The Lion Brewery, Inc.

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The Lion Brewery, Inc.

700 North Pennsylvania Avenue
Wilkes-Barre, Pennsylvania 18705
U.S.A.
Telephone: (570) 823-8801
Toll Free: (800) 233-8327
Fax: (570) 823-6686
Web site: http://www.lionbrewery.com

Private Company
Incorporated: 1905 as the Luzerne County Brewing Company
Employees: 135
Sales: $37 million (2006 est.)
NAIC: 312120 Breweries

The Lion Brewery, Inc., is a Pennsylvania-based beer maker whose regionally distributed brands include Pocono, Stegmaier, Gibbons, Bartels, Esslinger, Brubaker, Liebotschaner, and budget-priced Lionshead. The firm also produces other malt-based alcoholic beverages including Long Island Iced Tea, Kamikaze, and Cosmo, as well as Olde Philadelphia soft drinks. The bulk of production is done under contract to other companies, with Lion the largest North American brewer of malta, a nonalcoholic grain-based drink popular in the Caribbean. The firm makes alcoholic beverages and soft drinks under contract as well, some to organic or kosher standards. Lion is owned by a management-led investment group.

ORIGINS

The Lion Brewery traces its roots to 1905, when the Luzerne County Brewing Company built a brewhouse in Wilkes-Barre, Pennsylvania, on land purchased for one dollar from the Delaware and Hudson railroad. The new firm, which had a capacity of 100,000 31-gallon barrels per year, changed its name to The Lion Brewery in 1912 and made beer until Prohibition was enacted in 1920. It then turned to making “near beer,” a grain-based beverage that contained one-half of 1 percent alcohol, about one-tenth that of beer.

Like most brewers, the company struggled to survive during Prohibition, but when the law was repealed in 1933 it was purchased by Ted Smulowitz and Leo Swartz, who renamed it The Lion, Inc., and began making beer under the Gibbons brand name. Swartz later sold his stake to the Smulowitz family, who took full control of the operation. By the 1940s the brewery had grown to produce an average of 200,000 barrels of beer per year, and in 1954 the company installed a new 390-barrel copper brewing kettle to further boost capacity.

More than half of the nearly 2000 American breweries in existence before 1920 had closed during Prohibition, and in the decades after repeal the number of regional beer makers dwindled to fewer than 100, as such large national companies as Anheuser-Busch, Miller, and Pabst came to dominate the market. As smaller brewers faded away, their brands were often purchased by other companies and produced as budget-priced offerings for regional sale.

In 1967 the company bought the Bartels brand from a brewery in Edwardsville, Pennsylvania, and in 1974 it acquired the beers of larger local rival Stegmaier, which had recently gone under. The firm was now the only brewery left in Northeastern Pennsylvania, which had once been home to 28. Stegmaier had been founded in 1857 in Wilkes-Barre by German-born Charles Steg-maier, and had grown to become one of the largest brewers in the state. Its Stegmaier Gold Medal and Liebotschaner Cream Ale joined the Gibbons and Bartels brands, which were supplemented in 1977 by the acquisition of Esslinger beer of Philadelphia.

MALTA PRODUCTION BEGUN IN 1982

Selling beer at cut-rate prices to a diminishing local audience was not an easy way to turn a profit, and in 1982 Lion sought out and won a contract to produce a different kind of beverage called malta. The sweet, nonalcoholic drink brewed from grain mash and molasses had first been developed in the late 19th century by Germans living in the Caribbean islands. Malta had become popular among all age groups in the region and was viewed by some as a health drink. It also enjoyed strong sales in New York City, where many transplanted Caribbean nationals lived. Lion soon began making malta for several different firms under brand names such as Malta Goya and Malta Vitarroz, and over time this work became its main source of revenue. In 1987 the company added production of specialty soft drinks as well.

During the 1970s and 1980s brewing laws were relaxed around the United States, at the same time that the bland, homogenous taste of mass-marketed beers was driving many to seek out the richer flavors of imported brands. Soon a growing number of home brewers began to found small breweries to make beer in the traditional styles that were being ignored by the large companies. Though many were started as primitive operations with old dairy equipment, some so-called microbreweries used contract brewing, which took advantage of the excess capacity of regional breweries like Lion to save much of the start-up cost of $500,000 or more.

In 1989 the company took its own step in this direction by introducing a new premium Stegmaier beer called 1857, and five years later it added the Brewery Hill brand, which was named after the location of the former Stegmaier brewery. Varieties included Honey Amber, Raspberry Red Ale, and Black and Tan, the latter of which was a blend of 1857 and Stegmaier Porter. Lion also began to turn out contract beers for such companies as Blue Hen Ltd. of Delaware; Neuweiler Brewing Company of Allentown, Pennsylvania; and Stoudt of Adamstown, which brewed its own tap beers but had turned to Lion for a bottled line.

