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It's Official: Your Non-Beer Beverage Maker May Now Be Considered A "Craft Brewer"

Nicholas Rossolillo, The Motley Fool

The Brewer's Association (BA), a beer advocacy and research group, recently announced it is revising the definition of craft beer. The craft revolution has boomed in the last decade, with the number of brewers in America growing from 1,460 in 2006 to more than 7,000 today. This marks the fourth time the rules defining who could call their operations "craft" have been altered to give voice to new contributors to the movement, and the changes could indicate more struggles ahead for the largest brewers.

What's different after 2018

According to the BA, a craft brewer now must have the following characteristics:

  • Small: Its annual production must be 6 million barrels of beer or less (approximately 3% of U.S. annual sales). Beer production is attributed to a brewer according to rules of alternating proprietorships.
  • Independent: Less than 25% of the brewery can be owned or controlled (or equivalent economic interest) by a beverage alcohol industry member that is not itself a craft brewer.
  • Brewer: It must have a TTB (U.S. Alcohol and Tobacco Tax and Trade Bureau) Brewer's Notice, and it must make beer.

That last point in particular replaces a rule that said the majority of a craft brewer's total beverage alcohol volume had to be derived from "beers in which flavor comes from traditional or innovative brewing ingredients and their fermentation." In 2017, that point excluded some 60 alcohol producers, mainly because the bulk of their product was wine, mead, or cider. For 2018, the change will add about an additional 100 producers, though their contribution to national production totals will be small.

The addition is nonetheless significant. The official count isn't out yet, but the BA said there are now more 7,000 brewers in America, up from 6,372 at the end of 2017. That's at least a 10% rise in total count, plus an additional 1.1 million homebrewers who contributed an estimated 1% of total U.S. beer production. However, total craft sales volume only increased 5% in 2018, indicating that the beer industry is getting more competitive.

A table displaying various alcoholic beverages like wine, spirits, and beer.

Image source: Getty Images.

Not what to buy, but what not to buy

The change in the definition of a craft brew -- and the increased competition that it indicates -- won't help the biggest beer makers like Budweiser maker Anheuser-Busch InBev (NYSE: BUD). Nor will the revision help the status of the former craft brewers that the megaoperations have purchased over the last few years.

It also won't help guide investors toward new stock picks. The options for investing in craft brewers remain limited to a small handful of names like Sam Adams parent Boston Beer (NYSE: SAM) -- which can now produce as much of its Truly Spiked & Sparkling hard seltzer as it wants under the new rules -- and multi-brand owner Craft Brew Alliance (NASDAQ: BREW). Most craft beer operations are very small and privately held, which means buying a stake in them is essentially out of the question for most retail investors.

However, the BA's changes can help suggest to investors what they shouldn't purchase. The new definition underscores the pace of change  underway in the alcohol industry, especially in the beer segment. The growth in craft production and consumption in 2018 is a win for discerning consumers, but it hasn't been great for the biggest players in the market. A-B InBev, for example, has posted stagnant growth in sales per volume -- increasing just 0.3% globally through the first nine months of 2018. Revenue growth of 4.6% was derived from price increases, and all of that came from overseas; its North American sales are being sapped by legions of upstarts.

With newcomers entering the beer business at an impressive pace, and innovation still on the rise, it's hard to get too excited about investing in any publicly held U.S. beer companies these days.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.