Craft Beer Is Not Dead...Yet

The craft beer industry is still showing signs of life, but some of these seemingly promising indicators may be falsely inflated by large breweries' heady involvement in the craft business, like Boston Beer (NYSE: SAM).

Data from the craft beer industry's trade organization, the Brewers Association, shows that despite overall beer production falling 1% in 2018, production by craft brewers grew 4% last year to 25.9 million barrels, giving the segment a 13.2% share of the beer market by volume.

However, this could be the result of the lobbying group's decision to change the definition of "craft beer" last year. It was significantly altered to eliminate the need for a brewer to have the majority of its production be beer. As long as some beer is made every year, the business could be called a "craft brewer."

The effect of the change means that wineries and meaderies that also make a little bit of beer can now have their entire alcoholic beverage production counted toward the whole. It also means that Boston Beer will continue to quality as a craft brewer -- as it was in jeopardy of losing the categorization prior to the alteration.

Leading from behind

Boston Beer, the maker of Samuel Adams, is considered the face of the craft beer industry, and founder and chairman Jim Koch is one of its biggest cheerleaders. But the brewer is having more success selling hard cider, tea, and seltzer than it is selling its flagship brand. While it's not certain whether Boston Beer has crossed the threshold of selling more ancillary beverages than beer, analysts believe it may happen soon.

Depletions for Samuel Adams have declined for 16 consecutive quarters. Depletions are sales from distributors to retailers and are an industry proxy for consumer demand.

That's key because Boston Beer accounts for almost 8% of the Brewers Association's total production numbers. If the brewer lost its craft beer designation, the industry would go from reporting production growth to reporting a decline.

The state of true craft beer

Yet not everything is bleak in craft beer. It is true the amount of beer being produced is falling as consumers drink more wine, whiskey, and mead, but they're also shifting their preferences away from mass-produced craft beer like Samuel Adams to beer that's locally made, by small, truly craft brewers.

There are more than 7,300 breweries now in existence in the U.S., up 13% from 2017 and 93% greater than just five years ago. Last year the number of microbreweries jumped 15% and the number of brewpubs rose 10% from 2017.

This may suggest that the health of craft beer -- real craft brewers, not mass craft -- is actually quite good. It's at this small, local level where innovations in the industry, such as the hazy New England IPAs or the renewed popularity of sour beers like gose, bubble up from below, born in microbreweries and eventually adopted by larger brewers. It's a good part of the reason beer drinkers are flocking to and embracing their local brewpubs more than years past -- which in turn often leads to higher post-visit sales and brand loyalty.

Putting all of this into perspective, it seems that smaller breweries are outpacing the popularity of their larger, more corporate counterparts. While larger breweries saw about a 2% decline in growth year over year, smaller breweries enjoyed a comfortable cushion of expansion; those with between 1 million to 100,000 case equivalents (CEs) saw double digit growth.

Clouds on the horizon

Still, the industry may have peaked. The trade group's data also shows the number of new microbreweries and brewpubs opening in 2018 was less than in 2017 -- the first time since 2010 that's happened -- while the number of establishments that closed was continually growing.

There's still a wide disparity between openings and closings -- it's not the retail apocalypse of the shopping mall -- but it indicates that even with the Brewers Association's redefining what it means to be a craft brewer, it may not be long before we see production numbers fall.

So the craft beer industry is still alive, but its headiest days may be behind it.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of Boston Beer. The Motley Fool has a disclosure policy.