Long-time company head Bill Smulowitz, whose father and three uncles had revived the firm after Prohibition, had led the firm through the difficult years of the 1970s and 1980s, and in 1993 he decided to retire and sell control to publicly owned investment group Quincy Partners of New York. Afterward, Lion would be run by new CEO Chuck Lawson and Chairman Donald Sutherland, who also headed Quincy.

In the mid-1990s Lion began a plant upgrade that boosted its capacity from 340,000 to 400,000 barrels, while converting an unused seven-ounce bottling line to 12-ounce, the most popular craft beer and soft-drink size. In 1994 the firm’s 1857 beer won the Gold Medal for American Premium Lager at the Great American Beer Festival in Colorado, while Liebotschaner Cream Ale won a gold medal in its category. The company’s beers, as well as some of those it produced under contract, won many other such medals over the next few years.

COMPANY PERSPECTIVES

The staff at The Lion Brewery is dedicated to producing true handcrafted beers, made right here in our century-old Brewhouse. All of our premium beers are made using only the four basic ingredients allowed by the Reinheitsgebot, or German purity law. Under the skillful supervision of our Master Brewer, Leo Orlandini, each of our lagers and ales are brewed in small batches using only the finest hops and malts available to guarantee the highest quality and freshness. Each product we brew is an original recipe especially created to deliver a fuller flavor than ordinary beers, yet with an approachable style and character. As a result, our beers have garnered numerous medals from the Great American Beer Festival and the World Beer Championships in recent years.

For fiscal 1995 Lion recorded sales of $24.8 million, up more than $3 million from the year before. Malta production accounted for 75 percent of the total, with the firm the drink’s leading brewer in the continental United States. Lion’s 130 employees also continued to produce craft beers and soft drinks under contract, with customers in the latter category including Mad River and Reed’s, whose ginger beer the firm had begun brewing in 1991 before taking on its entire line. The Reed’s brand was now reportedly the best-selling brewed soft drink in U.S. health-food stores.

INITIAL PUBLIC OFFERING IN 1996

In early 1996 Lion made an initial public offering of stock on the NASDAQ to help pay off debt and boost production and marketing of its craft beers, selling 1.8 million shares at $6 each. In the spring the firm began producing a lemon-flavored alcoholic drink called One-Eyed Jack for Better Beverage Importers of Delaware, while adding Brewery Hill Pale Ale and Cherry Wheat to its own offerings. The initial popularity of One-Eyed Jack caused contract production to surge as its distribution reached 30 states, at the same time that Brewery Hill was becoming available in more than a dozen.

In 1997 the venerable Stegmaier brand was relaunched with a new marketing campaign that touted its 140-year-old history, and more new varieties were added. The craft beer market was becoming saturated, however, and the firm was shifting its focus to concentrate more on regional sales.

That summer the company began producing a new premium soft drink called Lion Brewery Root Beer. In development for a year, it used natural flavors and contained no preservatives. The firm also began contract production of another alcoholic lemon brew, called Hooper’s Hooch, for Bass Beers Americas.

With craft beer production stagnant due to an overabundance of microbreweries and aggressive new marketing campaigns from beer importers and spirit makers, the price of Lion stock slipped to less than $4 per share. In the fall of 1997 the firm announced that it was hiring an adviser to explore strategic options to boost shareholder value, including a possible sale. The following spring Lion and Pennsylvania-based micro-brewery Stoudt formed a joint sales and marketing alliance to help increase sales of their beers.

MANAGEMENT-LED BUYOUT IN 1999

In the summer of 1998 the Philadelphia-based Red Bell Brewing Company made three separate offers to buy the firm, culminating in a bid of $19 million in August. Red Bell operated several brewpubs (microbrewery-restaurants) and also distributed its products in five states, using Lion as a contract brewer. Lion’s board rejected the offer, however, and several days later announced it would accept the $17.2 million bid of Malt Acquiring, which was led by CEO Chuck Lawson and chief financial officer Patrick Belardi.

Red Bell aggressively contested the acceptance of the lower offer, but after Malt Acquiring raised its bid to $18.5 million ($4.70 a share) the board signed a definitive sales agreement. A lawsuit to block the sale was subsequently filed by five Lion shareholders, who included two Red Bell executives, but the judge denied their petition and in January 1999 the firm’s shareholders voted to accept the management offer. After the sale, buyout specialists American Capital Strategies and PNC Bank would hold sizable stakes in the company.

In the fall of 1999 Lion was sued by a group of women who alleged sex discrimination in its hiring practices. The suit was settled the following September with the company agreeing to pay $500,000 to 57 women and train its staff in nondiscriminatory hiring. The year also saw part of the long-abandoned Stegmaier brewery reopened as a combined postal distribution center and federal office building, which preserved much of its historic architecture.

