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The Boston Beer Company: Can it live up to recent hype?

Boston Beer Company

A corporate strategy article by Thunderbird students Andrea Bly, Jennifer Garcia, Liang-Kuan “Albert” Ho, Steve Juntunen and Kara Nguyen

Shares of The Boston Beer Company, Inc. (NYSE: SAM) closed Friday, December 16, 2011 at $103.05, up 40% since October. The company, who spearheaded the craft beer revolution in the US, has grown to produce over 32 varieties of beer under the company’s flagship brand, Samuel Adams Boston Lager and a variety of malt beverages and hard cider products under brand names Twisted Tea and HardCore Cider.

Under its Samuel Adams line, Boston Beer Company leads the craft brewery industry with annual revenues of $500 million in 2010. They have outperformed the uninspired beer market this year, reporting solid increases in sales and profits every month in 2011. This exploding success in the specialty market occurred against the backdrop of dismal growth in the mass market. But even within the specialty segment, Boston Beer has outperformed rivals with 6.6% volume growth in 2011, compared to 5% growth in the craft beer category.

This spectacular performance has attracted a lot of attention. Currently trading at 25 times the consensus earnings; should investors call it quits before a crash or will The Boston Beer Company be able to leverage recent success into sustainable growth?

From carefully selected ingredients, creative new brews, and calculated distribution, Boston Beer Company’s value and strategy is simple: to brew and deliver full-flavored, high-quality beer. Founder, Jim Koch pursued his passion for quality, flavorful beer by using family recipes and traditional brewing processes passed down the generations of his family. In 1984, Samuel Adams Boston Lager was born and became the Boston Beer Company’s trademark beer. Within the first six weeks of its release, Samuel Adams was voted “The Best Beer in America” at The Great American Beer Festival’s Consumer Preference Poll and it would continue winning more beer taste test awards than any other brewery in the market.

“There’s an incredible pleasure every time I have a Sam Adams,” says Koch. “In that beer, I can taste all of the history and all of the passion for brewing something wonderful. To me, it’s an incredibly complex symphony of flavors.”

What makes Boston Beer Company unique from the other leading companies is their image as a craft brewery. They aim to use only the finest ingredients and pay great attention to detail to ensure fresh quality beer.

In order to get their start in the industry, Jim Koch started small. Koch allowed local bartenders in Boston, Massachusetts to sample Sam Adams so that they could make informed recommendations to their customers.

“If you’re a little guy, you can’t compete with the big guys,” says Koch. “I won’t be competing with them. I’ll be making something better. And there are drinkers who will drink that”.

Boston Beer Company does not use gimmicky bottles that indicate if your beer is cold or flashy packaging to catch your attention at the grocery store. Instead, Boston Beer Company spends their time and money pioneering ways to deliver the best-quality product. For instance, their “Freshest Beer” program calculates and reduces the amount of time Boston Beer Company’s products sit at a wholesaler to ensure that consumers get the freshest beer out of the brewery.

Although the Freshest Beer program may require more expenses upfront, while it is perfected, Koch believes it will result in savings in the long run. It will result in less waste of beer that is destroyed due to expiration and increase profits as people continue to turn to Boston Beer Company for the freshest beer available.

The Boston Beer Company has managed to be quite successful while monitoring and responding to risks. As they continue to expand, it is imperative that they address various risks identified in their 10K filing and beyond. Boston Beer competes in a saturated industry with strong rivals at the local, domestic, and international level. They not only have to capture and maintain loyalty by customers, but they also have to compete for shelf space by distributors. They have pointed marketing efforts toward identifying a discriminating and educated consumer base. Meanwhile, a focus on fostering loyalty through distributors has proven to be a winning strategic formula.

Although these same measures will continue to provide positive outcomes for the company, a strategy for moving forward is the ultimate question. Offering a sustainable strategy to offset the existing and potential risks moving forward will be a new challenge for Boston Beer Company. Maintaining a loyal customer base and strong distribution network to add more distributors and expand shelf space will be essential to future success of the company.

The Boston Beer Company is cognizant that the public has the potential to be fickle toward acceptance of alcoholic beverages and that intake varies based on health trends, shifting consumer interests and values, and other factors. This was vividly illustrated in the 1990’s when Starbucks Coffee went from an obscure company in Seattle to a multi-national presence. Starbuck’s strategy was largely shaped by a decision to cater to the trend of a newly minted consumer base that was, health conscious and mindful of quality, freshness, and knowledge of where the product derived from. While it is true that many of Starbucks customers were searching for alternatives to alcoholic beverages, another portion of their consumer base was driven by the fact that Starbucks offered a high quality, uniquely sourced product.

Given the industry that Boston Beer Company is in, a non-alcoholic offering was not a viable strategic option. But rather than succumbing to the risk of less alcohol consumption, the company focused on another aspect of a changing public, targeting consumers with discriminating taste directly spoke to their market. The company managed a trend in lower alcohol consumption by focusing on other values in their product-line; quality, freshness, and provenance of ingredients. Integrating their devotion to customer values into their marketing campaigns proved to be a successful strategy for managing risk.

Nevertheless, both the research and development process and trade-off costs that are consequentially absorbed by adhering to a devotion to quality are substantial. Their most recent -Freshest Beer distribution program has raised costs at Boston Beer Company due to additional infrastructure upgrade requirements. Managing these costs will be an ongoing challenge for the company. But company management forecast that as more distributors participate in the program the proportional costs will decrease as metrics for predicting demand will become more reliable with more participants.

Moving forward, the company must monitor and respond to risks proactively and creatively, exhibiting the same insights and nimbleness that they have shown in prior instances. With a focus on social trends, distribution management, and close monitoring of sales metrics The Boston Beer Company will hopefully be able to leverage its recent growth. Managing the programs that the company has put in place and staying true to their values will with a bit of luck keep the bubble from bursting. As the rivals become more competitive and customers become more knowledgeable and powerful, can Boston Beer adapt its strategy to avoid becoming obsolete?