Jim Koch was obsessed with becoming an entrepreneur. He wasn't quite sure where ne should do his entrepreneuring. Maybe the brewing industry? Years before, his great-great-grandfather, Louis Koch, had concocted a recipe at his St. Louis brewery that was heavier, more full-bodied than such beers as Budweiser or Miller. However, it was much more expensive to produce than mass-market beers. It involved a lengthy brewing and fermentation process, as well as such premium ingredients as Bavarian hops that cost many times more than those regularly used by other brewers.
Jim had a well-paying job with the prestigious Boston Consulting Group. He had been with them for six-and-a half years already, but still he was haunted by that dream of becoming his own man. Of late, the thought pursued him that maybe the brewing industry might be ripe for a new type of product and a new approach, a good-tasting brew something like his ancestor's. He wondered if he might have a strategic window of opportunity in a particular consumer segment: men in their mid-twenties and older who were beer aficionados and would be willing to pay a premium for a good-tasting beer. What he couldn't be certain of was how large this segment was, and he knew from his consulting experience that too small a segment doomed a strategy. So, were there enough such sophisticated drinkers to support the new company that he envisioned?
In 1984, he thought he detected a clue that this might indeed be the case: Sales were surging for import beers such as Heineken and Beck's with their different tastes. Didn't this portend that enough Americans would be willing to pay substantially more for a full-bodied flavor?
As he studied this more, Koch also came to believe that these imports were very vulnerable to well-made domestic brews. They faced a major problem in maintaining freshness with a product that goes sour rather quickly. He knew that the foreign brewers, in trying to minimize the destructive influence of the time lag between production and consumption, were adding preservatives and even using cheaper ingredients for the American market.
Some small local brewers offered stronger tastes. But they were having great difficulty producing a lager with consistent quality. And he sensed they were squandering their opportunity. Although they could produce small batches of well-crafted beer, albeit of erratic quality, what they mainly lacked was ability and resources to aggressively market their products.
He thought now that he had indeed found the right niche, a strategic window of opportunity, for becoming an entrepreneurial success. See the following Information Box for further discussion of a strategic window of opportunity and its desirable accompaniment, a SWOT Analysis. But in the dark of night nagging thoughts assailed him: Strategic window or not, Boston Consulting Group background or not, could a small brewer possibly compete with the big boys? With their mightly clout and distribution networks and millions for promotion?
Koch decided to take the plunge, and gave up his job.
Amassing sufficient capital to start a new venture is the common problem with almost all entrepreneurs, and so it was with Koch. Still, he was better off than most. He had saved $100,000 from his years with Boston Consulting, and he persuaded family and friends to chip in another $140,000. But while this might be enough to start a new retail or service venture, it was far less than the estimated $10 million or more needed to build a state-of-the-art brewery.
Koch got around this major obstacle. Instead of building or buying, he contracted an existing firm, Pittsburgh Brewing Company, to brew his beer. It had good facilities, but more than this, its people had the brewing skills coming from more than 20 years of operation. He would call his new beer Samuel Adams, after a Revolutionary War patriot who was also a brewer.
A mighty problem still existed, and the success of the venture hinged on this. Koch would have to sell his great-tasting beer at $20 a case to break even and make a reasonable profit. But this was 15 percent more than even the premium imports like Heineken. Would anyone buy such an expensive beer, and one that didn't even have the cachet of an import? See the Information Box: Competing on Price, Revisited.
It fell to Koch as the fledgling firm's only salesperson to try to acquaint retailers and consumers with his new beer, this unknown brand with the very high price. "I went from bar to bar," he said. "Sometimes I had to call 15 times before someone would agree to carry it."[235]
He somehow conjured up enough funds for a $100,000 ad campaign in the local market. Shunning the advertising theme of the big brewers, which almost without exception stressed the sociability of the people drinking their brand, Koch's ads attacked the imports: "Declare your independence from foreign beer," he urged. And the name Samuel Adams was compatible with this cry for independence. Foreign brews were singled out as not having the premium ingredients and quality brewing of Samuel Adams. Koch appeared on most of his commercials, saying such things as: "Hi, I'm Jim Koch... It takes me all year to brew what the largest import makes in just three hours because I take the time to brew Samuel Adams right. I use my great-great-grandfather's century-old recipe, all malt brewing and rare hops that cost ten times what they use in the mass-produced imports. [236]
Gradually his persistence in calling on retailers and his anti-import ads, some of which garnered national attention in such periodicals as Newsweek and USA Today, induced more and more bartenders and beer drinkers to at least try Samuel Adams. Many liked it, despite the high price. (Or, perhaps, because of it?)
