What are the reasons to focus more on the light beer market?
In your write-up, please write a minimum of two pages (double-spaced, 12 point, Times New Roman is acceptable) answering the questions listed below. You will be graded on the depth of your analysis (i.e., Do you recognize and address all of the reasons or only a proportion of them? Do you explain your position with enough detail and support it from the case or only superficially?). As outlined in the syllabus a portion of your case grade will also be based on your involvement in the class discussion.
- Use the case information (including statistics, taste survey data, and ZMET results) as well as your own insights to answer the following:
- What are the reasons to focus more on the light beer market?
- What are the reasons why BBC should not pursue this market?
- The HBS team recommends that BBC should model their approach to the light beer market after Amstel Light and go after the same target segment with a light/refreshing beer.
- Do you agree with this recommendation or would you recommend an alternative approach? Explain your position.
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Order Paper Now________________________________________________________________________________________________________________ Assistant Professor Linda A. Cyr, Professor Joseph B. Lassiter III, and Lecturer Michael J. Roberts prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is based in part on a field study performed by Mark Lalley, Sarah Leary, Greg Pappas and Christina Wing, HBS MBAs ‘98. This case draws on two existing cases on Boston Beer Co., “The Boston Beer Company, Inc.,” HBS No. 196-138 by Christopher Charron under the supervision of Professor Amy Patricia Hutton, and “Boston Beer Company: Samuel Adams,” HBS No. 597-040 by Mollie H. Carter under the supervision of Professor Ray A. Goldberg. Copyright © 1998, 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
L I N D A A . C Y R
J O S E P H B . L A S S I T E R , I I I
M I C H A E L J . R O B E R T S
Boston Beer Company: Light Beer Decision
It was April 1998, and Mark Lalley, Sarah Leary, Greg Pappas and Christina Wing could not get their minds off of beer. The four second-year HBS students were nearing the end of their MBA studies, and trying to finish their field study project for Boston Beer Company (BBC), brewers of Samuel Adams Boston Lager and a host of other beers, including Boston Lightship.
The subject of the field study was light beer. Boston Lightship—BBC’s existing light beer offering— was a very minor contributor in the Company’s product line. Lightship had been successful, at one point reaching sales volumes as high as 12,000 cases per month. But in recent years, volume had dropped to less than 3,000 cases per month and the Company didn’t believe that it was reaping the returns on its earlier substantial investment in the brand. Although light beer was an exploding category, it still required considerable skill and resources to compete effectively, and BBC had been attempting to maintain Samuel Adams as its primary focus.
The students were tasked with determining whether there was an attractive opportunity in the light beer market, and if so, whether Lightship’s performance could be turned around or a new brew introduced. In an effort to answer these questions, the student team had drawn on many of the tools to which they had been exposed during their MBA program: customer surveys, market and competitor analysis, financial analysis, and even the “ZMET,” a new customer research technique that had been invented by HBS professor Gerald Zaltman. Still, the team was not having an easy time crafting its recommendations to the Company. As one team member put it:
We keep going around in circles. There are lots of good reasons to come out with a new light beer, and lots of reasons not to. When Jim Koch [pronounced Cook] founded this business in 1984, he went with his heart and not a lot of analysis, so it’s tempting for us to do the same. But there is a lot more to lose today than there was fourteen years ago.1
1 Source: Casewriter interview.
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Background2
Jim Koch founded the Boston Beer Company in 1984. Koch, a graduate of Harvard College, the Harvard Law School and the Harvard Business School, left a lucrative consulting career to start a beer company. A sixth generation descendant of German brewers, Koch had observed the changing tastes of American beer drinkers and the general homogenization of most domestic brews. With $100,000 of his own savings, $140,000 from family and friends, and a yellowed recipe for beer that had been handed down from his great-great-grandfather, Koch began brewing Samuel Adams Boston Lager.
Spurred on by a strong desire to change the way Americans thought about beer, Koch and the Company’s Samuel Adams Boston Lager were widely credited with defining the craft brew segment. Craft beers were defined as “full-flavored beers brewed with quality hops, malted barley, yeast and water without such adjuncts as rice, corn or stabilizers, or water dilution used to lighten beer for mass production and consumption.”3 When BBC introduced Samuel Adams in 1985, the craft brew segment was virtually non-existent, representing less than 0.1% of the total beer market. By 1997, the craft segment had been officially recognized, and was estimated to account for about 3% of the 190 million barrels of beer sold in the United States that year. In addition, BBC had maintained its position as the well-established leader in the craft segment and was larger than its next five competitors combined. (See Exhibit 1 for U.S. Beer Volumes by Segment)
In 1985 and for the 3 years thereafter, Samuel Adams Boston Lager was voted “Best Beer in America” in the consumer preference poll at the Great American Beer Festival. This early success with consumers, combined with Koch’s marketing flair and the novel notion of a consultant chucking it all to become a sixth generation brewer, propelled the Company to rapid growth. From a standing start in 1984, the Company was generating over $21 million in revenues selling 121,000 barrels of beer by 1990. For the year ended December 27, 1997, the Company garnered almost $210 million of revenue on a volume of 1,352,000 barrels. (See Exhibit 2 for Summary Financial and Operating Data and Production Volumes.)
