Boston Beer Company

Jim Koch, President and CEO of Boston Beer Company (BBC), is selling “a story as well as the beer”. In twelve years, since Jim Koch started the company with $250,000 collected from family and friends, Jim has defined a new market segment in the beer industry, craft-brewed beer. The BBC produces Samuel Adams beer as well as seasonal ales and lagers. BBC began distributing Samuel Adams locally, in the Boston area. Today, Samuel Adams is also available outside the US in the UK, Ireland, Canada, Sweden, Germany, and Hong Kong.

BBC focuses on the distribution and marketing of its product. The BBC’s key to success has been a combination of an innovative method in manufacturing, as well as an aggressive marketing strategy. BBC has changed the model of beer manufacturing in that it outsources its brewing of the beer, to fill capacity in existing brewing facilities, and eliminates the costs associated with operating a brewery. Samuel Adams beer is brewed in Boston, Philadelphia, and California. As demand for Samuel Adams beer grows, Jim Koch increases his brewing capacity by contracting additional outside brewers. He maintains the quality of his beer by keeping a brewmaster on location while the beer is being brewed. In addition, Jim Koch guarantees his customer high quality product by attaching a freshness label to every bottle of Samuel Adams beer.

Jim changed the model for producing beer and has positioned BBC to compete with large company players by selling a differentiated product at a premium price. The current beer industry is a $50B business, with flat sales. However, the craft-brewed business has grown by 50% in the last year and now represents 2% of that $50B market. Jim Koch is capturing the big companies’ attention. Annheuser-Busch (A-B), Miller Brewing Co. and Adolph Coors Co. are taking notice; the craft-brewed beer business is beginning to erode their market share.

BBC sales in 1995 were $169M, a 32.3% increase from 1994. BBC issued an IPO in 1995, at $20 per share; and today the stock trades at roughly $21 per share. BBC’s yearly advertising and promotion budget is $8M. The craft-brewed businesses are noticeably smaller than the industrial companies. To contrast, A-B’s 1995 sales were $10.3B and its advertising and promotion budget is $534M.

The big companies are beginning to move into the craft-brewed market. A-B has purchased a 25% share in RedHook Ale Brewery, which recently opened a brewery in New Hampshire. Both Miller and Coors are investing in small craft-brewed businesses. In October 1996, A-B launched it first attack campaign on a rival in six years. A-B is attacking BBC one-on-one for “truth in labeling” because A-B claims that less than 10% of BBC’s beer is brewed in New England yet Samuel Adam’s labels claim it is a New England brewed beer.

As the competition increases between the small craft-brewed businesses and the big players, the question of BBC’s ability to sustain its business arises. BBC’s business can be analyzed using Porter’s five forces.

The number of beer selections has increased more than twofold in the last five years, and the number of craft-brewed beers in on the increase. As the craft-brewed business increases, more substitute craft-brewed will become available. When Samuel Adams beer was introduced it had first-mover advantage in the craft-brewed market segment. In addition, this also increases the choices BBC’s buyers have in purchasing craft-brewed beers.

There are no barriers to entry in this business. A perfect example is Pete’s Wicked Ale. Pete Slosberg, maker of Pete’s Wicked Ale in Palo Alto, California used Jim Koch’s business model to build his craft-brewed business and Pete’s Wicked Ale is now the second largest craft-brewed beer in US, just below BBC.

Today, Jim Koch negotiates manufacturing contracts with outside breweries that brew other beers such as Schlitz. As his model gets adapted by other craft brewers, BBC will find itself competing for manufacturing capacity with its suppliers. BBC is also exposed through its distributors. A-B and other large companies cannot, because of antitrust laws, force their distributors to shun BBC. However, A-B can offer great incentives for their distributors to carry their craft-brewed products. A-B has the added advantage of their size and economies of scale to offer their distributors pricing incentives and higher margins on their products.

BBC is seeing competition from other home brewers as well as the big players; the rivalry is intense. A-B bought a 25% stake in RedHook Ale Brewery Inc., a Seattle based craft-brewer that just opened a new brewery in New Hampshire. Miller bought two specialty brewers, Celas and Shipyard No. 3 and Coors has established a subsidiary to make specialty beers.

In summary, BBC has created a specialty market and had first-mover advantage in that market. Jim Koch moved quickly to establish key distribution channels both in the US and abroad. Today, Samuel Adams is the best selling non-German beer in Germany! However, Jim Koch created a business model which reduces the barriers to entry for a small craft brewer, and as Pete’s Wicked Ale demonstrated, minimized the time required for a craft-brewer to enter the market. In addition, BBC has captured the attention of the big companies in the beer industry. Today, BBC is faced with competition from piers as well as fierce competition from companies with much deeper pockets than the craft-brewers, like BBC. Why is the Boston Beer Company interesting?

The Boston Beer Company is interesting for the following reasons:

· Changed the business model for the beer industry. · Established a new market segment in the beer industry. · Outsources all of its manufacturing yet differentiates its product on taste and quality. · Jim Koch is the Boston Beer Company. He is the visionary and the advertising voice for the company. Jim is also the spokeman for the craft-brewer market segment. It appears that Pete’s Wicked Ale has benefited from Jim’s evangelizing about craft-brewed beers.