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Is Craft Brew Alliance the Craft Brewer to Watch?

The one craft brewer to watch isn't really a craft brewer at all. The craft beer industry doesn't recognize Craft Brew Alliance (NASDAQ: BREW) as one of its own, because Anheuser-Busch InBev (NYSE: BUD) owns a large stake in the company. However, the brewer is recording growth that is far outstripping Boston Beer (NYSE: SAM), arguably the face of the craft beer industry.

In its recent second-quarter earnings report, Craft Brew Alliance said depletions for its Kona Brewing brand were accelerating, rising 7% for the period: more than double the 3% rate it recorded in the first quarter. (Depletions are sales by wholesalers to retailers, and are considered an industry proxy for consumer demand.)

Craft Brew Alliance beer bottles and glass
Craft Brew Alliance beer bottles and glass

Image source: Craft Brew Alliance.

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While Boston Beer reported a 12% increase in depletions for the period, that was all predicated on higher sales of hard tea, cider, and seltzer. Depletions at its flagship beer brand Samuel Adams continue to decline.

Considering that growth for the craft beer industry as a whole is slowing, the gains being made by Craft Brew Alliance are notable.

Craft beer growth is uneven

The industry trade group Brewers Association said craft beer sales rose 5% in the first six months of 2018: the same pace recorded in the first half of 2017. While that indicates the industry may have stabilized, it's a far cry from the double-digit growth it had been posting only a couple of years ago. Yet the remarkable thing is that now there are more than 6,600 breweries in operation, virtually all of them craft and more than double the number in existence just five years ago.

It's also important to point out that the Brewers Association's production numbers eliminate the contribution made by craft breweries that were subsequently acquired by noncraft brewers. For example, Anheuser-Busch has bought up about a dozen craft breweries in the past few years, and both Molson Coors and Constellation Brands have acquired what were previously fast-growing craft beers, like the latter's $1 billion acquisition of Ballast Point Brewing.

So despite those volumes no longer being counted toward the total, craft beer is still showing growth, while the beer industry at large is flat or declining.

What's important to note, however, is that even in craft circles, growth isn't uniform. The industry watchers at IRI point out that among craft brewers that do fit the Brewers Association definition, those producing more than one million barrels annually saw volumes fall a collective 2.5%, while those producing 10,000 barrels or fewer saw growth soar 31% for the first half of the year. Breweries between 10,000 barrels and 100,000 barrels were up 5.5%.

Riding the wave

At about 750,000 barrels a year, Craft Brew Alliance is closer to the biggest craft brewers than the smallest, yet it is still outperforming most. There are a couple of reasons for that.

First, Kona-brand beers are still seen as craft by the beer-drinking public, despite growing distribution from the partnership with Anheuser-Busch. The flagship Kona Big Wave brand saw depletions jump 22% in the quarter. It is now the biggest Kona beer, accounting for 38% of the brand's total mix.

Second, Craft Brew Alliance has nurtured the brand's Hawaiian roots, which plays into the current consumer preference for small, local beers. That's what is seemingly driving the growth of the craft beer segment as a whole. As Kona's distribution grows -- including internationally -- the public may no longer see it as a local Hawaiian product. Right now, though, customers' perception of the brand is working in Craft Brew's favor, which has allowed the brewer to take healthy price increases of as much as 3% across the portfolio.

Key takeaway

The big risk for Craft Brew Alliance is that its success is tied almost wholly to Kona Brewing. The other big brands it owns, like Redhook and Widmer Brothers, continue to see depletions fall. If the beer-drinking community turns on Kona like it did for Boston Beer's Samuel Adams, Craft Brew Alliance could experience a serious setback. But as it stands now, investors could be saying "mahalo," or thank you, for the big wave they'll be catching.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV and Boston Beer. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool has a disclosure policy.