BBC had achieved its growth by continuously expanding its product line and broadening its distribution. In April 1998, it offered 14 beers under the Samuel Adams name, as well as 3 beers under the LongShot label, 3 beers under the Oregon Original label, and two “hard” cider products called HardCore. (See Exhibit 3 for Sample Product Labels.) Although regarded as a New England company, BBC was an effective national distributor which sold beers in all 50 states, the District of Columbia and Puerto Rico—in addition to 19 countries—through a network of over 400 distributors.
BBC went public in November 1995 at $20 per share. It raised over $40 million and established a $395 million market value.4 The company’s track record, Koch’s skill at creating noteworthy products and the management team that was driving the company were all key factors in this success. (See Exhibit 4 for a Partial Organization Chart.) BBC’s stock rose quickly to $32 per share, tracking Wall Street’s fascination with craft brew offerings. But, by late 1996 the investor interest had cooled with BBC’s stock dropping first back to its $20 per share offering price, then to $12 per share, until it reached a low of $7.63 per share by year end 1997, reflecting the uncertainty of finding a significant position among the giants of the brewing industry as well as the other craft brew entrants. 2 This section is drawn largely from the existing HBS case by Amy Hutton.
3 Source: 1995 Boston Beer Company IPO Prospectus, p. 27
4 After the IPO, Koch maintained control of the Company through a superior class of voting stock which allowed him to elect five of the Company’s seven directors and have most other voting rights. In addition, Koch owned approximately 35% of the Company’s publicly traded common stock.
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This document is authorized for use only by Abdullah Haggi in Buyer Behavior taught by Dr. Matthew D. Meng, Utah State University from March 2018 to May 2018.
Boston Beer Company: Light Beer Decision 899-058
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At the time of the case, the Company’s stock was trading in the $10-11 range, implying a market value of more than $200 million with price volatility to be an expected part of it’s future.
Business Strategy
BBC’s strategy was “to continue to lead the craft-brewed beer market by creating and offering a wide variety of the highest quality full-flavored beers, while increasing sales through new product introductions and substantial trade and consumer awareness programs, supported by a large, well trained and rapidly expanding field sales organization.”5
This strategy, in turn, had several elements:6
High quality standards: Paramount in BBC’s strategy was product quality; it prided itself on producing a high-quality product and maintaining high standards. Koch and his senior brewmasters regularly traveled to Europe to select rare breeds of English and Bavarian hops. The Company required that each of its products undergo over 100 tests. As further demonstration of its emphasis on quality, BBC was the first brewer to stamp each bottle with a freshness date (a visible, understandable “sell by” date). Because beer is best consumed within 2-3 months after bottling, the Company maintained a strict policy of discarding beer that was no longer fresh.
Contract brewing: In 1984, Koch capitalized on an established fact in the beer business— overcapacity. Many regional brewers had extra tankage resulting from beer wars lost to the major brewers, Anheuser-Busch (A-B), Coors and Miller; these three brewers commanded a combined market share of over 70% of the beer market. Contract brewing enabled BBC to manage its rapid growth by making the most out of its scarce financial resources. It allowed the Company to use other firms’ excess capacity at lower fixed costs than if it established its own capacity. Contract brewing offered lower capital and transportation costs, ensured product freshness and provided greater manufacturing flexibility.
Under this system, BBC contracted with several brewers to produce beer under its supervision and to its specifications. BBC supplied breweries with its specially procured hops, proprietary yeast, and most packaging materials, while the brewers purchased malt to BBC’s specifications. Koch summed up how this approach enabled the Company to achieve its quality objectives without the investment required in physical assets:
In the value-added chain, I choose the parts I can do better than anyone else. I capture the art and science of brewing, while they run the plant. I’m not better at getting a roof fixed than they are. Owning something can tie you down. My beer gets good treatment because if the contractors were to do anything wrong, I could leave. With their own beer, they can’t leave. So, Samuel Adams is brewed especially well.7
In 1997, however, BBC purchased the brewery assets of an independent brewer—the Hudepohl- Schoenling Brewery of Cincinnati, Ohio. The acquisition of the brewery was the result of BBC’s ongoing analysis of its capacity requirements as well as its assessment of the strength of second-tier brewers. The Company could not afford to see its base of contract brewers reduced; at the same time, 5 1995 IPO Prospectus and 1997 10-K.
