Larry Nelson

Comment - Beer - Who's Big in Craft Beer

By | 3 October 2013

The performance of the craft beer sub-category dominates the brewing headlines. Larry Nelson takes an in-depth look at the numbers and details Boston Beer Co.s position as the driving force for craft in the US.

There are certain things that you never, ever expect to read, and here's one of them: The first billionaire craft brewer has arrived, according to Bloomberg, in the form of Jim Koch, founder & chairman of the Boston Beer Co.

A billionaire!

It’s a fairly abstract concept for the majority of us wrestling with mortgages, car payments and the like. A billion is almost cartoon-like in our understanding, like ‘ga-zillion’ or ‘mega-jillion’. Numerically it looks like binary code gone wrong - US$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 about $242.

All of this 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 said: “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, but one of the more telling was at the height of the last aroma hop shortage. Boston Beer staged a lottery, inviting its craft brethren to submit their requirements for a chance at getting Boston Beer's 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 (check here for details). He continues to frequent craft brewer conferences, can be counted on to visit hop fields in Germany and England each harvest and reportedly still calls in at potential customers, courting their business.

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 long-standing preoccupation of Koch's. In 2000, Boston Beer launched a national ‘beer amnesty’ for its distributors and retailers, buying back out-of-date beer. Around 100,000 cases were surrendered, equating to roughly 1% of Boston’s annual production, and at a cost of more than $2m. 

At the time, Koch said: “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. A decade later, he came back with a more robust answer to this quandary, launching the Freshest Beer Programme.

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 programme is believed to have cut the time that 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 programme. 

Clearly, there are costs to Boston in implementing Freshest Beer – shorter production runs, more frequent deliveries to wholesalers and 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, rather than the result of reams of market research. In an interview with Brewers’ Guardian in 2011, Koch revealed that no market research had been undertaken prior to his redrawing of the brewer-wholesaler relationship, with him believing that consumers would choose to buy beer that tastes fresher.

In marketing terms, the challenge for Boston Beer and craft brewers generally in the beginning 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 in 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 2.7m barrels may seem like a healthy number in isolation, in the context of the overall US market it’s still just 1% of total volumes.

Or, as Koch imagined the contrast back in 2011: “When you’re 1% 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 headline figures of craft brewer growth is the possibly disproportionate effect that the fraternity’s larger members are having in these boom times.

For the first six months of 2013, according to the Brewers Association, craft beer volumes rose by 900,000 barrels over the same period the previous year. As for 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 total 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.

Expert analysis

Craft Beer Market in the US 2012-2016

The analysts in this report forecast the Craft Beer market in the US to grow at a CAGR of 17.46 percent over the period 2012-2016. One of the key factors contributing to this market growth is the changing consumer taste and preference for craft beer. The Craft Beer market in the US has also been witnessing an increase in canned craft beer production. However, lack of awareness about craft beer among consumers could pose a challenge to the growth of this market.

Sectors: Beer & cider

Companies: Boston Beer Co.

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The editor of Brewers' Guardian, Larry Nelson, provides his monthly take on the latest developments in the beer category.

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