Monday, April 26, 2010

All in Due Time- Boston Beer

In the 1970s and early 1980’s Jim Koch observed the growth in the wine industry in America. The University of California, Davis, and some state universities in New York published reports on which grape varieties grew best in which regions of the country and also offered winemaking and grape improvement seminars spurring a revolution in the American wine industry. The public responded to the new offerings in a big way. Jim, however, came from a family of Brew meisters and his passion was beer.

It is important to establish that Jim Koch is a well educated man with a BA, MBA and JD degrees from Harvard University. This fact helps to explain his judicious approach to his business and its growth. In 1984 with growing American acceptance of premium imported beers Jim Koch established Boston Beers using the best business research and ingredients at his disposal. He left a six figure income at Boston Consulting, a renowned consultant to the world’s business leaders to establish a micro-brewing legend. Using an old family recipe, Koch soon realized that a great beer would have a premium price tag. He was undeterred. With a solid understanding of pricing theory he took that as a positive marketing position. Premium price is consistent with quality and when it only amounts to 30 cents a bottle he knew that it was not a problem but an opportunity. Koch encountered the difficulty of finding adequate funding to starting a new business but he used his own savings and with just under a quarter of a million dollars in total of his own and the money from friends and family he began his enterprise. This bankroll would not allow for bricks and mortar so Koch subcontracted the brewing. He was adamant about quality. He made sure to get the endorsement of the right people and won the Best Beer in America contest at the Great American Beer Festival just three months after Samuel Adam’s introduction. With personal visits to local bars and persistence, he began to establish a following for the robust beer. He encountered problems with distributors so he bought a truck in the Boston area and Boston beer delivered its own beer initially. He was on his way.

Koch also understood that great advertising revolves around having a good story to tell- preferably one with a villain. He distinguished his product by advertising in a manner that was unlike the beer commercials that the public was used to seeing. Koch made a serious appeal to American patriotism about the quality of American made Samuel Adams beer pitting it against the invaders. He couched his ads in the language of the Declaration of Independence urging them to “declare their independence from European beers.” Even the beer’s name “Sam Adams” brought together the idea of both beer and patriotism.

Koch expanded Boston Beer judiciously. Region by region he expanded making sure that the quality and the sales were in place before taking on another region. By 1989 they had a sales force which was dedicated to their line of beer alone. By 1992 they went national and sales soared by 63%. They added new beers and new flavours. By 1994 they were marketing the beer with the highest alcohol content in the world. In 1995 Koch used his IPO as another attention gaining device with coupons on the beer packaging that allowed customers to buy 33 shares of the company for $15 per share or $495 and the stock rose within days to $30 per share. It was an exciting time for Koch. Still, he steered a straight course and kept costs low by continuing to contract brewing.

People were drinking less beer per capita for health, diet and appearance issues. When they did drink beer, they wanted it to be really good. In the mid nineties the big breweries could no longer afford to ignore the plethora of microbreweries. Boston Beer had become the seventh largest brewery in America and dominated the microbrewery category. The big boys began to respond with Ice beer and other distinctive beers. By the year 2000 there were so many microbreweries that they were eroding Boston Breweries market share so Koch responded by cutting products.

In 2002 Koch reasserted his natural talent for publicity and led a ten city tour pitting Boston Beers and three microbrewery beers from local vendors against his villains, the imports, in what he called the “Liquid Lunch Tour”. In all cities his beer triumphed in blind taste tests. Koch has consistently made his fight against the ‘foreigners” and has embraced other microbrews and America. In a time of crisis for microbrewers, Koch even came to their aid when hops were not available proving his good will.

