Boston Beer Company

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Boston Beer Company

75 Arlington Street
Boston, Massachusetts 02116
U.S.A.
(617) 482-1332
Fax: (617) 482-5527
Web site: http://www.samadams.com

Public Company
Incorporated: 1984
Employees: 196
Sales: $169.36 million (1995)
Stock Exchanges: New York
SICs: 2082 Malt Beverages

The leading specialty brewer in the United States, Boston Beer Company has made Samuel Adams known for being more than a signatory of the Declaration of Independence or a rebellious participant in the Boston Tea Party. Headquartered in Boston, Massachusetts, Boston Beer brews and markets Samuel Adams Boston Lager, an all-malt Pilsner-style beer based on a hundred-year-old formulation that continues to be the most popular “craft” beer on the market. In a competitive malt liquor market driven by increasingly discriminating upscale consumers, small “microbreweries” such as Boston Beer have become the dominant force. And Boston Beer’s pivotal role in sparking the microbrewery boom of the 1990s has become the stuff of business legend; although its success has propelled it over the top—technically, the annual production of a microbrewery must remain under 15,000 barrels—the company remains the yardstick by which industry success is measured. Within the domestic specialty beer market, the company’s sales are larger than the next five craft breweries combined.

Much of the success of Boston Beer has been its ability to foster and stay on top of a niche market for the second most popular beverage in the world (the first being tea). Unlike other microbrewers—skilled craftspeople who pride themselves on small-batch production and local distribution, often eschewing the “business” side of the business by leaving advertising to word of mouth—Boston Beer has been ambitious. A tiger in the industry, it went for the jugular, directly challenging high-priced imports like Heineken, St. Pauli Girl, and Beck’s. Strategically avoiding head-to-head combat with domestic giants like Miller Brewery, Anheuser-Busch, and Budweiser, whose highly financed promotional “lifestyle” campaigns feature frogs, dogs, and buxom, bikini-clad beach babes, Boston Beer aimed for a share of the six percent import market. Instead of gearing its product toward twenty-something middle-class males, Samuel Adams is marketed toward connoisseurs, beer aficionados with an eye for quality and a taste for an exceptional product. Advertising the weaknesses of imported beers, that is, that foreign brews headed for the United States have fewer premium ingredients, a “lighter” taste, and are less fresh because of long shipping times (like other perishable foodstuffs, beer “goes sour” and loses its flavor and quality after as little as four months), the company has prided itself on the quality of ingredients and brewing skill it brings to its products. By directly tackling the premium imports, Boston Beer would create a new marketing niche, domestically brewed premium beer, and assume a leadership position within the growing specialty beer market.

Founded in 1984 on Life Savings and Hard Work

Boston Beer Company was founded by C. James Koch (pronounced Cook), a Cincinnati native who moved to Boston to study at Harvard’s law and business schools. In the early 1980s, Koch (descended from five generations of brewmasters) noticed an increase in the sales of imported beers. In April 1984, with $100,000 of his own savings, $140,000 from supportive family and friends, and the sales savvy of Rhonda L. Kallman (his former secretary and, eventually, company marketing vice-president), 33-year-old Koch quit his well-paying job as management consultant to Boston Consulting Group. Armed with a recipe formulated by his great-great-grandfather, St. Louis-based brewer Louis Koch, he derived a beer that was more full bodied than typical U.S. brews. Koch’s recipe adhered to rigorous German beer purity laws that demanded top-quality ingredients and long brewing and fermentation periods. After cooking up the first few batches on his kitchen stove, Koch contracted with 30-year-veteran Pittsburgh Brewing Co. to manufacture his brown-bottled, premium lager in their modern plant. Door-to-door marketing of the new beer began in downtown Boston in 1985, netting Koch a customer base of 25 restaurants and bars. Shipments of Samuel Adams Boston Lager were under way by April. Ironically, Koch was unable to find a distributor willing to carry his product, so was forced to buy a truck and do it himself.

