Are Craft Beers Tapped Out?

Marked primarily by the introduction and meteoric growth of Boston Beer some three decades ago, craft beer's heyday may have at last reached a peak. A new survey by industry analysts at Restaurant Sciences says the volume sales of craft beer at restaurants and bars in North America decreased 6% on average over the last three months compared to a year ago.

The survey, which represents some 1,000 craft beer families and more than 5,700 craft beer brands, says the brews suffered from widespread fatigue, with volumes down 13% at family restaurants, 10% at higher-end establishments, and 4% at casual-dining restaurants, bars, and nightclubs.

Certainly the number of beers available is daunting, reminding me of the old sales adage that "A confused mind always says no," but it also appears the industry has taken for granted the willingness of beer drinkers to pay a premium for craft brew. Price hikes in the range of 3% to 7% this fall may have taxed their generosity too much.

Craft beer has been siphoning off sales from mass brewers Anheuser-Busch InBev and Molson Coors for years. The Brewers Association says craft beer sales in the U.S. represented 10.2% of the total beer market in dollars in 2012, along with a 6.5% share by volume. At a time when overall beer sales rose an estimated 0.9% by volume last year, craft beer volumes surged 15% (and were up 17% in dollars) and rose another 13% again across the first six months of 2013.

To be considered "craft," the industry association demands a brewer be small and independent, make no more than 6 million barrels annually, and use traditional ingredients like malted barley. Last year, the Brewers Association penned an editorial excoriating Bud and Coors for pretending to be craft brewers by introducing smaller beers like Shock Top, Goose Island, and Blue Moon, thus diluting what ought to be a truly singular process.

Of course, the big brewers want that definition to be more fluid in order to blunt the impact of the craft beers on their own sales. They've achieved a modicum of success, with Consumer Reports last summer labeling Bud's Shock Top its craft beer "best buy." Yet as acquisitions are made in the business, it becomes more difficult to determine who is who. For example, more than 30% of the stock of Craft Brew Alliance , which owns the crafty Kona Brewing, is owned by Anheuser-Busch.Exchange AgreementThe Amended and Restated Exchange and Recapitalization Agreement (the "Exchange Agreement") is an agreement with A-B under which we granted A-Bcertain contractual rights. The Exchange Agreement was entered into as part of a recapitalization in which we redeemed preferred shares held by A-B in

Perhaps beer drinkers are smarter than that, so as mass brewers flood the market with their "knockoff" craft products -- think MillerCoors Tenth and Blake or A-B's Green Valley Brewing -- they pull back from buying any, or at least not in the same quantities they used to. Of course, when the Brewers Association hiked its threshold for craft beer status from 2 million barrels to 6 million to accommodate Boston Beer's growth, it became clear the industry is willing to water itself down when necessary.

In addition to its self-inflicted wounds, though, craft beer has to contend with changing tastes. Boston Beer's biggest seller these days isn't its flagship Samuel Adams beer, but rather its hard ciders and teas. And distillers are offering more flavors in their whiskeys and vodkas that are attracting more female drinkers. Moreover, there's a general trend overall to drink less alcohol while dining out. It's not just craft beer, as the analysts at Technomic point out: On-premise channel volume grew just 0.7% in 2012 and was expected to decline this year and next.

Craft beer will continue to grow. The Brewers Association said in late June that there were 2,483 craft breweries in the country, the greatest number since the 1870s, and another 1,605 brewers were on tap to join them. It certainly seems we're in the midst of an explosion, but that also suggests the balloon will one day burst. Certainly brewers won't be able to pass along price hikes as readily as they have in the past, which may pressure margins for many. For some like Boston Beer that have just found their legs again, this could be an inopportune time for that to happen.

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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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