One of the hottest niche markets today is microbrewery beer, and this EOY runner-up is one of its creators.
When Jim Koch decided to become a microbrewer of beer -- giving up the secure life for which his Harvard degrees and tony consulting job had prepared him -- the niche he targeted didn't exist. Now, despite counterattacks by his huge, supercompetitive rivals, it does
FOUNDER: Jim Koch, baby-boomer Fortune 500 consultant with three Harvard degrees, now 45
MARKET ENTERED: Beer manufacturing. Mature
industry dominated by big competitors (Anheuser-Busch, Miller, Coors)
STRATEGY: Make superpremium niche economically viable, based on product quality, guerrilla marketing
RESULT: Pretax profits of $14 million on sales of $180 million* * *
The main difference between Sam Adams, whose father was a brewer, and Jim Koch, whose father was a brewer, is that Adams didn't call his beer James Koch. Otherwise, each was passionately into causes, graduated from Harvard, did business in Pennsylvania, was a populist, and was a thorn in the side of the competition. It's appropriate, then, that in 1985 Koch sold his first case of Samuel Adams barely a block from the site of its namesake's 1776 brewery.
The sale occurred only a few months after Koch (pronounced "Cook") had given notice at his former job (as a $2,500-a-day consultant to big business), drafted a business plan, raised $140,000 on top of his own $100,000, and launched the Boston Beer Co. (BBC). Even then, the new brew, samples of which Koch carried in an executive briefcase lined with ice packs, was exceptional enough -- and Koch glib enough -- to persuade the barkeep to order a few cases. Elated, the rookie salesman was well down the street when he realized he'd forgotten to ask how many. (For the record, it was 25.)
No longer is "how many" a quantity that eludes BBC's founder, now that he's gone on from that bumbling beginning to become the country's 10th-largest beer producer, behind such family lines as Busch, Miller, Coors, Strohs, Heileman, and Pabst. In 1994 BBC sold $133 million worth of beer, for a pretax profit of $9.7 million; 1995 sales are estimated at $180 million, with income at $14 million. And, despite additional financing in 1987, which diluted his initial $100,000 investment, Koch owns 42% of the action (subject to possible adjustment because of 1995's planned initial public offering).
Like it or not, beer is the world's second-most-popular drink, next to tea. Which might explain the original Sam Adams's dumping the latter into Boston Harbor. More to the point, it explains how the big domestic brewers rack up commanding figures year after year (leader Anheuser-Busch's 1994 sales: $8.7 billion). Next to Anheuser-Busch's, Miller's, and Coors's combined 1994 production of 150 million barrels (a barrel yields approximately 52 six-packs), BBC's 700,000 barrels were a drop in the bucket. But they were enough to spirit the company to the head of the minuscule microbrewing niche. Really minuscule: despite its number 10 overall position, BBC manufactures only about three one-thousandths of the beer sold in this country. At that, its output is greater than that of the next six microbrewers combined.
What makes BBC's immediate acceptance and its 40% annualized growth thereafter so remarkable is that the company sprang from ashes. At the time of its founding, in late 1984, the ranks of colorful local breweries, which at their peak in the 1870s approached more than 3,000, had dwindled to fewer than 40. They disappeared "because they didn't make a product that was either cheaper or better. If you don't have one or the other," Koch holds, "you don't have a business." Not the least of the failures were the 13 breweries operated by his forebears, starting with great-great-grandfather Louis, who ran a brewery in St. Louis "when Eberhard Anheuser was still selling soap."
But since Jim Koch's arrival on the craft-beer scene, an estimated 500 small breweries and brew pubs have ventured to open, their ranks swelling at the rate of some 50 a year from 1985 on. Observers agree that the steep reversal was at least partly inspired by BBC's success and the publicity it received.
The success itself was spurred by as astute and imaginative a promotional barrage as the industry had seen. In addition to handing out the typical T-shirts and coasters, Koch and company peppered Boston and its environs with restaurant umbrellas, pub-menu chalkboards, and gala beer parties -- all touting BBC's brands. Koch himself took to the airwaves, drolly reciting 60-second spots of self-praise like a micro Iacocca. Eschewing "babes and hunks," BBC print ads educated drinkers about how to recognize and enjoy truly premium brew (and why they should expect to pay more for it), by inference taking competitors to task for not delivering the quality and consistency of Koch's offering. In grudging admiration of his merchandising instincts and sometimes abrasive infighting skills -- "You can't do what I do without being feisty," Koch concedes -- one major brewer recently responded to Koch's stated mission to make Samuel Adams the country's number-one-selling specialty beer by the deadline of the year 2006 with this curt appraisal: "He's going to beat it."
