Jim: She Got the House, I Got Sam Adams

FILED AUGUST 27, 2010

Dear Client:

One of the things I like about Boston Beer Co. founder/brewer Jim Koch is that he's a thinking man's beer man. The other thing I like is that he puts his mouth where his money is, ie he's not afraid to drink the beer he makes, and get immersed in this industry we all love.

Boston Beer Co. has had a break-through year, with double digit growth that has accelerated. We caught up with Jim to talk about what's driving that growth, crafts in c-stores, why wholesalers should charge more for slower moving SKUs, his new collaboration, and more. You, my good friends, are a fly on the wall.

BBD: You've had a terrific year, with year-to-date core shipments up 13%. What's happened?

Jim Koch: It's more people drinking more Sam Adams more often. One of the things we're seeing is 20-somethings adopting craft beer in the same way that their boomer parents have adopted wine. That's very exciting for craft beer, and I think for the beer industry in general.

I think that 20-somethings are much more into indie culture. They seem to be less susceptible to mass marketed and mass produced products, unless the product has some visible heart and soul, like Apple does. Apple is a behemoth, but it has a heart and soul as personified by Steve Jobs. He drives their culture all the way through to the products themselves. It's easier for that to happen at a smaller company than a bigger company. It can happen at a bigger company - like Apple - but it's very difficult and it requires the unique situation of having a founder who is still driving the culture and products. So I think we"re seeing an important shift in younger beer drinkers.

And I think there is a paradigm shift going on in Better Beer. For forty years, Better Beer growth has been driven by imports. Their appeal was the status and image of international brands that got automatic prestige because they came form somewhere else. If a beer was imported, it was automatically considered better and worth more money than a domestic beer even if the import was simply the mass market ordinary beer in its home country. Today, that image and prestige is being superseded among younger drinkers by beers from small independent brewers in the U.S. - the craft brewers. The appeal comes from a belief that a beer is better when it embodies the pride and passion of a small independent brewer who just cares about making great beer. Nobody thought that way when I started Sam Adams back in 1984.

BBD: Why do you think the big brewers haven't connected with twenty-something consumers?

JK: I don't know whether it's because the ads haven't been good enough to do that, or it's an impossible task. I tend to believe it's the first. My family's been in this business a long time, and one of the things that has always been obvious is, don't bet against the big guys. I have a lot of confidence that the big brewers will get their advertising right eventually, and that will be good for the whole beer industry. Coors Light has got great advertising that's driven growth, so it's doable. They have a good campaign that centers on a simple product benefit that's not too serious or technical. We just need Miller Lite and Bud Light to do that again. They have smart capable people who will figure it out.

BBD: Your convenience store sales are on fire. Is that due to new placements or velocity?

JK: It's both. We're getting distribution gains and we're getting pull-through. It's probably five years overdue, so it's happening with a lot of built up demand creating velocity. But remember, this is a category that we've been working on for fifteen years. This stuff takes time -- the first national on-premise chain that we worked on was TGI Fridays, and it took us about twelve years to get in. Sam Adams is beginning to enter the beer portfolio of the mainstream c-store drinker. Because of the high service levels and the influence that the big brewers have in that channel, c-stores have been slower to take advantage of the craft beer opportunity. That's starting to correct itself. For us it's a big opportunity. C-stores represent about 20 to 25% of beer volume, depending on how you define them. And they put Sam Adams on the shelf as their first craft sku. In craft beer, we are kind of the lead dog pulling the sled into new channels and distribution. If Sam Adams sells, they'll put more craft beers into the box. But as you pointed out last week, there's only 90 or so skus in c-stores, so they are only going to have maybe five or ten craft SKUs, and we're going to end up with two or three of them, along with a few others craft brewers. They're not going to have a lot of craft facings just for variety.

BBD: Have you seen on-premise trends improve?

