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 STZ with a $245 price target.
• The analyst reiterated a Neutral rating on Anheuser Busch Inbev NV BUD with a $75 price target.
• The analyst has an Underperform rating on Boston Beer Company Inc 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. 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 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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