As I was listening to the joint press conference yesterday, the thing that stuck out to me was the emphasis on how competitive the U.S. market is. What they were undoubtedly talking about was the rock and the hard place they find themselves in. At the top, they have to compete with the giant Anheuser-Busch, maker of everything Bud. And on the other side, they compete against a seemingly unlimited number of craft beers.

The beer market, as a whole, has been taking a nosedive compared to spirits and wine sales, but those numbers are skewed. The top three — Anheuser, Miller and Coors — make up around 90% of the market. Sales from these three have dropped like a sack of bricks in the past decade or so. But the story doesn’t stop there. Craft beer sales are up 31.5% over the past three years and are only going higher.

Back in July, I wrote that the last time the major U.S. brewers started consolidating they changed the whole landscape of the U.S. beer industry. That was in the 1970s. This consolidation period brought the total number of beer makers in the U.S. to 44. Experts expected it to go to only five. But something quite the opposite happened…

Due to crucial legislation by the Jimmy Carter administration, companies like Anchor Brewing Company and Boston Beer Company (the latter is the maker of Samuel Adams Boston Lager) started up to bring consumers a change from the light beers that the Anheusers and Millers of the world were selling. This revolutionized the business. Bringing the number of U.S. brewers from 44 in the 1970s to over 1,400 today.

If this recent merger is any indicator, it appears that these macrobrewers are trying to deal with this grassroots craft beer revolution. Now, I don’t know if Anheuser-Busch will ever decide to team up or if the other majors — Pabst Brewing Company and D.G. Yeungling & Son — will get together, but it looks like we are on our way to round two of consolidations.

When it comes down to it, it won’t really matter what the big nationals do. Craft beer is here to stay. With new demand from Europe and Asia for U.S. craft beers, the industry is going to stay around for a long time. There will be tons of profits to be had too. Sam Adams was the first craft to make it from just a new type of beer to a top tier brew that rolls off almost everyone’s lips. Just take a look at what they’ve done in the past few years:

We can expect this as the standard once some of the smaller craft beers shoot out of the gate. If I were you, I’d keep my eye on Redhook Ale Brewery, Inc. (HOOK: NASDAQ) and Pyramid Breweries, Inc. (PMID: NASDAQ). These could be the next two out of the starters’ box for the public craft brewers.

I also suspect that many more will be going public in the next few years. We’ll just have to keep our eyes open…

Sincerely,
Jim Nelson
October 10, 2007

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Penny Stock Breweries was originally featured in the Penny Sleuth.