Is Boston Beer Going Flat?

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It's been a rough summer for outdoor lovers, with most of the U.S. frying under an oppressive heat wave in mid-July. Heat index maps have made the country look like a sunburned backside. One way to beat the heat is with a cold, refreshing beer, and luckily for us, the right beer can also offer a valuable tip for our portfolios.

Good people drink good beer
Just as discerning investors are flocking (shameless plug alert) to The Motley Fool for valuable information, discerning beer-drinkers have been seeking out craft brews for their superior taste and craftsmanship. The segment still accounts for a small minority of all beer sold in the country, but its share has been steadily increasing, even as overall beer consumption has dropped:

Segment

2008

2009

2010

U.S. beer market210,400,000205,800,000203,600,000
Craft brew market8,501,7139,115,6359,951,956
Craft brew as percentage of U.S. beer market4.04%4.43%4.89%

Source: Brewers Association. Figures in barrels. 1 barrel = 31 U.S. gallons.

That bodes well for sophisticated palates but not as well for curious investors. Only two craft breweries are publicly traded: Boston Beer (NYS: SAM) and Craft Brewers Alliance (NAS: HOOK) . With so many small-scale slingers of suds seeking self-sufficiency, the segment suffers from serious splintering. Sufferin' succotash! More plainly, the barrier to entry for craft brewing is quite low, the business model is easily replicable, and the typical consumer rarely has any brand loyalty.

Despite those issues, both Boston Beer and Craft Brewers have been good plays for those who saw their potential early. However, momentum has flagged as of late, especially for Boston Beer, which posted disappointing earnings for two straight quarters. As fellow Fool Travis Hoium pointed out, Sam Adams -- despite its small scale relative to the major players -- is by now ubiquitous enough that most people don't consider it a "craft" brew. In fact, the Brewers Association modified its bylaws this year specifically to allow Boston Beer to retain its classification as a craft brewery, a decision that raised a few eyebrows.

Tapping into a frothy niche
Boston Beer has found it difficult to increase market share as craft brewing gains stature, losing some ground (though still holding a commanding position) in the craft brew segment:

Company

Percent of US sales / percent of craft sales, 2010

Percent of US sales / percent of craft sales, 2009

Percent of US sales / percent of craft sales, 2008

Boston Beer1.12% / 22.83%1.08% / 24.38%1.11% / 27.54%
AB InBev (NYS: BUD) 53.25%* / N/A54.00%* / N/A53.72%* / N/A
SABMiller (OTC: SBMRY.PK)17.44%* / N/A17.71%* / N/A11.98%* / N/A
Craft Brewers Alliance0.30% / 6.11%0.29% / 6.44%0.20% / 5%

Source: SEC filings. *Numbers encompass North American market; U.S.-only numbers were not available.

While Craft Brewers Alliance has sustained some solid forward momentum, it's done so at the expense of its cash reserves, which hover at dangerously low levels relative to a high debt load. Boston Beer has the cash and a balance sheet free of debt, but can it capitalize on the growth of craft brewing, or will it be relegated to the no-man's-land between the upstarts and the venerable megabrewers it takes great pains to differentiate from? Boston Beer CEO Jim Koch once said that he makes beer that only appeals to 5 percent of beer drinkers. While the craft brewing movement is likely to surpass that figure in the near future, Koch's concoctions might not be the first choice for many connoisseurs.

What do you think about Boston Beer's position? Can it keep growing, or is it losing momentum? Share your thoughts in the comments section!

At the time this article was published Fool contributorAlex Planesowns no shares of any of the stocks mentioned but does own several six-packs of Sam Adams. The Motley Fool owns shares of Boston Beer.Motley Fool newsletter serviceshave recommended buying shares of Boston Beer. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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