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Rob Carrick

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Doff the beer goggles

Rob Carrick

 

OTTAWA (GlobeinvestorGOLD) — Invest responsibly. Keep beer in the fridge, not your portfolio.

Remember this slogan the next time you throw back a few cold ones on a hot summer day and lapse into the delusion that something so refreshing might just be an investment opportunity. It's not.

Small breweries such as Brick Brewing Co. and Big Rock Brewery Income Trust have delivered heady returns in the past few years, but they're best thought of as anomalies. Ever binged on beer and then purged? That's sort of like the long-term experience of owning shares in a brewing company.

Consider Molson Coors Brewing, which has fallen by a cumulative 12 per cent over the past three years, a period that reflects the performance of Molson Inc. shares before the recent merger with Adolph Coors Co. Consider giant Anheuser-Busch, down 9 per cent over the past three years. Consider Sleeman Breweries, up a lukewarm 9 per cent in total over the same period. All of these companies have had good times, but they never last for several reasons that you have to be aware before buying brewing company stocks:

Price competition:
Cheap beer sells, which is why price wars are a part of the beer industry landscape. In fact, the appeal of cheap beer pretty much sums up story behind Lakeport Brewing, the latest brewing company to become an income trust. If small upstarts like Lakeport cut prices, giants like Molson may have to follow suit to maintain market share. In the U.S. market right now, Anheuser-Busch, SABMiller and Molson Coors are all combatants in a price war.
Marketing challenges:
What explains the ups and downs in the battle between Labatt Blue and Molson Canadian? It sure ain't taste. Rather, it's marketing campaigns that can work brilliantly and build market share or fizzle and leave sales flat.
Growth challenges:
Faced with stagnant sales in Canada, Molson made a foray into the Brazilian market that hasn't worked out at all. That's part of the reason why Molson hooked up with Coors, which itself has been struggling to build market share in the U.S. market.
Consumption challenges:
Lakeport's prospectus notes that Canadian beer sales in stores rose 6 per cent from 1999 to 2003, while sales in bars and restaurants was flat. This suggests that brewing companies will have to generate their own growth rather than sitting back and hope people will simply drink more beer.

The most promising area of the brewing industry for investors has to be the smaller players who make their reputation by plying a niche — quality beer for Brick and Big Rock and cheap beer for Lakeport. The shares of Brick, which has an eponymous lineup of beers and also sells under the names Red Cap, Formosa and Laker, is up about 66 per cent in the past year, while Big Rock, an income trust, has gained 40 per cent. Generating the growth necessary to maintain gains like these will be tough.

If you're nimble, you may be able to catch a wave with a big brewing company as well. Molson stock had a nice run earlier this decade when the company tightened its focus on brewing and hockey (through minority ownership of the Montreal Canadiens) while giving up attempts to diversify into areas such as retailing and chemicals. Anheuser-Busch shares jumped about 6.5 per cent recently on news that Berkshire Hathaway, Warren Buffett's holding company, had taken a significant share. Today, Molson Coors shares are down 20 per cent on the year and Anheuser-Busch has given up much of its recent advance.

Mr. Buffett has impeccable judgment, so maybe there's untapped value in Anheuser-Busch's shares. As for the brewing industry as a whole, don't drink and invest.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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