The First Craft Brewer Just Got Bought Out. Can the Industry Still Survive?

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Is nothing sacred? America's "first and oldest" craft brewer is no more. Anchor Brewing, which was founded in San Francisco in 1896, agreed to be bought out earlier this month by Japan's Sapporo for $85 million.

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Following the purchase by Anheuser-Busch InBev (NYSE: BUD) of Wicked Weed, Karbach Brewing, and many others; Constellation Brands' (NYSE: STZ) acquisition of Funky Buddha Brewing and Ballast Point Brewing; and Heineken's buyout of Lagunitas, the loss of yet another craft beer to a megabrewer isn't much of a surprise. But when you take out such an icon of the industry, it may be time to ask whether the craft-brew industry itself can survive.

Plenty of froth

Make no mistake: The craft-beer industry is healthy. Last year it produced 24.1 million barrels, 6.2% more than it did in 2015 and representing 12.3% of the 196.7 million barrels produced by the entire U.S. beer market, which was flat overall. Were it not for craft beer, the overall industry would have experienced a decline.

And the only reason craft-beer growth is down to single digits is because of all the beer that's being taken out of production by the megabrewers.

The craft-beer industry's trade group, the Brewers Association, only counts production from brewers who produce fewer than 6 million barrels annually, are not more than 25% owned by one of the giants, and whose beers' flavor comes from traditional or innovative brewing ingredients and their fermentation.

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When Anheuser-Busch buys up a craft brewery, for example, its production is no longer counted toward the total. So despite all of the breweries that have been removed from the tally, craft beer is still growing.

Craft a new meaning

But that doesn't mean the craft-beer industry isn't facing challenges. Aside from seeing some of its best and oldest constituents sell out and cash in, the buyouts are further diluting the meaning of craft beer in the minds of consumers. They might not even be aware their favorite craft beer is no longer independent, and they might not care.

If beer drinkers are concerned first and foremost with taste, then it may not matter to them whether the brewer gets its funding from Anheuser-Busch or Constellation brands. To be sure, many beer drinkers do care, and to that end, the Brewers Association is trying to make them better able to identify which beers are true craft and those that are "mass craft" by creating an icon that craft brewers can add to their label.

For their part, the craft brewers which have been bought out maintain they'll stay true to their roots and that their beer and recipes won't change. That's what Anchor Brewing said in announcing the acquisition -- that management will stay on, the beer will still be made in its Potrero Hill brewery, and the taproom it was opening will still go ahead, as scheduled. But President and CEO Keith Gregor also told SFGate that while it plans to remain at its current site, that's only until it outgrows the capacity of the space, which now operates at 55% to 60% of capacity.

Too big for their britches

That's what happened when San Diego's Ballast Point got acquired. Constellation said the regional brewer would continue to operate as a standalone company, with its existing management team and employees running the day-to-day operations, but a year later Constellation was constructing a massive 259,000-square-foot facility all the way across the country in Virginia. Similarly, Anheuser-Busch invested $62 million to expand its Lysander, N.Y., brewery to be able to accommodate its sudden interest in craft beer.

Anchor is the 22nd largest craft brewer in the country, with a reported $33 million in sales last year. It may not be long before it, too, has outgrown its current digs and Sapporo finances the construction of a new brewery for it.

With megabrewers buying up the real estate and millennial drinkers reportedly in increasing numbers turning to wine and spirits, the craft-beer industry faces a tough road. The loss of another craft brewer from its ranks isn't likely to be a death blow to the industry -- even if it is an original -- but with mass craft beer watering down the definition, it may be that the thriving craft-beer industry we know now will be unrecognizable a few years down the road.

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