Now his problem became finding distributors, and this proved quite daunting for a new firm in this industry where major brands often had a lock on existing wholesalers. The situation was so bad in Boston—no wholesaler would carry Samuel Adams even though it was a local brand—that Boston Beer bought a truck and delivered the cases itself.
Koch slowly expanded his distribution one geographical area at a time, from Boston into Washington, D.C., then to New York, Chicago, and California, taking care that production could match the steady expansion without sacrificing quality. He brought in his secretary at Boston Consulting, Rhonda Kaliman, to assist him in building a sales organization. This grew from less than a dozen sales reps in 1989 to 70 nationwide by 1994, more than any other microbrewer and about the same number as Anheuser-Busch, the giant of the industry. Now, Samuel Adams salespeople could give more personalized and expert attention to customers than competitors whose sales reps often sold many beverage lines.
Sales soared 63 percent in 1992 when the company went national and achieved distribution in bars and restaurants in 48 states. In a continual search for new beer ideas, Boston Beer added a stout, a wheat beer, and even a cranberry lambic, a type of beer flavored with fruit. Adding to the growing popularity were the numerous industry awards and citations Samuel Adams had received since 1984. It was not only voted the Best Beer in America four times at the annual Great American Beer Festival, but also received six gold medals in blind tastings.
In April 1994, Jim Koch and two of his brewmasters were testing their entry in the Great American Beer Festival, "Triple Bock." They had not yet tried to market this creation, although their expectations were high. But this was so different. It boasted a 17 percent alcoholic content with no carbonation, and they planned to package it in a cobalt bottle with a cork. It was meant to be sipped as a fine brandy. "It's a taste that nobody has ever put into a beer," Koch said.[237] Too innovative? Jim and his colleagues pondered this as they sipped on this beautiful spring day.
In 10 years, Boston Beer had forged ahead to become a major contender in its industry and the largest U.S. specialty brewer. But a significant change in consumer preferences was confronting the industry in the 1990s. The big brands that had been so dominant, to the extent that smaller brewers could not compete against their production efficiencies, now were seeing their market shares decline. The brand images they had spent millions trying to establish were in trouble. Many were cutting prices in desperate attempts to keep and lure consumers. For example, special price promotions in some markets were offering 12-packs of Budweiser, Coors, and Miller for just $1.99.
The shifting consumer preferences, and the severe price competition with their regular brands, were compelling the big brewers to seek the types of beers that would command higher prices. Imports were still strengthening, growing at an 11 percent rate between 1993 and 1994. But microbrews seemed the wave of the future, with prices and profit margins that were mouth-watering to the big barons of the industry.
Consequently, the major breweries came up with their own craft brands. For example, Icehouse, a name that conveys a fake microbrewery image to a beer was actually produced in megabreweries by Miller Brewing. So too, the pseudo-import Killian's Irish Red, was made by Coors in Golden, Colorado. Killian's, stocked in retailer's import cases and commanding a high price, muscled its way abreast of Samuel Adams as the largest specialty beer in the United States.
The brewing industry was desperately trying to innovate. But no one saw anything revolutionary on the horizon, not like the 1970s, when light beer made a significant breakthrough in the staid industry. Now, "ice" beers became the gimmick. First developed in Canada, these are beers produced at temperatures a little colder than ordinary beer. This gives them a slightly higher alcohol content. Whether because of this, or the magic of the name "ice," these products captured almost 6 percent of total industry sales in 1994, more than all the imports combined. But, still, the potential was limited.
Anheuser-Busch, with a still dominant 44 percent of U.S. beer sales despite its 9 percent sales volume slide in the early 1990s, asserted its reluctance to change: "The breweries that we have are designed to produce big brands. Our competition can't compete with big brands. That's why they've had to introduce lots of little brands."[238] But even Anheuser, despite its words, was sneaking into microbrewing by buying into Redhook Ale Brewery, a Seattle microbrewery that sold 76,000 barrels of beer in 1993, versus Anheuser's 90 million. Anheuser's distributors applauded this move as a badly needed step in giving them higher-profit, prestige brands. When Anheuser tiptoed into this market, other giants began to look for microbreweries to invest in.
