Company History THE BOSTON BEER COMPANY WAS FOUNDED BY JIM KOCH IN 1984 after the discov- ery of his great-great-grandfather's family microbrew recipe in the attic of his home in Cincinnati, Ohio. In his kitchen, Jim Koch brewed the first batch of what is today known as Samuel Adams Boston Lager. Through use of the family recipe, Jim handcrafted a higher-quality, more flavorful beer than what was currently available in the United States. Samuel Adams beers were known for their distinct taste and freshness. Although different brewers had access to the rare, expensive Noble hops that Samuel Adams used, its special ingre- dients remained a secret and were what gave its brews their distinct flavor. Jim Koch refused to compromise on the components that made up the full, rich, flavorful taste of Samuel Adams beer. As his business began to grow, Jim moved his brewing operations into an old, abandoned brewery in Pennsylvania. This was subsequently followed by the opening of the extremely popular Boston Brewery in 1988. In the mid-1990s, Jim further expanded his business opera- tions by purchasing the Hudepohl-Schoenling Brewery in his hometown of Cincinnati, Ohio. In 1995, The Boston Beer Company Inc. went public. Jim Koch was viewed as the pioneer of the American craft beer revolution. He founded the largest craft brewery, brewing over 1 million barrels of 25 different styles of Boston Beer products and employing 520 people. Nevertheless, Boston Beer was only the sixth-largest brewer in the United States, producing less than 1% of the total U.S. beer market in 2010. Since its inception, Jim Koch has had numerous offers from the large brewing companies to buy him out, but he has consistently declined them. He wanted to remain independent and never compromise on the full, rich, flavorful, and fresh taste of Samuel Adams beer. Jim never altered his great-great-grandfather's original recipe created over a century ago. Corporate Mission and Vision The mission of the Boston Beer Company was "to seek long-term profitable growth by offering the highest quality products to the U.S. beer drinker." As the largest craft brewer, the Boston Beer Company had been successful for several reasons: (1) premium products produced from the highest-quality ingredients; (2) an unwavering commitment to the freshness of its beer: (3) constant creativity and innovation that resulted in the introduction of a new flavor of beer every year; and (4) the passion and dedication of its employees. +2 The Boston Beer Company's vision was "to become the leading brewer in the Better Beer category by creating and offering high quality full-flavored beers." The Better Beer category was comprised of craft brewers, specialty beers, and a large majority of the imports. As of 2010, Samuel Adams was the largest craft brewer and "the third largest brand in the Better Beer cat- egory of the United States brewing industry, trailing only the imports Corona and Heineken In 2007, the Boston Beer Company had revenues of $341 million with COGS of $152 million and $22.5 million of net income. From 2007 to 2009, revenues grew by 22% to $415 million with COGS of $201 million and $31.1 million in net income. Management expected sales to be $430 million in 2010. The Boston Beer Company had no long-term debt and only 14 million shares outstanding. In August 2010, the stock price was $67. The Beer Industry The domestic beer market in 2010 was facing many challenges. In 2010, domestic beer overall sales declined 1.2%. Industry analysts predicted inflation-adjusted growth to be only 0.8% through 2012. Decreases in domestic beer sales as a whole were mainly due to decreased alcohol consumption per person. U.S. consumers were drinking less beer because of health concerns, increased awareness of the legal consequences of alcohol abuse, and an increase in options for more flavorful wines and spirits. To gain more market share in a highly competitive market, the industry was shifting to the mass production of beers, leading to industry consolidation. There were two major players in the brewing industry in the United States: AB InBev (Anheuser-Busch) and SABMiller PLC (SABMiller). SABMiller PLC was a 2007 joint venture of SABMiller and Molson Coors. Anheuser-Busch had been purchased in 2008 by Belgium producer InBev, the second-largest beer producer in the world. The domestic beer industry also contained some opportunities. Although sales of domes tic beer were flat, the past decade showed increases in the domestic consumption of light beer and the craft beer categories. The Better Beer category (comprised of craft, specialty, and import beers) was growing at an annual rate of 2.5% and comprised roughly 19% of all U.S. sales. Beers were classified as "better beers" mainly because of higher quality, taste, price. mated 9% in 2010. In an industry dominated by male customers, females were viewed as an and image, compared to mass-produced domestic beers. The craft beer segment grew an esti- opportunity. Research showed that women were most concerned about the calories in beer. more wine." CASE 15 The Boston Beer Company 15-3 The growth in craft beer sales was good news for the Boston Beer Company, which posi- tioned itself in this category and was the largest and most successful craft brewer in the United States. It ranked third overall in the U.S. Better Beer