Will Sam Adams Outgrow The Craft Beer Market?
Boston Beer Company sold nearly 2.5 million barrels of beer during the first 9 months of 2013. This represents a growth rate of 23% per year and put the company on track to sell nearly 3.5 million barrels in 2013. With a P/E (stock price to earnings) ratio of around 45x, the market clearly expects Boston Beer Company to continue to grow at an impressive rate. To put this in perspective, Anheuser-Bush and tech darling Apple both have P/E ratios of 13x. The question is, when competing in the “craft beer” market, where a producer’s primary marketing attribute is its authenticity and relatively small size, can SAM sustain the growth long-term in order to justify such an elevated valuation?
If the company continues to grow at 23% a year, they will nearly double their sales and be producing well more than 6 million barrels by 2016. Great news for SAM shareholders, right! Maybe.
Until recently, to be considered a “craft” brewer from both the industry’s and the IRS’s perspective (to qualify for the excise tax benefits), a producer could produce no more than 2 million barrels a year. SAM blew through that barrier in 2009 and, perhaps as a result, The Brewers Association updated its definition of “Craft Beer” in 2011, raising the production limit from 2 million barrels to 6 million barrels a year. Jim Koch is currently lobbying Congress to have the IRS follow suit. The question is, will Boston Beer outgrow the market it helped to create and, if so, will that have an impact on its ability to continue to grow at an aggressive rate?
We have already seen that, as the industry has grown, the Brewers Association has been willing to change its definition of “small” to enable Sam Adams to continue to quality as a “craft beer”. So why not just have the industry re-write the definition again?
Much of the growth in the craft beer market over the past 10 years has benefitted the hundreds of relatively small producers who see craft beer of as much of an art as a business and many would like to keep it that way. Consider that Sam Adams’ current annual production of over 3 million barrels a year is more than 3x greater than its largest craft brewing industry peers (see table below). Clearly, no other industry participant is even close to having any reason to want to see the 6 million barrel limit increased. In fact, as Boston Beer Company continues to grow, many of the smaller producers (i.e. the entirety of the remaining craft beer market) may see this issue as way to gain some leverage to compete against the 800lb gorilla in the market.
- Sierra Nevada: 780,000 barrels
- New Belgium Brewing: 764,264 barrels
- Lagunitas Brewing: 260,000 barrels
- Stone Brewing: 210,200 barrels
- Anchor Brewing: 200,000 barrels (recently expanded capacity to be able to produce up to 680,000 barrels)
David Becomes Goliath?
This is not to say that there is a hard ceiling on the production volume and related profitability of Boston Brewing Company, but when looking at the company’s long-term growth potential, one has to consider the possible negative impact of size. At what point does the company that once led the “David vs. Goliath” fight against the big brewers become the new Goliath in the eyes of the craft beer producer, who is fighting for market share in an increasingly crowded and competitive marketplace, as well as the consumer, who enjoys having an ever expanding universe of small-batch, local, unique producers from which to chose.