Upstart Brewers Rise Against Craft$-$Beer Founding Father Samuel Adams

by Tripp Mickle

When Jim Koch launched what would become the nation$$s best$-$known craft beer in $1984,$ he named it after Samuel Adams because he wanted to start a beer revolution.

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He succeeded, expanding his small Boston brewery into a nationwide brand and helping inspire a legion of would$-$be beer makers. But after years of thriving as the main craft alternative to Budweiser and Miller Lite, the craft beer boom he helped begin is turning on him.

Craft breweries are springing up at a rate of nearly two a day, according to the Brewers Association, which represents $3,000-$plus small$-$scale beer producers. The newcomers are taking tap handles, shelf space and sales, making it harder for Sam Adams to stand out from the crowd. Meanwhile, Anheuser$-$Busch InBev NV$,$ MillerCoors LLC and Heineken NV are using their war chests to buy some of those new craft$-$beer rivals.

The volume shipped by Boston Beer Co$.,$ which makes Sam Adams, last year grew just $3\mathrm{.}6\%$ after back$-$to$-$back years of more$-$than$-20\%$ gains. The company$$s shares have plunged $32\%$ over the past year as investors lose confidence in a quick turnaround.

The problem? Sam Adams has gotten too big and familiar to be considered an authentic craft by elitist beer connoisseurs, yet it isn$$t hefty enough to have the cost advantages of big brewers.

Its challenge is on display at Hop City, a popular Atlanta craft$-$beer store, where four varieties of Sam Adams beer are competing on $7-$foot$-$tall shelves overflowing with $6,500$ different beer options from more than $250$ breweries. Younger drinkers often skip it in favor of something like Georgia brewer Creature Comforts' Tropicalia, a citrus$-$scented ale, says Hop City salesman Caleb Raubenolt. Forty$-$year$-$olds will try it as a "gateway into craft," and move on to something like New Belgium Brewing Co$.\text{'}$s Fat Tire, an amber ale, he adds.

Mr$.$ Koch, Boston Beer$$s chairman, believes the consumer trends driving today$$s craft beer boom aren$$t permanent. He says they are similar to a challenge the company faced in the late $1990$s$,$ when sales volumes temporarily fell $13\%.$

$$We are going through a period of a lot of experimentation and trial,$$ said Mr$.$ Koch. The enthusiasm for new craft beers will wane, he predicts, and when it does, drinkers will buy Sam Adams again.

But there are more than $4,200$ craft breweries now$$up from $1,564$ in $1999$and together they outsell Boston Beer$$s offerings. Plus, over the past year, AB InBev acquired Arizona$$s Four Peaks and Los Angeles$$ Golden Road breweries, MillerCoors scooped up San Diego$$s Saint Archer, and Heineken invested in California$$s Lagunitas Brewing Co$.$

To combat this, Mr$.$ Koch is concocting new variations of Sam Adams such as last year$$s Sam Adams Rebel Rouser IPA and Grapefruit IPA. This year$$s mix includes Rebel Raw, a double India pale ale loaded with bitter hops, and brews infused with nitrogen for creaminess like Nitro Coffee Stout. But even with new recipes, Boston Beer expects beer volume to decline in $2016.$

Some analysts are calling for drastic change: It is time for Boston Beer to consider selling itself, says Susquehanna Financial Group analyst Pablo Zuanic.

$$The growth of the company has stalled,$$ Mr$.$ Zuanic said, noting that first$-$mover advantages have $$dried up$$ and successful innovations are rare. $$He has to think: When is the right time to sell?$$

Mr$.$ Koch, who controls the company, says he isn$$t interested.

$$I$$m excited to see the success of this revolution I helped start,$$ Mr$.$ Koch said. $$I want to continue to drive that success.$$

Mr$.$ Koch plans to do what he did during the $1990$s downturn: cut costs, improve quality and make the freshest beer on the market. Then, the company cut costs and boosted its gross profit margin to $56\%$ in $2000$ from $51\%$ in $1999.$

Over the past five years, the company focused on growth, nearly doubling its output and brewing capacity to meet demand. Mr$.$ Koch said top$-$line growth like that meant the company could $$only focus on a limited number of things, mostly keeping the wheels on the bus as you$$re roaring down the road.$$ Now, he said, it is time to $$focus on getting good.$$

One of Mr$.$ Koch$$s biggest focus areas is freshness$$the longer beer is on the shelf, the poorer it generally tastes. In $2010,$ Mr$.$ Koch said he began plowing money into overhauling Sam Adams supply chain to cut the amount of time beer sits in warehouses to a week from a month.

The program required $$50$ million in capital investments and cut revenue by $$15$ million$-$$$20$ million since $2010$ because of reduced shipments. But the financial sacrifices were worth it$,$ Mr$.$ Koch says.

With craft beer$$s market share projected to nearly double to $20\%$ by $2020,$ he foresees a downturn in craft$-$beer quality because more people are opening breweries to cash in than make great beer, he says. $$If we give drinkers better tasting beer, they$$ll drink more of it$,$ Mr$.$ Ko