6 This section is drawn largely from the Hutton case.
7 Source: Hutton case – page 3.
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financial hardship among these brewers allowed BBC to purchase existing plant capacity at less than 20% of the cost of building comparable new capacity. As shipping volumes grew, BBC became more confident that it could keep the plant running at efficient production volumes.
Sales and marketing focus: Koch poured the capital freed-up by this contract brewing strategy into sales and marketing. BBC built its own sales and distribution force as a matter of necessity—in the early days sales were so small and distributors so skeptical that the Company could not get an independent distributor to handle the product. To help him in his initial sales efforts, Koch called on his former administrative assistant from the Boston Consulting Group, Rhonda Kallman. Kallman proved to have an uncanny ability to understand local retailers and distributors, and she became critical to the Company’s early sales effort. And, as the Company became more successful, Koch realized that the enthusiasm and dedication of the sales team were important factors in the Company’s success.
Jim Koch’s passion for beer, and for Samuel Adams products in particular, was reflected in BBC’s approach to the market. It didn’t just sell; it proselytized. Its 200-member sales team was widely hailed as one of the best trained and most successful in the beer industry. Educating the consumer was central to BBC’s marketing strategy. BBC’s salespeople focused on teaching distributors, wholesalers, bar-owners, and the final consumer about the virtues of high quality (and higher priced) beer, through tastings, demonstrations, educational seminars and brewery tours. The ultimate objective was to get the consumer fired-up about beer—to elevate his or her thinking about beer— and ultimately, to change the way people thought about beer.
Product innovation: Although it contracted out the production of its beers, BBC owned a small Boston brewery that continued to be active in researching consumer tastes, sampling competitors’ beers and developing new beers. In addition to its flagship Samuel Adams Boston Lager, BBC brewed an array of specialty brands and continuously re-evaluated its product line. At the time of the case, its palette of offerings brewed under the Samuel Adams name consisted of eight year-round brews and six seasonal brews. Although the seasonal brews were less profitable due to smaller production runs and higher ingredient costs, they were nonetheless integral parts of BBC’s overall strategy to build brand awareness and gain leverage with distributors and retailers. BBC accomplished this by seeking greater shelf space and continuously introducing beer drinkers to different styles of beer while keeping them in the Samuel Adams family.
BBC was also committed to expanding its product line beyond the Samuel Adams label. In 1994, it developed the Oregon Ale and Beer Company as a separate organization with a distinct sales force to brew and deliver to consumers a line of 4 Pacific Northwest style beers under the Oregon Original label. In addition, beginning in 1995, BBC began sponsoring an annual World Homebrew Contest in which winners got the opportunity to have their recipes brewed and marketed nationally under the LongShot label. Finally, in early 1997, after tracking the explosive growth in the Cider category, BBC entered this category with two new product offerings: HardCore Crisp Hard Cider and HardCore Cranberry Cider.
The Situation in Early 1998
Several factors had led BBC management to revisit the Company’s “light beer” strategy in early 1998. The primary factor was that growth in the craft segment had slowed. One analyst offered the following observations on the state of the brewing industry in early 1998:
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Growth in the craft segment is in the single digits for the first time ever after having enjoyed rates above 40% per year since the early 1980s . . . brewers who do not fill their capacity will be tempted to get better utilization through price discounting.
The lessening growth of specialty beers has brought transition to the large brewers as well. With single digit growth and a volume under 6 million barrels in the craft sector, the big boys are focusing more on the imports, which are maintaining double-digit growth rates on a much larger volume base of 14 million barrels.8
Another observer commented on these trends and how they were affecting Samuel Adams:
Sales have leveled off or declined for a number of reasons. For one thing, distributors and retailers are becoming more discriminating as to which brands they are willing to carry. They are paying more attention to turnover and margins; brands that do not contribute to the bottom line are being dropped. In addition, the traditional craft markets, Washington, Oregon, and New England are becoming increasingly mature and glutted with excess product. These factors, in combination with Miller’s and Anheuser-Busch’s focus on exclusivity, are making it tougher for smaller brands to compete.9
- Do you agree with this recommendation or would you recommend an alternative approach? Explain your position.
