U.S. Beverage Brewers Face Cost Increases

Companies Sell Less Beer as Ingredient Prices Rise.

Written by Dennis Askew for smallcapnetwork.com

U.S. Brewers really have to be imaginative these days. They are facing the paradox that while sales are dropping, the costs to produce products is increasing in the form of commodity ingredients. Molson Coors Brewing Company (NYSE:TAP) reported yesterday its Q4 net income fell by more than half partially because of ingredient costs.

Other U.S. Brewers like Boston Beer Company (NYSE:SAM) and Craft Brewers Alliance (NASDAQ:HOOK) are also feeling the pinch.

Molson Coors, based in Denver, raised prices during Q4 to absorb the higher costs of ingredients and protect its profit margins and as wholesale prices increased, so too did retail prices and the company sold less beer.

Analysts of TAP had higher expectations, which were missed, and shares dropped 4% in yesterdays’ trading. “In the U.S., unemployment amongst our core consumer base remains high, and U.S. beer industry volumes continue to be weak,” said Peter Swinburn, president and CEO of Molson Coors.

Molson Coors reported Q4 earnings of $109.8 million, or $0.58 a share, that’s down from $222.1 million and $1.19 in Q4 of the previous year. Analysts were looking for $0.69 per share this Q4.

The Miller Coors joint venture in the U.S. rose 41% to $144.2 million based on bottom line cost cutting measures to offset more expensive grain prices.

U.S. breweries Boston Beer Company and Craft Brewers Alliance have also had to face rising ingredient costs. Boston Beer sells approximately 20 beers under the Samuel Adams’ or the Sam Adams’ brand names. SAM also generates revenues from eight flavored malt beverage products under the Twisted Tea’ brand name. Its shares have fallen from $100 in mid December to $92 today, a loss of 8% in 60 days.

Craft Brewers Alliance, best known for its Widmer Brothers Beers, Redhook Beers, and Kona Brewing brand names has also lost share value. The stock was trading in the $10 range in mid September and is now trading in the $7.45 range, a loss of 25% in five months.

This is where the factor of imagination comes in.

TAP, SAM, and HOOK all face the same dilemma, how to stabilize or lower product costs while it costs more to produce those very products. In essence; how to keep profit margins from shrinking and producing less income.

Molson Coors is planning some big promotions for the summer and will introduce a Miller Genuine Draft Lemonade for the hot weather. The company also plans on diversifying its offerings by pushing its Blue Moon brand to the forefront for the summer season and trying to expand the Coors brand in China.

People have drinking beer since ancient times in Egypt and they won’t stop. But innovation in marketing and market expansion, even at higher retail product costs, are the only current weapons in the arsenal to offset rising costs. SAM and HOOK will also follow TAP’s lead in summertime promotions.

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