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Home | The Hop Bine | Relatively big

Relatively big

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Koch: very much a craft brewer at heart

Segmenting the craft brewer boom as its first billionaire arrives

Things you never, ever expected to read, brewing division. Bloomberg has brought to the world’s attention that the first billionaire craft brewer is amongst usin the person of Jim Koch, founder and chairman of the Boston Beer Company. 

A billionaire: it’s a fairly abstract concept for the majority of us wrestling with mortgages, car payments and their ilk. A billion is almost cartoon-like in our understanding, like ‘ga-zillion’ or ‘mega-jillion’. Numerically it looks like binary code gone wrong - $1,000,000,000. 

It’s worth based on share value, which in the case of Boston Beer has its Class A shares traded on the new York Stock Exchange (symbol: SAM). Over the past 12 months the share price has skyrocketed, from $100 to briefly grazing $250, today trading at $242 and change.

All of which seems to have bemused Koch, who in 1984 started Boston Beer, as so many of his fellow craft brewers have legendarily done, around his kitchen table. Asked by Bloomberg for a reaction to their declaration of his reaching this financial milestone, Koch replied, “Having watched my stock price go up and down, it seems almost whimsical. I remind people getting rich is life’s great booby prize. Any normal person would much rather be happy than rich.”

True enough, and for Koch the emphasis need be placed to this day on ‘craft brewer’ rather than ‘billionaire.’ Despite numerous ups and downs, especially at the beginning of this century, he and Boston Beer have kept faith with the American craft brewing movement, as well as encouraging and supporting its growth.

Of this there are numerous examples that could be cited here, but one of the more telling was at the height of the last aroma hop shortage. Boston Beer staged a lottery, inviting craft brethren to submit their requirements for a chance at their surpluses. These hops were sold at cost rather than the then exorbitant spot market prices.

And Koch has started a philanthropic organisation, offering small business loans to food and beverage producers (see btad.samueladams.com). He continues to frequent craft brewer conferences, can be counted on visiting hop fields in Germany and England each harvest and reportedly still visits potential customers, courting their business.

An insistence on quality

How did Koch and Boston reach these heights and how has it been sustained? I think that the answer is two-fold: an insistence on quality, sometimes to the detriment of the bottom line; and an understanding of the value of marketing, of creating a lasting bond between the brewer and its consumers and customers.

Ensuring product quality has been a preoccupation of Koch, a long-standing one. In 2000, Boston Beer launched a national ‘beer amnesty’ for its distributors and retailers, buying back out-of-date beer. In the end more than 100,000 cases were surrendered, equating to roughly one per cent of Boston’s annual production, and at a cost of more than $2 million. 

At the time he commented, “The unfortunate part of the system in the US is that the wholesaler has no incentive to do anything with that beer but resell it. The good wholesalers do the right thing, but their economic motivation is to do the wrong thing. This created a situation where protecting the quality of the beer was in their economic interest.”

In the end a policy was adopted where Boston split the cost of expired beer 50:50 with wholesalers, recognising that sometimes responsibility for over-stocking was with the brewer. And a decade later he came back with a more robust answer to this quandary, launching the Freshest Beer Program. 

Freshest Beer has Boston providing better service to wholesalers through improved forecasting and production planning, reducing the amount of time beer is warehoused and also ensuring that it is refrigerated. The program is believed to have cut the time beer is held by wholesalers in half. According to Boston’s 2012 annual report, it expects that by the end of this year between 65% and 75% of its beer volume will be part of the program. 

Clearly there are costs accruing to Boston in implementing Freshest Beer – shorter production runs, more frequent deliveries to wholesalers and a one-off costs for items such as additional buffer tanks in the brewery. Koch believes that this will be rewarded by consumers who will recognise that the beer tastes noticeably better. (Not that Freshest Beer is part of any marketing campaign – he feels that supply chains intricacies aren’t motivational.)

Freshest Beer is an act of faith than the result of reams of market research. In an interview with Brewers’ Guardian in 2011, Koch revealed that in fact no market research had been undertaken prior to his redrawing of the brewer-wholesaler relationship, with him trusting in consumers’ judgement that they would choose to buy beer that tastes fresher.

In marketing terms, in the beginning the challenge for Boston Beer and craft brewers generally was to create craft beer as a category in the minds of wholesalers and retailers. In retrospect, it was clever of Koch then to focus on what he termed the ‘Better Beer’ category, lumping little-known craft beer producers with consumer-respected imported beers, underlining the chasm of taste between them and mainstream light lagers. 

Today Koch believes that craft beer is entering the mainstream of the US beer market and is here to stay. And while today’s 2.7 million barrels may seem like a healthy number in isolation, in the context of the overall US market it’s just one per cent of total volumes. 

Or as Koch imagined the contrast in the same 2011 BG interview, “When you’re one per cent of the market you wake up scared every morning. Yes, here in the US Sam Adams is the largest craft brewer but that’s like being the tallest pygmy and unfortunately we’re playing in the [National Basketball Association].”

Conversely, Boston is by far the biggest of the craft brewers. What is being lost in the heady headline figures of craft brewer growth is the possibly disproportionate effect that the fraternity’s larger members are playing in these boom times.

For the first six months of 2013 figures supplied by the Brewers Association have craft beer volumes increasing by 900,000 barrels over the same period the previous year. Boston Beer? Its year-on-year increase for the same period was 145,000 barrels, meaning that on its own it accounted for roughly 16% of craft’s gains.

And what of the contributions of others, such as New Belgium, Sierra Nevada and Deschutes? It would be worth taking a closer look at individual growth figures, to understand to what extent today’s boom is due to a handful of craft brewers establishing national presences rather than that of more broad-based growth. Call it Craft Beer 2.0: the ethos remains the same, but the economies of scale are creating a two-tier system.

Or put another way: how large can a craft brewer become before no longer being considered a craft brewer, by consumers and by their peers and competitors? To this question there are answers numbering a billion shades of grey. 

This column was first published by www.just-drinks.com


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