JK: We actually had strong on-premise growth throughout this recession. It was puzzling at first. Then several big on-premise chains with pretty sophisticated tracking of their consumer behavior explained to us what was happening. We grew because drinkers were trading out of wines and cocktails into craft beer. To those drinkers a craft beer like Samuel Adams has all the same values of quality and more flavor and premium image that a wine or cocktail does, but at a better price. So a consumer can trade out of a $9 top shelf margarita or a $7 glass of wine down to a $5 pint of Sam Adams, and they can still feel like they're getting something special and well-made. The rise of craft beer has given the beer industry a winning weapon to combat the image of wine and spirits.

BBD: Would you ever consider selling Sam Adams in cans?

JK: There will probably come a day when Sam Adams will be in cans. Can makers have continued to improve the quality of the package. But right now, can makers are dealing with some concern over BPA in the liners, and they're working on finding new lining material. Until all of that gets resolved, we're waiting on the sidelines. I've been watching it since the late 1980s and the quality of the liners keeps better. So there will come a time, I think, when we can put Sam Adams in a can without compromising our standards for the quality of the beer.

BBD: How is your small brewer tax relief bill going (HR 4278 and S 3339)? Do you think it has legs?

JK: Yes, it has great legs. In fact, Harry, I've seen you in shorts and it just might have even better legs than you. From nothing, it's gotten over 100 co-sponsors in the House, and over 20 Senators. We have the advantage of strong bipartisan support, and more importantly, no opposition. This is one of the very few bills which has support from both sides of the aisle and no opposition. It's also been a coming-of-age effort for craft brewers politically. The whole Brewers Association got behind this. Sam Calagione [from Dogfish Head] and Dan Kopman [from Schafly] have been tireless in energizing craft brewers to contact their representatives. And what was exciting was that the legislators were very responsive. Craft brewers are politically very cuddly and embraceable. Politicians love craft brewers because we're small local businesses that are growing and creating good jobs, and we're one of the few bright spots in American manufacturing, where American producers are competing successfully against importers. And so I think we've all been pleasantly surprised at how much support we've gotten from legislators.

Craft brewers have been politically small potatoes for a long time. And now the Brewers Association has a goal of developing our political presence to be equal to the NBWA and the Beer Institute in five years. That's a major shift in the political equation of the beer industry. The wholesalers have used their local presence in every district for many years, and craft brewers are just now waking up to the fact that we can do the same thing. We can't do it in the same way - we can't do it with large contributions, but we can do it with grassroots efforts like having events at our breweries, bringing legislators on brewery tours, inviting them to ribbon cuttings. It's a good development for the beer industry in general. The NBWA and the Beer Institute have been very helpful with our bill. And a few wholesalers individually have also been very helpful in getting us access to key Congressmen. I hope it leads to more co-operation and dialogue among the BA, the BI and the NBWA. It shows how much we can do when we're not divided as an industry.

BBD: When you started out, did you ever think you'd get this big?

JK: No, my business plan was to get to 5,000 barrels in five years. I only got investors because I told them either they'd get free beer for life or we'd have a hell of a party when we went bankrupt. Here's the irony. I used to be a manufacturing consultant and I travelled all the time. My wife hated it and was ready to divorce me. So I wanted to create a business where I could spend more time at home, not have to travel I thought this would be a very small Boston business. And what happened? It became much more than a little local business and she divorced me anyway. Luckily, she got the house and I got Sam Adams. And for the last 24 years I travel more than ever. So, nothing really worked out as planned. But I still feel very blessed.

The remarkable part is not sales volume - we're not even one share point yet. We're tiny, still trying to get to small. But the impact is much greater. Here's an example: We are going to be launching a beer called Infinium, It's a watershed for American craft brewing. It's collaboration between Sam Adams and Weihenstephan, one of the world's most important breweries. Weihenstephan is not only the oldest brewery in the world - it's on a hill outside Munich where brewers have been making beer for a thousand years - but it's also the largest and best brewing university in the world. It's the Harvard of beer. They have professors of hops, yeast, fermentation, brewhouse, etc. They are also the research center for the German brewing industry. In Germany it is considered so important that it's one of only two breweries owned by the Bavarian government - along with Hofbrauhaus. It's a national treasure. The brewers at Weihenstephan watched what was going on at Samuel Adams with beers like Utopias and decided they should innovate and make a new beer, within the German purity law. And they decided couldn't do it well enough on their own, that they needed our help to do that. It was a tremendous honor.