Not to say that Koch alone revivified the marketing concept of gourmet "craft" offerings concocted by neighborhood microbreweries. He was attracted to specialty beer after seeing an article about San Francisco's Anchor Brewery, taken over in the 1960s by one Fritz Maytag to revive the area's steamed-beer tradition. The article reminded Koch that if he remained in the safety of consultancy, he would be the first in his family in six generations not to become a brewer. He recalls: "I read the piece and thought, 'Maytag is making better beer than the imports right here in the United States! If I don't do the same thing, a tradition that's lasted for 140 years will die with me, and I'm going to be real disappointed in myself.' "
No need. In April 1984 Harvard M.B.A. (and Harvard juris doctor -- he's also a lawyer) C. James Koch resigned from the prestigious Boston Consulting Group (annual compensation: about $250,000) to become beermeister of his own fate (annual salary: exactly $50,000). Maytag's Anchor Brewery may have been his inspiration, but it wasn't his model. "Fritz had family money," Koch observes matter-of-factly. "He was a wealthy man when he went in, and he took two decades to turn a profit. My grandfather was a brewer. He didn't invent a washing machine, so I didn't have the luxury of lots of time and money. As a result, I started my company with two priorities -- making a great beer as soon as I could and getting people to drink it."
The best entrepreneurial advice the admittedly impatient Koch says he's received is, "Jim, nothing good happens fast." That axiom was whispered in his ear by a high school girlfriend. But, says its recipient, "when you're building a company, it's not bad counsel." Thus, in his 1984 offering prospectus he advised potential investors, "Sales of 5,000 barrels per year are required for attractive profitability based on the Boston market alone. I believe this will take 3-5 years, but appears to be achievable." His calculations turned out to be way off. It took him just eight months to sell the first 5,000 barrels.
Koch also described the aims of the proposed company in the prospectus. He opted not to go after Bud and its ilk but to take on premium imports like Heineken and Molson, even though such brands constituted just 6% of the market. To produce the better-than-theirs beer he had in mind would require extra-expensive ingredients, but in the premium market sector, imports' freight bills and currency problems would give him room to maneuver. Eventually, increased volume would allow Koch to achieve economies of scale and deliver beer more drinkable than the imports for the same or less money. And the imports' by-definition inability to deliver a brew as fresh as Koch's would be a promotable edge for BBC.
Getting people to brew the beer, however, was another story. For all the calculated hyperbole Koch was to generate in boosting the cause of local brews, BBC had no local brewery. In the beginning Koch cooked his new elixir, a weighty lager, on his kitchen stove, using a complex recipe he had discovered in his father's attic. He and Rhonda Kallman -- the then-22-year-old secretary he took with him when he left consulting, because, among other business talents, she knew the local bar scene better than he -- lugged samples from pub to pub in quest of direct sales. After they made one, Koch, Kallman, and the company's first hire -- a truck driver -- hauled the cases around the city. No one else was willing to deliver the goods. "When I started, they all thought I was crazy," Koch relates. "Every distributor in Boston turned me down. Not only did we make the calls and get the orders, we had to rent a truck and lease a warehouse. When a batch was ready, we bottled it and delivered it. Try schlepping five cases of beer down the steps of one of those Faneuil Hall restaurants -- you're talking 160 pounds! It gave me an appreciation of who does the hard work in the company."
Partner Kallman now heads a 115-person sales force that's been appraised by one Wall Street analyst as "by far the best in the sector." The group is not only the industry's most efficient -- one rep to every 500 clients -- but its most balanced: half the salespeople are female. "That's way off the scale for the beer business," Koch notes. "I'm often asked why I hire so many women. The answer is, I don't; I hire talented, resourceful, intelligent, energetic people. It happens that God made half of them women."
