Fears of an imminent U.S.-China trade war have shaken up a number of sectors. The beer industry too hasn’t been spared. President Donald Trump’s imposition of a 10% tariff on imported aluminum from China is likely to have a devastating effect on the U.S. beer industry. Given that most of the beer produced in the United States today is packaged in cans, aluminum tariffs will only make things difficult for the country’s beer industry.

The tariffs certainly aren’t a good sign at a time when the U.S. beer industry is already witnessing a decline in domestic beer sales due to the changing preferences of consumers. Amid all these developments, the only good news is that U.S. craft beer exports rose in 2017.

And, yes, most of the exports were to Canada, the Asia-Pacific region (excluding Japan), the U.K. and Western Europe. That said, the beer industry stands a critical juncture, where higher exports are being cheered but lower domestic sales and aluminum tariffs are denting the confidence of brewers. Let’s look at each of the good, the bad and the ugly sides of the U.S. beer industry in this tumultuous time.

The Good: Craft Beer Export Rise  

International distribution of craft beer continued to increase in 2017, with U.S. export volumes rising 3.6% to $125.4 million, according to The Brewers Association (BA). Canada remains the biggest market for craft beer export, accounting for 51.3% of total exports. The Asia-Pacific region (excluding Japan) also witnessed robust growth of 7.4%.

The U.K., Sweden, Korea, Australia are the second, third, fourth and fifth biggest markets, accounting for 10.5%, 6.7%, 4.6% and 3.8% exports, respectively. The U.K. market grew 7.1%, accounting for 10.5% of beer exports compared with 10.1% in 2016. The Western Europe market grew 1.3%. However, despite 2017 setting a record, export growth slowed for the third consecutive year. U.S. craft beer exports increased 37%, 16% and 4.4% in 2014, 2015 and 2016, respectively.

Now, coming to the country that is breathing fire, China accounts for a meager 2.5% of U.S. craft beer export. Given this scenario, U.S. craft beer exporters might not really worry if China concocts any tariff on beer. Canada, U.K. Sweden, France and Australia are still the biggest consumers of  Anheuser-Busch InBev SA/NV (BUD - Free Report) , Molson Coors Brewing Company (TAP - Free Report) , Craft Brew Alliance, Inc. (BREW - Free Report) and Constellation Brands Inc (STZ - Free Report) and Diageo plc (DEO - Free Report) , who export their beer in bulk.

Moreover, the Asia-Pacific (excluding Japan) is being seen as lucrative market with its taste for craft beer developing over the last few years. Naturally, beer exporters will be looking to capture this market. Shares of Craft Brew Alliance, Constellation Brands, Diageo and Anheuser-Busch have increased 52.7%, 33.9%, 22.5% and 1%, respectively, in the last year.

The Bad: Domestic Beer Sales Decline

While craft beer export is soaring, beer sales are struggling at home. Per Alcohol and Tobacco Tax and Trade Bureau statistics published in a report by the Beer Institute (BI), the U.S. beer industry shipped 3.8 million fewer barrels in 2017 than 2016, reflecting a decline of 2.2%. According to Michael Uhrich, BI chief economist, this is “the largest percentage decrease in annual domestic beer shipment volume since 1954.” The question is, are Americans consuming less beer? Well, beer sales volume fell 1% in the United States in 2017.

One of the primary reasons cited by analysts for this is that there is an increasing shift toward distilled spirits and wines, a category headwind. According to Vivien Azer, managing director and senior research analyst, Cowen and Co., consumers aged 21-34 were eight percentage points less likely to prefer beer than their 35-to-44-year-old counterparts. 

However, amid this decline in domestic sales, preference for craft beer to draught beer has increased. This is perhaps because consumers are going for authenticity with a good brand story and increased flavor selection. The only good sign is that 2018 started on a good note for the beer industry, with a 3% sales increase through the first four weeks, according to retail data provider IRI Worldwide. 

The Ugly: Aluminum Tariffs to Hurt Beer Industry

Americans prefer their beer in cans. More than 50% of the beer produced in the United States is packaged in cans. And with Trump imposing 10% tariff on imported aluminum from China, the situation certainly looks grim. According to the BI, 10% aluminum tariff would amount to $347,700,000 on beverages sold in cans. Additionally, this might also result in a loss of 20,000 jobs.

At the end of 2016, there were more than 53,000 breweries across the United States selling around 190 million barrels of beer. Of these, almost 60% of the beer is sold in aluminum packaging. United States currently imports around 52% of the aluminum used for manufacturing.

Given this scenario, large breweries like Molson Coors, Anheuser-Busch, Craft Brew Alliance, Constellation Brands will have to spend more on producing aluminum beer cans. Moreover, foreign brands like Heineken NV (HEINY - Free Report) and Carlsberg AS (CABGY - Free Report) that have manufacturing units in the United States will have to bear the brunt of the 10% aluminum tariff. Heineken has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In Conclusion

Undoubtedly, the U.S. beer industry is walking on a tight rope. Declining domestic beer sales coupled with the imposition of a 10% duty on imported aluminum has heightened their worries. High production cost of beer will result in either the companies losing revenues or the price burden being passed on to consumers. The second certainly doesn’t look a wise option given the dwindling domestic beer sales figure.

The only bright spot is that Americans are very good at recycling and beer cans produced in the country today contain approximately 70% recycled aluminum. Moreover, a rise in craft beer exports certainly will give a boost to the confidence of brewers, which will try to focus on more lucrative markets.