Because of the brew’s high retail cost—$20 per case, against Heineken’s $17—these first sales were the hardest. Koch and Kallman used a personal approach, encouraging bartenders to sample their product and explaining why Samuel Adams was a higher quality brew from a better company. Their dogged persistence eventually won over the New England market. By 1987 the company was poised to enter the finicky Manhattan market where, Koch contended in the Wall Street Journal, “New Yorkers are well behind other cities in accepting quality American beers.” He added, “But we’ve done so well elsewhere, we’re ready to invest the time and money in educating New York.” By 1988 Koch and Kallman had such a strong sales base that they were able to acquire $3 million from an investment banking firm for the purchase of an old brewery within Boston’s Jamaica Plains section. Although efforts to establish a full-scale brewing operation there were quickly nixed because of the prohibitive costs associated with outfitting a brewery, the location would serve as a research and development facility, as well as a tourist attraction.

Boston Beer Goes National, 1990–92

Boston Beer soon saw its distribution networks grow to include Washington, D.C., and Chicago. In 1990, as part of its controlled, targeted expansion strategy, the company further expanded its market by reaching an agreement with Portland, Oregon-based Blitz-Weinhart Brewing to brew and distribute its product in the western United States. It also opened the Samuel Adams Brew House in Philadelphia, where the Samuel Adams flagship brand is still brewed. Distribution increased in 1992, when California’s Pacific Wine Co. agreed to distribute Boston Beer products on the West Coast. With distribution now encompassing the 48 contiguous states, Koch watched 1992 sales increase 63 percent to $48.17 million, resulting in net income of $1.6 million.

Since upscale U.S. beer drinkers’ tastes ran strongly to imports, marketing a new high-end brew required some creativity. As early as 1986 Koch earmarked a large portion of the company budget for marketing. He composed some quirky radio advertisements promoting the quality of his product. And he did some flag waving, touting Samuel Adams as a made-in-the-U.S.A. alternative to pricey foreign brews. But, more important, Koch recognized the value in focusing his efforts on a specific market segment, rather than the general beer-drinking public. In addition to catchy slogans like “Declare Your Independence from Foreign Beer,” his ads were also an impassioned attempt to educate listeners about beer in general and about what made Samuel Adams unique, in particular.

Samuel Adams’s rise to the top had stronger foundations than the flurry of interest generated by a clever ad campaign, however. Boston Beer made a quality product. The company uses only four age-old ingredients—hops, malt, yeast, and water—a time-honored four-vessel, all-malt process, and a secondary fermentation process called krausening to create a smoother brew. Use of relatively rare European-grown Hallertau Mittelfrueh, Spalt Spalt, Saaz, and Tettnang Tettnang hops provides a distinctive aroma and spicy edge. Boston Beer watched its flagship brand win numerous awards at Denver’s annual Great American Beer Festival and more medals at the 1994 World Beer Championship than any other brew. Tellingly, Koch’s 1993 advertising campaign, which claimed his product as the best beer in the United States “four years running,” unleashed arguments and threats of litigation by rival microbrewers in an increasingly competitive beer industry. Similarly, ads claiming that Samuel Adams was the sole American beer imported into Germany ruffled feathers of more than one competitor who maintained a European market for their product. Ultimately, the hue and cry over Koch’s jealous advertising strengthened the name recognition of his company’s product as consumers went to the bar to find out what all the fuss was about.

Due to both clever ad strategies and quality products, Boston Beer watched its production increase from 294,000 barrels in 1992 to 714,000 by 1994. From 1992 to 1993 the company expanded its employee base from 87 to 110; the following year would see 170 people working to produce and promote Boston Beer products. These increases in production and staff were the result of increased sales; the company’s sales staff, which numbered more than 90 people by the end of 1994, personally contacted customers whose collective beer tab earned the brewer a net income of more than $9 million. Well trained in brewing techniques—all company employees are required to spend a day brewing beer in Boston—company salespeople continually educate retailers about the quality of their products.

As sales and profits increased, so did the money the company allotted to advertising. Boston Beer sponsored bar beer nights that featured Samuel Adams t-shirt and cap giveaways, distributed coasters, table cards, restaurant umbrellas, and menu boards, and donated their product to charity events to increase public exposure. Samuel Adams was served at each of the social balls and dinners that accompanied President Clinton’s ascension to the presidency in 1993. By 1995, along with other microbreweries like Mistik Beverages, Boston Beer began to consider the benefits of a television advertising campaign to tout its product; television testing was still under way through 1996.