Together we developed the first new style of beer in Germany in a hundred years. It's the Opus One of beer [the 1980 partnership between Baron de Rothschild and Robert Mondavi to create a new wine]. We are now in a time when perhaps the most significant brewery in Europe reaches out to a small American brewer to make a new beer because they needed our energy and creativity, alongside their technical expertise and history. As a brewer, I think it's an amazing thing when the oldest brewery in the world partners with a guy who was making beer in his kitchen twenty six years ago. How cool is that? And it turned out each of us needed the other. Neither of us could have made this beer on our own.

BBD: What's the beer like?

JK: It's really not like anything out there. It's unique in the same way that Sam Adams Utopias is unique. Infinium combines elements of Dom Perignon, Noble Pilsener, Chateau d'Yquem and Weihenstephaner Hefeweizen. So I guess it's what Champagne whould be if it could be. It brings flavor elements to the liquid that grapes can't bring. It's dry without being thin. And it's acidic without being sharp. If you think about Champagne, it's dry, thin, and sharp. We've made a beer that is dry, but using malt instead of grapes give Infinium a texture and substance and structure making it more balanced and versatile. It shows that the brewer's art has more to offer the drinker than the winemaker's art.

We've had to tear the brewing process apart and rethink some of it. In fact we have joint patents with Weihenstephan in Europe and here in the US.

BBD: Your CFO recently told a Deutche bank analyst that it's conceivable that Boston Beer could reach 6 or 7 million barrels? Is it possible to triple sales?

JK: Look, I think it's realistic that Better Beer can get to a third of the beer market, imports and crafts and domestic specialties like Blue Moon included in that number. I'm confident of that because wine and spirits are already there. I think imports can continue to grow but not as quickly as in the past. Craft can be a third of that third, which is 11%, up from about 5% today. So if we hold our share of craft beer we'll more than double.

BBD: But triple sales?

JK: I think we can certainly double. I was talking to a wholesaler about the long tail of slow-moving brands that have come into craft beer. (And incidentally I thought Nick Lake's comments in your publication on this topic last week were just right on, as usual). But the wholesaler was telling me that he had to bring on all these new brands so that he can find the 'next Sam Adams.' I said, "There's probably not going to be a 'next Sam Adams.' But you know, here's how you find the next Sam Adams: double your Sam Adams volume. That's your next Sam Adams."

BBD: The next Sam Adams is Sam Adams...

JK: Just like the capital of Djibouti is Djibouti [Ed. Note: Only Jim Koch would know that]. When you look at one of these distributors that take on so many craft brands, they typically take 50 suppliers and 800 SKUs to equal Sam Adams' volume, with tougher profitability. So it's going to be heck of a lot easier and a lot more profitable to double your Sam Adams volume than to take on 50 suppliers and hand sell 800 SKUs. How far can beer SKU proliferation go when a c-store can only hold 90 SKUs and a grocery store can only hold 210 and on-premise can take 20 or 30? Nick Lake was right when he told your readers that in virtually all markets, the top 4 to 6 craft and domestic specialty brands represent between 60 to 90% of craft/domestic specialty volume. And that percentage is growing, despite the SKU proliferation. I don't think wholesalers have thought out the fact that it takes about $2.50 to $3 a case more to handle a slow moving SKU with little repeat business from a small volume supplier than it does to handle the faster moving SKUs with brand loyalty from larger craft suppliers. Wholesalers are leaving money on the table by not recovering the extra costs of handling these slow moving SKUs from the very small volume suppliers.

