six months that followed.  So without Modelo, is Constellation a $20 stock again?

Probably not.  But without Modelo, it’s certainly not a $40 stock either.

I would recommend avoiding Constellation for now.   In the world of booze stocks, there are better values out there.  My favorite today?  Dutch megabrewer Heineken (OTC:$HEINY).

At 20 times earnings, Heineken is far from cheap.  But it’s one of the best options today for getting exposure to the rise of the emerging market consumer, and particularly the rise of the up-and-coming African middle class.

Disclosures: Sizemore Capital is long HEINY.

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Beer Stocks: The Keg Party is in Emerging Markets

Back in April, I wrote favorably about Molson Coors ($TAP) (see “Beer Stocks: Crack One Open”), noting that the brewer was significantly cheaper than Anheuser Busch InBev ($BUD) and SABMiller (SBMRY) and that it paid the best dividend of any major brewer.  At 3.1%, its dividend yield at the time was nearly double that of Anheuser Busch InBev.

Since then, Molson Coors is up a modest 10%, more or less in line with the S&P 500.  Meanwhile, BUD has rallied by more than 20%.

But looking longer term, we see an even starker contrast.  Since the beginning of 2010, Molson Coors has trailed its “Big Beer” peers by a wide margin.  Anheuser Busch InBev, SABMiller and Heineken (HINKY) are up 66%, 50%, and 30%, respectively.

But Molson Coors?

TAP has been flatter than a three-week-old keg, actually showing a slight loss over the past two years.

So, what gives?  What explains the lack of investor interest in Molson Coors?

It’s really quite simple.  Molson Coors missed the party in emerging markets.

Prior to its June acquisition of Eastern European brewery StarBev, Molson Coors had negligible exposure to emerging markets.  Its business was limited almost exclusively to North America and the UK, where beer brewing is a slow-growth business.  And outside of its trendy Blue Moon brand, Molson Coors had also largely missed out on the one promising growth outlet for the North American market: upscale premium microbrews.

The company found itself selling low-margin, mass-market beer to an aging and shrinking North American and British market.  Molson Coors faced relentless competition from both Budweiser and Miller at the mass-market level, and from innumerable up-and-coming foreign and premium brands at the higher end.  Not the sort of scenario that would make investors thirsty for more.

Even after the StarBev merger, Molson Coors will only sell about 14% of its volumes outside of North America and the UK.

Meanwhile, take a look at BUD.  Anheuser Busch InBev sells more beer in Latin America (34% of volumes) than it does in North America (32% of volumes).  Overall, emerging markets make up more than half of all beer sold.

And BUD isn’t even the best positioned of the group.  Heineken is a long-term recommendation of the Sizemore Investment Letter precisely because of its exposure to emerging markets and specifically to Africa, the next great growth market.  Heineken gets 21% of its profits from Africa already, and this figure is set to skyrocket as African incomes rise and millions of Africans join the ranks of the middle classes.  Rival SABMiller is also a major player in Africa, and particularly in South Africa.

Heineken also made a major expansion into Southeast Asia this year with its purchase of Asia Pacific Breweries.

So, where does all of this leave Molson Coors?

With the global beer market already well on its way to consolidation, there are not a lot of attractive acquisition targets left to snag, and those that do come up are not likely to go cheaply.  Realistically, Molson Coors will be primarily a North American seller of suds for the foreseeable future.

This isn’t all bad.   While the Echo Boomers—the large generation of Americans in their 20s and very early 30s—do not slosh the stuff as enthusiastically as previous generations (they tend to prefer vodka-based mixed drinks), there are signs of life in the domestic market.  U.S. beer shipments are actually up this year, after falling slightly for the past three years in a row.  Mass-market brewing may no longer be a growth business in the United States and Canada, but it is generally pretty stable.  We don’t have to worry about any of the major brewers facing financial distress any time soon.

Looking at Molson Coors’ financials, I continue to believe the stock has value as a cheap income stock.  TAP trades for just 11 times expected 2013 earnings and pays a dividend of 2.9 percent—the highest of all major beer brewers.  This isn’t a “home run” stock, but it’s one that is priced to offer decent returns going forward.

Bottom line: If you want growth, Heineken remains my favorite brewer.  But I consider Molson Coors a worthwhile choice for a long-term dividend-focused portfolio.

This article first appeared on InvestorPlace.  Sizemore Capital is long HINKY.

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Charles Sizemore Discusses His Favorite Beer Stocks on Bloomberg TV

Crack open a cold one, and watch Charles Sizemore give his thoughts on international beer stocks on Bloomberg TV.


If you cannot view the video, please follow this link to Bloomberg’s site: Playing the World of Beer Stocks

Stocks mentioned: Boston Beer ($SAM), Anheuser-Busch InBev ($BUD), Heineken ($HINKY), Molson-Coors ($TAP)

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