Company Perspectives:

Investment in the Boston Beer Company is an investment in the dominant brand of the high growth craft beer category. The Company’s growth strategy is based on creating and offering the highest quality full-flavor beers. We are continuing to prove our ability to execute this strategy … profitably. Cheers!

Public Offering in 1995

Prompted by its forward momentum, Boston Beer made the decision to go public in 1995, offering 3.1 million shares that November. Of those, it held back 990,000 shares, directing these toward its loyal customers. These customers included not only the bar owners, shop owners, and wholesalers who distributed company products; every six-pack of Samuel Adams sold at retail came with a mail-in coupon for discounted shares in Boston Beer’s growing operation. More than 130,000 customers were quick to invest in a piece of their favorite brew.

By the close of the year the company reported net income of $5.9 million on revenues of $151.3 million. Production was a record 961,000 barrels divided among an increasing array of products that included Samuel Adams Brand Ale, Boston Lager, Cream Stout, Honey Porter, and Triple Bock, as well as such tempting seasonal variations as Cranberry Iambic and Winter Lager. In addition, the company produced and marketed beers under the Boston Lightship brand. The Oregon Original brands, brewed by the company-owned Oregon Ale and Beer Company, had also been introduced to most major markets by 1995.

The Sincerest Form of Flattery

Not surprisingly, Boston Beer’s success spawned a host of imitators. In fact, throughout the early 1990s approximately 55 new breweries were established each year. Of these, the company perceived a real threat in the similarly named Boston Beer Works. Although Boston Beer would sue the coattail brewery, it lost the suit in 1994.

In addition to encouraging other beer-brewing entrepreneurs, the major U.S. breweries did not respond to the advances made by Boston-based upstart Koch by lying down. Watching a segment of a relentlessly sluggish beer market mushroom almost overnight would tantalize any businessman. Beer giants Anheuser-Busch, Coors, and the Philip Morris-owned Miller Brewery used their leverage to try to restrict the supply of raw materials and national distribution network of the entire microbrewery industry, a $400 million market divided among almost 500 brewers by 1994. Their efforts would force many craft brewers to confine their distribution within regional markets, with a select few becoming the targets of takeovers as the giants maneuvered for a piece of the growing microbrew pie.

The “if you can’t beat ‘em, join ‘em” strategy proved to be increasingly popular as well. Adopting an increasing array of small-scale guises, such as Miller’s nonexistent Plank Road Brewery (Miller’s original name in 1855), the major breweries attempted to cash in on the micro movement by introducing a battery of so-called “craft” beers into the high-end marketplace. Aesthetically appealing labels proclaiming brands like Red Dog, Killian, Blue Moon, Elk Mountain, Eisbock, Leinenkugel, Red Wolf House, and Augsburger could be seen filling retail beer shelves and popping up in point-of-sale tavern displays. Even importers responded to the competition by distributing “micros” of their own, such as Heineken’s Tarwebok and Labatt’s Moretti La Rossa.

The Future of the Beer Industry

Although Boston Beer’s third quarter 1996 results once again showed record results, the 294,000 barrels sold were fewer than the company had expected for its product line, sending mini-shockwaves throughout the microbrewery industry. Other small-scale brewers, many of whom were fledgling operations, wondered if the wave they had been riding had crested. While the overall beer market continued to stagnate because of the increasing influence of health-conscious consumers, however, the market for upscale craft beers remained on an ascent—albeit one not quite as steep—as these same consumers expressed a clear preference for quality malt liquor products when they did choose to indulge. On the strength of third quarter net sales of $46.1 million the company went ahead with the planned purchase of Cincinnati’s historic Hudepohl-Schoenling Brewing Co., its Midwest contract brewery.

Throughout 1996 beer sales began to level off across the board, with both micros and large brewers alike posting more moderate increases in sales. Feeling an especially acute pinch due to lackluster Budweiser earnings, Anheuser-Busch fronted a group complaint to the Bureau of Alcohol, Tobacco and Firearms (BATF) leveled against Boston Beer, Pete’s Brewing Co. (makers of Pete’s Wicked Ale), and fellow top-gun brewer Miller. Accusing the two micros of false advertising in their reported claims to brew “in small batches” instead of through large-scale contracted breweries, Busch and associates also demanded that Miller’s parentage of both Icehouse and Red Dog be legitimized on the label rather than cloaked by its fictitious alter-ego, the Plank Road Brewery.