Put another way, there's a risk that wholesalers are subsidizing the winification, as Steve Hindy at Brooklyn calls it, of the high end of the beer business. Some beer drinkers want to behave like the wine drinkers who are always on a journey of discovery and never buy the same wine twice and beer wholesalers can give them that endless variety. Wine distributors work on 35% margins for items like that. Beer wholesalers shouldn't be subsidizing this behavior at the expense of their lead craft brands. Beer wholesalers should be fully recovering the cost of handling those slow moving SKUs by having the right margins and prices. At Boston Beer, we encourage our wholesalers to take on more craft brands and to charge higher margin rates to make sure they are fully recovering the costs of hand selling the slow moving items with little brand loyalty. One wholesaler I talked told me he was dropping a certain craft brand because the volume was too low to make money on it. I looked at the pricing and they were charging the same margin dollars as on Sam Adams because it had the same FOB. I said, "Don't drop it, just raise the price and make money on it. Don't charge a $5 margin, make an $8 margin It can bear a dollar a sixpack more on the shelf price." That way, craft brewers can get access to accounts that want variety and wholesalers can make money.

BBD: Thanks for your time, Jim.

DGUSA POSTS BEER GAINS ON BACK OF GUINNESS FOR FISCAL YEAR

For their fiscal year ending June 30, Guinness volume growth was "driven by the performance of Guinness Draft in Can, Guinness Extra Stout and Guinness Kegs, as it lapped the planned destock of the prior year. Although imported beers declined, Guinness grew share by 0.1 percentage points. Marketing spend increased behind the "250th Celebration", Arthur's Day and the integrated campaign "Fortune Favors the Bold"," said Diageo.

Following the planned destock of the prior year, Diageo's "beer brands grew volume 4% and net sales 4% driven predominantly by Guinness. Harp and Smithwicks also grew volume and net sales, albeit off a small base. The introduction of Red Stripe Light helped grow net sales of Red Stripe 3%.


UPDATE: ABITA RAISES $100K FOR GULF OIL VICTIMS

We all know that beer is good and good for you. But it's also good in other ways, because the folks in this industry, I've found, are a giving sort of people. Take David Blossman at Abita....please take him. Okay, that's an old joke. But the folks at Abita brewed a special beer called Save Our Shore, a charitable pilsner, which we reported on a while back. David reports that sales of the charity brew have so far raised $100,000 to help the victims of the Gulf oil disaster.

New Orleans Archbishop Gregory Aymond was on hand yesterday at the Abita brewery to accept the funds on behalf of Catholic Charities. "We're very confident in Catholic Charities, and their ability to get the money to people who need it," David told WWL First News. According to Blossman, the $100,000 will be evenly divided by Catholic Charities among 40 families in serious need of financial assistance following the oil disaster.

Until tomorrow, Harry

"A man can sleep around, no questions asked, but if a woman makes nineteen or twenty mistakes she's a tramp."
-Joan Rivers

Make yourself heard, your opinions count. Feedback and tipster form: http://www.beernet.com/hotline.php

--------- Sell Day Calendar ----------
Today's Sell Day: 19
Sell days this month: 22
Sell days this month last year: 21
This month ends on a: Tues
This month last year ended on a: Mon
YTD sell days Over/Under: -1

Anonymous News Hotline: http://www.beernet.com/hotline.php

(c) 2010 BeerNet Communications, Inc. - All rights reserved. Please, no forwarding or copying. May quote with attribution. Individual subscriptions $480/year. Corporate rates available.
Editor: Harry Schuhmacher - hs@beernet.com
Assistant Editor: Megan Metcalf - megan@beernet.com
Customer Service: Jennifer Waddill - admin@beernet.com

Check beernet.com for back issues or to subscribe or renew. Phone: 210-805-8006. Email: admin@beernet.com



SchuPub, LLC, 601 E. Ashby Place, San Antonio, TX 78212, USA

To unsubscribe or change subscriber options visit:
http://www.aweber.com/z/r/?7AwM7IystCxMbGysrOystEa07GxsnKysbA==

Go back to listing Go to next article Go to previous article

Top Secret News Hotline:

Got beer news for BBD?

Submit Anonymously
twitter facebook