By 2005, sentimentality or quality control finally lured Koch into the bricks and mortar world of brewery ownership when he bought the brewery in which his father had apprenticed. It cost him a lot of money in restoration and process improvement but it did not put the company in jeopardy. In addition, he bought another building to maintain production when the first went down. They were, however, able to reintroduce some of the beers that they had stopped producing and they won a variety of international awards as well. Here are some of the factors that I believe influenced Koch’s slower expansion and continual solidification of the business gains. Per capita consumption of alcohol In North America peaked in 1980s. The people that were in their twenties during the 1970s were the heaviest drinkers America has seen. Interest in more sophisticated beverages has increased. It appears that adults over 40 are fuelling the growth in market share. These boomers are the population that drink and the younger demographic is not likely to follow in their patterns. While the consumption of coffee is increasing in the younger demographic, fuelling the optimistic expansion of Starbucks, Koch realized that he was dealing with a very different phenomenon requiring a different approach.

I believe the secrets to Koch’s success are the following:

1. Knowledge in brewing and in business
2. Knowledge of his target market
3. A recession resistant product
4. A deep belief in the superiority of the product
5. A sense of timeliness and market readiness.He was aware that his demographic the biggest drinkers in modern history were aging and looking for a different experience at that point in time.

6. Self control- Lack of the need to build a personal edifice in the early days.The things the business needed like advertising were put ahead of what the company could live without like buildings of their own.

7. Judicious spending – he was dealing with the money of family and friendsso unlike many that are dealing with the money of strangers, he was careful.

8. Prudent expansion: maintaining quality, delivery and customer satisfaction
9. A great sense of theatre and psychological advertising hooks
10. Knowing how to pick a fight with “enemies” and support your friends.
11. Commitment to quality and service
12. A sense of destiny in bringing back a family legacy
13. He made it easy for people to buy what he sold (Koch showed barmen and retailers how they could make more money with premium beer).

“"Per capita consumption of beer and alcohol is going down, as it has for 20 years. It's no surprise. People are drinking less, and they're drinking better. Per capita beer consumption peaked 20 years ago, and it's down almost 20 percent. And that's true with all alcohol. .So if people aren't drinking as much individually, the key is to trade them up so that what they are drinking translates into higher profits.” Jim Koch said to a group of MBA students.

Today the top five largest brewers are: Anheuser-Busch, Miller, Coors, S&P and Boston Beer. Boston beer has just registered its 16th consecutive year of growth. To stay there Koch educates retailers in the practice of ‘trading up’. Merchandising is the message. He encourages them to put higher profit beer like Samuel Adams up front in a more prominent position so that the retail makes more profit while also encouraging them to make customers work to find cheaper lower profit brands. He believes that two thirds of decisions are made at point of purchase so that is the place to nab them.

"During the last recession in the late '80s and early '90s, we continued to grow at enormous rates," he explains. "What happens during an economic downturn is that better beer becomes a very affordable indulgence. It's not like you're buying a $40 bottle of wine. It's not like you're going out for a $100 dinner. You pay $2 or $3 more for a 6-pack of beer….You're not going to stop treating yourself." Koch

Koch found his market segment and he is mining it. Samuel Adams has introduced ‘Utopias’ which have been recognized by the Guiness Book of World records as the strongest beer in the world with up to 27% alcohol by volume. A noncarbonated beer, it is aged in scotch, cognac or port barrels for almost a year and then uniquely packaged. It sells for $150 per bottle. In 2009 new flavours were introduced and Koch continued to involve the customer by having consumers vote on their favourites. Boston Beers began the Imperial series of even better beers with higher alcohol content at more regular prices the same year. They also produced a limited brew only on tap in select bars which supports an entrepreneurial fund which supports new business ventures. In addition, the manufacture Twisted Iced Tea and HardCore hard apple cider is marketed under a separate name. Like the wine industry that he has emulated, he offers limited “vintages” of beers in his brewery gift shop along with glasses specially designed to enhance the beer drinking experience by funnelling the aromas to the nose.

2009 was a busy year because the Boston Beer company jointed with Weihenstephan, a German brewery to produce a new craft beer for the German and US markets in 2010. In twist sure to appeal to Koch the German brewery was founded in 1040 by Benedictine monks. I bet he will weave a story from that! Koch has become a very subtle invader of Europe! They say what comes around goes around or as the tag line for Samuel Adams says: All in due time!

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