This troubled Jim Koch: "I'm afraid of the big guys. They have the power to dominate any segment they want." Then he expressed his faith and confidence: "Still, my faith is that better beer will win out."[239]
In August 1995, Boston Beer announced an initial public stock offering (IPO) of 5.3 million shares, of which 990,000 shares would be made available directly to the public through a coupon offer. This selling of shares to the general public was unlike any other IPO and, as such, caught the fancy of the national press.
The company put clip-and-mail coupons on Samuel Adams six-packs and other beer packages. These offered customers a chance to buy 33 shares of stock at a maximum price of $15, or $495 total. Only one subscription was allowed per customer, and these were honored on a first-come, first-served basis. The success was overwhelming. First distributed in October, by the first of November the offering was oversubscribed. The company expected that the total funds generated from the IPO would be $75 million.[240] But when the new stock offering finally came out on November 20, 1995, heavy demand led to its being priced at $20 a share. Two days later it was selling on the New York Stock Exchange for $30. Interestingly, its stock symbol is SAM.
Boston Beer was riding a high. It reported an impressive 50 percent growth in 1994 over 1993, brewing 700,000 barrels and becoming the largest microbrewery in the country. The entire microbrewing industry was producing more than double the volume in 1990. By now Boston Beer had 12 different beers, including six seasonals, and was distributing in all 50 states through 300 wholesalers. Its newest beer, the 17-percent alcohol content Triple Bock, had been introduced to the market.[241]
Most of Boston Beer's production continued to be contract brewed. In early 1995, it encountered difficulties with Pittsburgh Brewing, the first of the three contract breweries it was now using. Because of an alleged overdraft of $31 million by its owner, Michael Carlow, who was accused of fraud, the brewery was to be auctioned off. Jim Koch stoutly professed having no interest in buying the brewery and that any problems of Pittsburgh Brewery would have no effect on Boston Beer.[242]
See the following Information Box for a discussion of contracting out rather than building production facilities.
By 1998, Samuel Adams had become the seventh-largest brewer overall, and was the largest independent craft brewer, in a sector that had grown 39 percent in a five-year period, while U.S. total beer shipments remained virtually flat. Samuel Adams Boston Lager, the company's flagship product, grew faster than the overall craft beer sector, and accounted for the majority of Boston Beer's sales in 1997.
For 1997, revenues were $184 million, down 3.8 percent from the year before, but a major increase from the $77 million in 1994, the year before Boston went public. Net income at $7.6 million was a decline of 9.9 percent from the year before, but this compared with $5.3 million in 1994.
Boston Beer produced more than two dozen styles of beer, and was selling in all 50 states and several foreign countries. Its sales force was still the largest of any craft brewer, and one of the largest in the domestic beer industry.
The acute disappointment had to be the stock-market valuation of its shares. An exuberant public reaction to the initial stock offering had bid the price up to $30 a share. Almost immediately, the share price began a slow decline. By late 1998, shares were trading around $8.
The situation had not improved significantly by the millennium. Indeed, the growth that had so bedazzled Koch and early investors seemed only an illusion. Samuel Adams had been the forefather of microbrews, but this specialty market had now spawned 3,000 microbrews, all competing within the $3 billion beer market—a market that represented just 3 percent of the U.S. beer market—with a mind-boggling array of ciders, ales, stouts, and so-called better beers. "After people got inundated with so many choices... they kind of stepped back," said one industry analyst.[243]
Koch drastically cut back his assortment of brews, concentrating only on bestsellers: the flagship lager and four seasonal brews. He went through four advertising agencies in six years trying to find the right pitch, but without much success. Experts were wondering if Koch would eventually sell out to a big brewer such as Miller. By mid-2001, the stock price ranged from $8 to $10 a share, still a disaster for its IPO investors.
Table 15.1 shows the trend in revenues and net income for 1998 through 2005. Sales and profits show little growth trend during this five-year period. The stock price ranged between $10 and $18 a share for 2003. 2005 had better results, with the stock price ranging from $20.71 to $27.27. Still, for those investors who bought at or near the initial offering in 1995, this was hardly a coup.
In August—National Beer Month—of 2002, Koch led a 10-city "Liquid Lunch" taste-test tour, pitting three Samuel Adams beers and local craft beers from each of the cities against leading international brews, such as Heineken, Corona, and Guinness. The beers were scored according to appearance, aroma, flavor, mouth-feel, and overall impression. The taste testers included beer enthusiasts, consumers, journalists, and winners from local radio-station promotions.
