Is Constellation Brands Inc. the New King of Craft Beer?

By Markets Fool.com

Despite being mostly a west coast phenomenon, Ballast Point Brewing has since migrated east and continues to remain atop the lists of fastest-growing craft beers. Image source: Getty Images.

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Buying a regional craft beer brewer for a billion dollars when the industry is slowing down takes a bit of bravado -- and a willingness to withstand second-guessing of your decision. So, it's a bit understandable if Constellation Brands (NYSE: STZ) CEO Rob Sands used the first-quarter earnings conference call with analysts tocrow a little bit about Ballast Point Brewing's performance.

Crafting heady growth

According to Sands, Ballast Point is the fastest-growing craft beer in the U.S., with depletion rates of more than 60% in the quarter.Depletions are sales from distributors to retailers and are considered a reliable proxy for consumer demand. So, considering craft beer is really the only segment of the beer industry that's posting any real growth -- even if it is suffering from a bit of consumer fatigue -- Constellation Brands' achievement with Ballast Point is something to boast about.

No doubt a good part of the growth has been thanks to placing the craft beer into Constellation's distribution network. Primarily a west coast brewer, Ballast Point expanded into Colorado last year and announced in May it would be opening its first east coast brewery in Virginia.Ballast Point was already one of the fastest-growing craft beers when Constellation picked it up last year (and no doubt what attracted the beer and liquor distributor to it in the firstplace),and it looks as though its trajectory will remain on a sharply inclined plane.

Going flat

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According to The Brewers Association, craft beer sales continue to grow in 2016, but at a slower pace than the double-digit rates we've become accustomed to. The craft brew industry trade group says that over the first six months of the year, production volume rose 8% year over year, a big drop from the 13% rate it notched in the first half of 2015, and just half the 16% expansion it enjoyed in 2014.

Much of the slowdown can be attributed to declining volumes at the largest craft brewers. Although Boston Beer (NYSE: SAM) has arguably been the face of the craft beer industry for years, its flagship Samuel Adams brand is suffering from falling depletions, which were down 5% in the second quarter and are off by a like amount over the first six months of the year.

Similarly,growth is down at other big craft brewers like New Belgium Brewing and Sierra Nevada, too. But the industry remains otherwise healthy in that the smallest breweries, especially those producing less than 15,000 barrels annually, continue to grow at 30% rates.With Ballast Point growing at twice that rate, it might soon be big enough to take on Boston Beer and D. G. Yuengling and Son, the craft industry's biggest producer.

From regional beer to national sensation, craft beer Ballast Point Brewing has benefited from being acquired by Constellation Brands, even if it was for a pricey $1 billion. Image source: Ballast Point Brewing.

A rose by any other name

Of course, this all depends on what your definition of craft beer is. The industry trade group has its own idea:

  • Small: annual production of 6 million barrels of beer or fewer.
  • Independent: less than 25% of the craft brewery is owned or controlled by mass brewers.
  • Traditional: derives its flavor from the use of traditional or innovative ingredients and their fermentation.

Constellation's acquisition of Ballast Point would put it out of the Brewers Association's league, but as more big brewers buy up their craft brethren, or even begin brewing their own craft knockoffs, the once bright line that separated the two has been muddied.

While the craft industry likes to refer to such beers as "craft-y," drinkers themselves aren't necessarily so hardcore and look more toward how a beer tastes and theingredients used. That attitude allowedAnheuser-Busch InBev's (NYSE: BUD)craft-like Shock Top brand to rocket to the top of the most popular brews, though in more recent periods, its sales have sagged.

There may be some sentimental reasons for looking to Boston Beer or Yuengling as the true heart of the craft industry, but A-B has picked up more than a few small brewers over the years, and with Constellation Brands picking up what could be the hottest name in craft beer today, it just might find itself the undisputed king of the craft brew industry.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool recommends Anheuser-Busch InBev NV. 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.