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When Boston Beer (NYSE: SAM) announced the acquisition of Dogfish Head Brewery for $300 million in cash and stock last week, it was big news for the beer industry -- and for craft beer consumers. This isn't a deal that will make Anheuser-Busch InBev (NYSE: BUD) shake in its boots, but it shows where the industry is at today. Craft brewers are consolidating, and independence is no longer assured, even for large craft brewers.
This puts companies and customers in a tough position. Dogfish Head has built a rabid following under the leadership of founder Sam Calagione and now it's selling out to a large competitor. Will it remain a fan favorite, or will Boston Beer become the next beer behemoth that customers abandon for local flavors?
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Boston Beer's scale versus the behemoths of beer
The argument both Boston Beer and Dogfish Head used for their merger is the need to develop scale versus much larger competitors. You can see below that Boston Beer is a fraction of the size of A-B InBev, Molson Coors, and Heineken.
BUD Revenue (TTM) data by YCharts.
Scale helps lower costs both for marketing and production, so it may make sense for the companies to combine forces from a financial perspective. But what big beer companies have learned in recent years is that beer has become a local business, and buying up hot brands hasn't paid off as some had hoped.
Beer has gone local
What Dogfish Head leveraged to grow its brand was a unique take on beer production and a rabid local following around its original Delaware location. The uniqueness of the brand made it an in-demand product customers would seek out, with people (myself included) driving for hours just to try their latest beers if distribution didn't reach close to home. The uniqueness of the brand is what made the company what it is.
When a brewer is acquired or grows to a scale where it's no longer unique and local, it loses some of that appeal. Boston Beer's Sam Adams brand is seeing this trend, reporting in 2018 that depletions were down for the year compared to 4% growth for craft beer overall. The company's growth was driven by non-beers like Truly Hard Seltzer, Twisted Tea, and Angry Orchard.
There are limited returns to scale in the craft beer space. After buying about a dozen well-known craft brewers in a decade span, A-B InBev said it isn't buying any more in part because the deals aren't paying off. Acquisitions often come with bad press as the beer behemoth buys the local beer favorite, weakening the smaller company's brand appeal.