KEY DATES

1905:: Luzerne County Brewing Company is founded in Wilkes-Barre, Pennsylvania.
1920:: Prohibition begins; company switches to “near beer” with 0.5 percent alcohol.
1933:: Ted Smulowitz and Leo Swartz buy firm and rename it The Lion.
1940s:: Production reaches 200,000 barrels per year.
1967:: The Bartels brand is acquired.
1974:: Stegmaier and Liebotschaner brands are purchased.
1977:: Esslinger brand is added.
1982:: Company begins production of malta, a nonalcoholic grain-based beverage.
1987:: Firm begins making soft drinks.
1993:: Smulowitz family sells controlling interest in firm to Quincy Partners.
1996:: Company goes public on NASDAQ.
1999:: CEO Chuck Lawson leads an $18.5 million buyout, taking the company private.
2002:: Brewery Hill line becomes Pocono Lagers and Ales.
2003:: Lion wins organic certification to brew sodas for Steap and others.

In 2000 the company invested $1.5 million to replace its 50-year-old pasteurization equipment with a faster and more efficient version. A state Machinery and Equipment Loan covered one-third of the cost. Soon afterward, $400,000 more was spent to add equipment that applied clear plastic labels. The expenditures capped nearly $8 million in improvements made over the last ten years. Lion had been named Mid-Sized Brewery of the Year at the Great American Beer Festival and head brewer Leo Orlandini Brewmaster of the Year.

In April 2001 the firm introduced a new alcoholic brew called Lion’s Long Island Iced Tea, which was initially distributed in 14 states and sold well. In the fall, Chester’s Hard Root Beer was added, followed in early 2002 by Cosmo, a malt-based drink flavored with cranberry and citrus essences, and a few months later Kamikaze. Though they accounted for less than 3 percent of beer sales, so-called malternatives or alcopops were growing in popularity with both the public and with beverage makers. Because the alcohol was derived from malted grain, companies paid the tax rate of beer and could make more profit than from such higher-taxed drinks as wine coolers, which had the same level of alcohol.

In the spring of 2002 Lion rebranded its Brewery Hill line as Pocono Lagers and Ales, in honor of top-selling Pocono Lager, and added a light beer. The following January the firm introduced a new premium brand of soft drinks called Olde Philadelphia Gourmet Soda, whose ten flavors were offered in 12-ounce bottles.

ORGANIC CERTIFICATION IN 2003

In early 2003 the company won certification as an organic brewery, becoming the first of its type in Pennsylvania. Though relatively few production changes were needed to meet the standards, compliance meant an additional annual inspection, special cleaning and storage rules, and maintaining paperwork on all ingredients to ensure traceability. It would enable Lion to brew the nationally distributed Steap Green Tea Soda line for the Heavenly Beverage Company, as well as other drinks for Napa Valley Soda Company.

In the fall of 2004 Lion formed a marketing alliance with Christian Moerlein Brewing Company of Ohio. Each firm would represent the other’s products in their respective market areas, with Lion CEO Chuck Lawson heading the joint effort.

In 2005 the company celebrated its 100th anniversary. Though it had for some time claimed 1901 as the birth date, recent research had revealed it to be 1905. To mark the occasion the limited-edition Steg-maier India Pale Ale was offered, and the firm sponsored a two-day Oktoberfest event in the fall that was expected to become an annual event.

In January 2006 the firm replaced its 52-year-old copper brewing kettle with a new stainless steel one that would improve quality while giving better control over the brewing process. Lion was producing four seasonal specialty beers including Stegmaier Brewhouse Bock, a traditional beer style brewed in late winter.

The company had also seen a surge in sales of its unadvertised Lionshead brand, which cost just over $10 per case of 24 bottles. The brew won favorable reviews for its taste compared to other cheap beers and was a staple at Eastern Pennsylvania college parties. During 2006 the firm launched a MySpace.com Web page to promote it. Lion’s annual sales were now estimated at $37 million.

Over 100 years old and going strong, The Lion Brewery, Inc., had survived Prohibition and industry consolidation to find its niche making a range of alcoholic and nonalcoholic drinks. It continued to produce a popular line of regionally distributed beers under its own brand names, while contract brewing of malta, soft drinks, and other craft beers had helped underwrite the modernization of its plant and prepare it for new challenges.

Frank Uhle

PRINCIPAL COMPETITORS

D.G. Yuengling and Son, Inc.; Pittsburgh Brewing Company; Matt Brewing Company; High Falls Brewing Co., Inc.; City Brewing Company; Straub Brewery; Anheuser-Busch, Inc.; SABMiller plc; Molson Coors Brewing Company.