In one-on-one taste tests, Samuel Adams was preferred over the imports in all 30 blind taste-offs. Many of the local brews also bested their foreign competition. Koch's crusade against imports received a good promotional push. He declared: "These imports have been considered the world standards. But I believe when you take away the fancy bottles and marketing mystique of imported beer, you discover that Samuel Adams and other American brewers simply make better tasting beers."[244]
Table 15.1. Boston Beer Revenue and Net Income, 1998–2005 (in millions)
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|---|---|---|
Source: Company annual reports. | ||||||||
Commentary: Here we see a company with practically no growth from 1998 through 2003, even though revenue increased slightly during these five years. Net income, however, did not exceed that of 1999 and 2000 until 2004. Then 2005 finally looked like a banner year, giving hope of much better days to come. However, the stock market valuations for 2005 ranged from a low of $20.71 to $27.27. These statistics show a stable company, one comfortably established in its own niche. Unfortunately, this is little consolation for those investors who bought at the initial public stock offering (IPO) of $20 a share in late November 1995, or bought a few days later at $30 a share, expecting big growth. | ||||||||
Revenue | $183.5 | $176.8 | $190.6 | $186.8 | $215.4 | $238.3 | $239.7 | $263.3 |
Net Income | 7.9 | 11.1 | 11.2 | 7.8 | 8.6 | 10.6 | 12.5 | 15.6 |
In January 2005, Jim Koch announced that he would spend nearly $7 million modernizing an old brewery in Cincinnati to restore roots deep in Ohio's German heritage. Koch's father had once apprenticed in the brewery, and now the expansion would mean that nearly two-thirds of Samuel Adams beer would be produced and bottled in Ohio by the end of 2005. The mayor and other city officials downed bottles of beer with Koch to toast the economic coup of gaining 100 new jobs. Boston Beer's annual sales remained at about $208 million a year. "Anheuser spills more in a day than we make in a year," Koch quipped.[245]
Although many entrepreneurial opportunities come in the retail and service indusries, mostly because these typically require less start-up investment, Jim Koch saw the possibility in beer, even without a huge wallet. He started with $100,000 of his own money and $140,000 from friends and relatives. He had the beer recipe and determination. By contracting out the production to an existing brewery with unused production capacity, the bulk of the start-up money could be spent on nonproduction concerns, such as advertising.
His determination to gain acceptance of his beer, despite its high price and lack of foreign cachet, is characteristic of most successful entrepreneurs. They press on, despite obstacles in gaining acceptance. They have confidence that their product or concept is viable. They are not easily discouraged.
At the same time, Koch believed he had something unique, a flavor and quality that neither domestic nor imported brews could deliver. He had the audacity to make his product still more unique by charging even higher prices than the imports, thus conveying an image of highest quality.
His search for uniqueness did not end with the product. He developed an advertising theme far different from that of other beers by stressing quality and aggressively attacking the imports: "Declare your independence from foreign beer." And he was the spokesman on TV and radio commercials, giving a personal and charismatic touch.
As Boston Beer moved out of regional into national distribution, Koch developed a sales force as large as Anheuser-Busch, the giant of the industry. His grasping of uniqueness even went to Boston Beer's initial public stock offering, in which customers were invited to buy into the company through coupons on six-packs. And it was oversubscribed in only a few weeks.
The temptation for any firm, when demand seems to be growing insatiably, but especially for newer, smaller firms, is to expand aggressively: "We must not miss this opportunity." Such optimism can sow the seeds of disaster, when demand suddenly lessens because of a saturated market and/or new competition, leaving our firm with too much plant and other fixed assets, and a burdensome overhead.
Controlled growth—we might also call this "aggressive moderation"—is usually far better. Now our firm is not shunning growth, even vigorous growth, but is controlling it within its present resources, not overextending itself. Boston Beer showed this restraint by expanding within its production capability, adding several more contract brewers as needed. It expanded market by market at the beginning, only moving to a new geographical area when it could supply it. First was Boston, then Washington D.C., then New York, Chicago, California, and finally all 50 states.
Besides husbanding resources, both material and personnel, aggressive moderation is compatible with the tightness of controls needed to assure high-quality product and service standards. Even more than this, moderation allows a firm to build the accounting and financial standards and controls needed to prevent a dangerous buildup of inventories and expenses.