In retaliation, in March 1996 Boston Beer petitioned the BATF to request “full disclosure” on all beer labels. This would end the widespread use of encoded freshness dates and require point of product origin to be clearly identified. Boston Beer has been among only a handful of brewers to print encoded freshness dates on their products so that they can be evaluated by consumers, a practice they initiated in 1989. The brewer also accepts product returns after expiration dates have been reached. Boston Beer’s move to raise industry accountability to its own standards quickly got the nod from Consumer Reports, which praised both the company’s packaging and product by voting Samuel Adams the best in the United States in its 1996 craft-brewed ale taste test.

Boston Beer also began efforts to bring its brew home to Boston, purchasing an abandoned brewery that it slated for renovation and planned for operation by January 1977. Meanwhile, the regional distribution of company-contracted brewing sites—which include Pittsburgh Brewing Co., upstate New York’s F. X. Matt Brewing Co. and Genesee Brewing Co., Cincinnati’s Hudepohl-Schoenling Brewing Co., and the Stroh-owned Blitz-Weinhart—continued to ensure the freshness of its products to its large customer base outside the greater Boston area.

Innovation Continues

In its position as microbrewery industry leader, Boston Beer has continued to encourage cultivation of the brewmeister’s art. In 1995 it organized the first annual World Homebrew Championships, a summer gathering of 60 judges entrusted with the task of choosing the best among brews from around the world. Three category winners were announced in 1996 and their brews successfully marketed by the company under the names LongShot American Pale Ale, LongShot Hazelnut Brown Ale, and LongShot Black Lager. Boston Beer also entered into a working relationship with Seagram Beverage Company. Under the terms of the agreement, in exchange for ownership of both trademark and trade name and future royalties on sales, the company agreed to aid the liquor giant in the development and marketing, in 1997, of its new Devil Mountain craft beer line.

Commanding a sales force of 115 people by 1996, Boston Beer began to introduce its product line internationally; not only Germany, but also Ireland, Japan, and Hong Kong have welcomed Samuel Adams. In May of 1996 the company signed an agreement with England’s Whitbread PLC to aid the United Kingdom’s fourth largest brewery in the development of a craft brew catering to British tastes. The company also literally took to the skies, as Samuel Adams became American Airlines’ in-flight beer on transcontinental flights beginning in mid-1996.

Industrywide Rankings Disguise Reality

Although pleased to have acquired an international profile, the company’s efforts remained concentrated upon its domestic market. Its goals continued to be educating the consumer and developing a taste for a top-quality beer while maintaining profitability. Despite its ranking as one of the top ten brewers in the United States, Boston Brewery prides itself on being a small fish in an ocean containing a few large sharks; in the mid-1990s, the combined sales of the entire U.S. microbrewery industry accounted for less revenue than the total sales of Michelob Light in any one year. In a market dominated by a handful of giants, tenth-ranked Boston Brewery is, in the words of Koch, “like being the 12th largest car company.” Anheuser-Busch’s production had reached the millionth barrel by the first week of the year, the company CEO explained to Greg W. Prince in Beverage World. “When I tell people we’re one five-hundredth of the beer business, … [they] are surprised at how small we really are.”

Koch continued to indulge in the brewer’s art, deriving new brews for the discerning palate. During 1995 he introduced three new products—Scotch Ale, Cherry Wheat, and Old Fezziwig Ale—increasing the company’s product line to 14. Triple Bock, first introduced in 1994, is a dark, sherry-like barley beer that is aged in oak casks. An acquired taste, it is a sipping beer that boasts a 17 percent alcohol level.

Similarly, Boston Beer continued its commitment to satisfying a broader spectrum of discriminating consumers looking for a quality product. Its spicy Cherry Wheat Ale, introduced as a seasonal brew, became an annual product due to customer demand. The company’s LongShot beers and Oregon Original brands continued to post record sales in a competitive market. Boston Beer was also encouraged by the fact that the market for specialty beers in the 1990s had expanded to include not only yuppie business people but twenty-something drinkers as well. These younger drinkers have gained their more sophisticated taste for malt liquors on the strength of the craft beer renaissance, a phenomenon directly attributable to Koch and Boston Beer.