category, trailing only two imports: Corona from Mexico and Heineken from The Netherlands. Domestic Beers Two major players in the U.S. domestic beer market-AB InBev and MillerCoors-accounted for roughly 95% of all U.S. beer production and sales, minus imports. MillerCoors LLC controlled roughly 30% of the U.S. beer market. MillerCoors recently entered the Better Beer category by acquiring, in whole or in part, existing craft brewers and by importing and distributing foreign brewers' brands. In 2010, the company experienced double-digit growth with its Blue Moon, Leinenkugel's, and Peroni Nastro Azzurro brands. AB Inbev was the number-one brewer in the U.S. market in terms of both volume and revenues. Its dominant position allowed it to exert significant influence over distributors, mak- ing it difficult for smaller brewers to maintain their market presence or access new markets. Inbev was created in the 2004 merger of the Belgian company Interbrew and the Brazilian brewer AmBev, and subsequently purchased Anheuser-Busch in 2008. Craft Beer Segment Imports Sierra Nevada Brewing Company was the second-largest craft beer maker in the United States. Founded in Chico, California, in 1980, the company's mission was to produce the finest-quality beers and ales, and believed that its mission could be accomplished "without compromising its role as a good corporate citizen and environmental steward." Its most suc- cessful brands included the hop-flavored Pale Ale, as well as Porter, Stout, and wheat variet- ies. Sierra Nevada, like Samuel Adams, produced seasonal brews including Summer Fest, Celebration, and Big Foot. Although Sierra Nevada beer had been distributed nationally for some time, sales were still strongest on the West Coast. New Belgium Brewing Company was founded in 1991 in Fort Collins, Colorado. Its Fat Tire brand made up two-thirds of the company's total sales. New Belgium currently had nine total craft beer brands, in addition to seasonal and limited brands. Its products were offered in 25 western and midwestern states. New Belgium, like Sierra Nevada, focused on being eco- friendly and stressed employee ownership in its mission. Grupo Modelo was founded in 1925 and was the market leader in Mexico. Its most successful product, Corona Extra, was the United States' number-one beer import out of 450 imported beers. AB Inbev held a 50% noncontrolling interest in Grupo Modelo. Heineken, the third-largest brewer by revenue, positioned itself as the world's most valuable international premium beer. Heineken had over 170 international, regional, and local specialty beers and 115 breweries in 65 countries. It had the widest presence of all interna- tional brewers due to the sales of Heineken and Amstel products. Current Challenges The Boston Beer Company had been growing revenues by 22% over the past two years, and the craft beer industry as a whole continued to experience double-digit growth as well. How- ever, there were some challenges ahead if the company was to successfully achieve its mission and continue this level of growth. 1. Probably the most critical challenge was the increased level of competition in the craft beer industry. "Volume sales within the craft beer industry increased 20% during 2002-2010 to 220 million cases," and this astonishing growth attracted many players into this market, especially imported beers such as Corona and Heineken, and the top two brewers AB Inbev and MillerCoors. 2. Through mergers and acquisitions, the major competitors achieved cost savings and greater leverage with suppliers and distributors and preferential shelf space and place- ment with retailers. 3. A continuous increase in production costs of all basic beer ingredients, such as barley malt and hops, as well as packaging materials like glass, cardboard, and aluminum continued into 2010 with further increases in fuel and transportation costs. The global inventory of the company's "Noble" hops declined, and the harvest in recent years of its two key hops suppliers in Germany did not meet the high standards of the Boston Beer Company. As a result, Boston Beer received a lower quantity at a higher price than expected. 4. The company purchased a brewery in Breinigsville, Pennsylvania, in 2008 for $55 million, Although this brewery was expected to increase capacity by 1.6 million barrels of beer annually, it required significant renovations before it could produce quality beer. United Airlines Dilemma United Airlines recently approached the Boston Beer Company with an interesting opportu- nity. United wanted to offer Samuel Adams Boston Lager to fliers on all of its flights. This would provide the Boston Beer Company increased national exposure and could result in a significant increase in beer sales. However, United Airlines would only sell Samuel Adams Boston Lager in cans, not bottles. The Boston Beer Company had never sold any of its beers in cans because management believed that metal detracts from the flavor of the beer. Management felt that the "full-flavor" of Samuel Adams could only be realized using glass bottles. Should Boston Beer's manage- ment rethink its decision not to distribute its beer in cans to take advantage of this opportunity? Many years ago, Jim Koch said that there would never be a "Sam Adams Light Beer," but he eventually reversed that decision and Sam Light became a huge success.