It is difficult for a new firm to perceive, in the heady days of growth, that its growth potential is sorely limited without drastic and risky changes. Limits on potential usually are due to two factors:
Ease of entry into the industry, which encourages a host of competitors. This turned out to be especially true with the influx of microbrewers, to 3,000 in just a few years.
Finite potential in demand. (This also affected the high-tech industry and the collapse of the NASDAQ at the turn of the millennium.) Demand for specialty beer, while at first robust and rising, was certainly not going to take over the mainstream beer market.
Given the rush to microbreweries in an environment of limited demand, the aspirations of Jim Koch to be a dominant force in the brewing industry had to be curbed. He could still be a profitable firm and do well in his niche, but he would never be a challenge beyond that. Perhaps that is enough for most entrepreneurs. They can hardly expect to grasp the golden ring of complete market dominance.
Invitation for Your Own Analysis and Conclusions
We welcome your analysis of Jim Koch and his Boston Beer enterprise. Do you see any business plan that might have made him more successful, a bigger factor in the market?
Have you ever tried one of the Boston Beer brews? If so, how did you likethe taste? Did you think it was worth the higher price?
The investment community evidently thought Boston Beer had great growthprobabilities to have bid up the initial price so quickly. Why do you supposeso many fell into this trap? Or was Jim Koch a poor executive in not bringingBoston Beer up to their expectations?
"The myriad specialty beers are but a fad. People will quickly tire of an expensive, strong-flavored beer. Much of it is just a gimmick." Discuss.
What problems do you see retailers facing with the burgeoning number of different beers today? What might be the implications of this?
Playing the devil's advocate, critique the strategy of charging some of the highest prices in the world for your beer.
We saw the detection of a problem with the freshness of a beer at a restaurant by Jim Koch himself. How can Boston Beer prevent such incidents from happening again? Can distributor negligence or shortsighted actions be totally prevented by Boston Beer?
Do you think Boston Beer can continue to compete effectively against the giant brewers, with their infinitely greater resources, who are now moving into the specialty beer market with their own microbrews? Why or why not?
In 1998, Boston Beer produced more than two dozen styles of beer. Now it is down to just a few. Do you see any problems with this?
You are Jim Koch. You have just learned that Michael Feuer, founder of OfficeMax, has grown his entrepreneurial endeavor to a $1.8 billion enterprise in just seven years. It has taken you ten years to grow Boston Beer to a $50 million firm. You are depressed at this but determined to greatly increase your company's growth. How would you go about setting Boston Beer on this great growth path? Be as specific as you can. What dangers do you see ahead?
It is 1986 and Boston Beer is beginning its growth after hiring Pittsburgh Brewery to produce its beer. Jim Koch has charged you with coordinating the efforts at Pittsburgh Brewery, paying particular attention to assuring that your quality standards are rigidly maintained. How would you go about doing this?
Debate how Boston Beer should commit the $100 million it received in late 1995 from the public stock offering. In particular, debate whether the bulk of the proceeds should go to building its own state-of-the-art brewery, or something else.
How is Boston Beer faring today? Has its expansion accelerated or stalled? Is it facing any particular problems? Has the stock price risen to the $30 initial issuance price? Are any merger rumors circulating?
[235] Jenny McCune, "Brewing Up Profits," Management Review, April 1994, p. 18.
[236] Ibid., p. 19.
[237] Ibid., p. 20.
[238] Patricia Sellers, "A Whole New Ballgame in Beer," Fortune, September 19, 1994, p. 86.
[239] Ibid.
[240] "Boston Beer's Plan for Offering Stock," New York Times National Edition, August 26, 1995, p. 20.
[241] "Little Giants," Beverage World, December 1994, p. 26.
[242] "Sam Adams Brewer May Be on Block," Boston Business Journal, February 24, 1995, p. 3.
[243] Hillary Chura, "Boston Beer Crafts Strategy: Slumping Brewer Abandons Some of Its Specialty Beers," Advertising Age, November 8, 1999, p. 20.
[244] Boston Beer Company News, August 25, 2000, www.samadams.com.
[245] Bill Sloat, "Samuel Adams Brewer Expanding in Cincinnati," Cleveland Plain Dealer, January 7, 2005, pp. C1 and C3.
[246] McCune, p. 16.