A US Beer Industry Review: Seltzers Sizzle, Big Domestic Brands Fall Out Of Favor

The beer industry is facing challenging times as production volume stagnates. U.S. beer sales volume was down 1 percent in 2017, according to statistics from the Brewers Association.

Craft beer, which accounted for about 8 percent of overall dollar sales, saw sales volume rise by 5 percent.

As the domestic beer industry fights a secular shift toward non-alcoholic beverages, Macquarie Research offered insight into the North American beer industry after attending the Beer Marketer's Insight Conference.

The Analyst

• Analyst Caroline Levy reiterated an Outperform rating on Constellation Brands, Inc. Class A (NYSE: STZ) with a $245 price target.
• The analyst reiterated a Neutral rating on Anheuser Busch Inbev NV (NYSE: BUD) with a $75 price target.
• The analyst has an Underperform rating on Boston Beer Company Inc (NYSE: SAM) with a $285 price target.

The Thesis

The prospects for sustainable growth for hard seltzers are bullish, Levy said in a Tuesday note.

Hard seltzers are made through fermentation just like beer, but from cane sugar, with a real fruit flavor and low sugar content.

Hard seltzer, a 27-million case business, could grow to 50-60 million cases by the end of 2019, the analyst said, citing estimates by White Claw.

White Claw and Boston Beer are the No. 1 and No. 2 players, respectively, in the segment, with a combined market share in terms of value of 75-80 percent, according to IRI data, Levy said. 

The analyst attributes hard seltzer's appeal to calorie consciousness and a variety of flavor options, which increase demand and lower the risk of seasonality.

"The on-premise market for hard seltzer, albeit very small today, provides the category with further growth opportunity," she said.

Macquarie also highlighted the push toward non-alcoholic beer, with Heineken N.V. (OTC: HEINY) launching Heineken 0.0 in the U.S. next year.

Anheuser Busch has ambitious targets globally for its non-alcoholic brands, Levy said. 

Notwithstanding Boston Beer's challenging valuation, Macquarie is incrementally positive on the company due to the potential for sustainable longer-term growth for its non-beer brands.

Levy said she sees a long runway for beer growth at Molson Coors Brewing Co (NYSE: TAP), thanks to its "successful Corona Premium launch and the powerful momentum behind Modelo."

The Price Action

The Dow Jones U.S. Brewers Index has lost about 23 percent year-to-date.

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