In the absence of BBC's own facility, the solution to meeting the increased demand as sales expanded to other cities was to outsource brewing to an otherwise-underutilized brewhouse. "Here's what I'd like to do," Koch would say as he made cold calls, shopping his then-novel concept around. "I'll bring you my own recipe and ingredients, and I want to make my beer at your place." One of the takers was Pennsylvania's Pittsburgh Brewing Co., a capacious plant whose own label was then in decline. A nonbeliever when it came to formal market research, Koch chose the name Samuel Adams by printing mock labels and personally polling beer drinkers wherever they gathered, including captive audiences on airplanes. (The runner-up name: New World.) "I figured here's a cheap way to do it, and what better place than a plane? It was my demographic -- businesspeople, a lot of them interested in a better beer." Today BBC products make up the majority of Pittsburgh Brewing's output, and BBC has struck similar contracts with breweries in Oregon, Washington, and New York. Now, Koch crows, "we're able to get beer into any market in the country within 24 hours of shipping."
Koch is such a fanatic for freshness that BBC was the first of the beer crafters to stamp a noncoded sell-by date on its batches. Beer is at its best in the first minutes after bottling, Koch holds, and hangs on for only four or five months before its quality starts to deteriorate. "That's why we pioneered freshness dating. If you're selling quality, freshness is important. You shouldn't allow the consumer to buy stale beer without his knowing it. I'd rather call it back and destroy it than have someone drink it." And he does just that, at no small cost. In 1995 BBC will take back and destroy about $1 million worth of old beer. Every year some is put into a tub, and Koch, dressed in a business suit, sits in a chair over it, charging $1 a throw for the crowd to take potshots at a target and drop him into his own drink. The considerable receipts go to charity.
Actually, destroying the beer increases BBC's profits, Koch calculates. "It sends a clear message to everybody -- consumers, retailers, distributors, our salespeople -- and gives them a simple decision-making rule: 'Date passed, beer goes.' " The bottom-line rationale is "you get a lot of administrative overhead in business because you're always making trade-offs. Therefore, in matters where decisions can be made on clear and obvious principles, such as no old beer, you save time and money. You don't have bureaucracy debating things like 'Well, how old is old?' "
Although he's "always wanted to have a brewery," Koch has yet to own a full-fledged factory of his own. (A miniature one on the outskirts of Boston is devoted to visitor tastings and research and development -- of such concoctions as cranberry beer.) In 1987 he obtained venture capital earmarked to build a factory that could produce 225,000 barrels a year and bought $2.7 million worth of equipment. But when construction estimates came in at twice his budget, Koch scrapped the project, abandoning 30 huge tanks that had already been delivered to the site. "It was a big mistake," he admits. "I remember thinking, 'Jeez, I'm almost 40, and I just wrote off more than I've made in my whole life.' " But pushing on would have sunk the company -- not to mention annoyed its VC backers -- "and wouldn't have made my beer any better."
After almost a dozen years into it, he's found extra merit to the contract route. "In the value-added chain, I choose the parts I can do better than anyone else," Koch says. "I capture the art-and-science part of brewing, while they run the plant. I'm not better at getting a roof fixed than they are." With Pittsburgh Brewing's labor pact with the union due to expire last May, Koch called union management five months in advance and suggested that negotiations start right away, saying, "If you take it to the deadline, I will already have found another place to brew my beer." The union settled in March. "Owning something can tie you down," Koch believes. "My beer gets good treatment because if the contractor were to do anything wrong, I could leave. Whereas with their own beer, they can't leave. So Sam Adams is brewed especially well."
So well, in fact, that it was the first American beer allowed into Germany, the only country in the world that enforces a beer-purity law. Koch seized the moment to hint that the language of the law showed that while his beer met stringent standards, his competitors' brews didn't. A relentless challenger who compares the opposition's products unfavorably with his own, Koch has more than once irritated his rivals, as any innovative merchant is apt to, by pushing claims to the edge of exactitude -- but not beyond. In fact, the statute didn't bar other beers because they had worms or such; it barred them simply because their recipes called for ingredients German brews didn't contain. BBC brands are exported to England and Ireland as well and were sold in Japan until Koch pulled them because "the distribution system there has so many layers, we weren't getting fresh beer into consumers' hands." But Koch's forays into foreign markets aren't so much for profit as for posture: we're as good as the imports, he likes to say. "Going international is not a priority," he admits. "We got Iowa only last year."
With the Hawkeye State under their belts, Koch and Kallman now have covered all 50 states. Little wonder that, Koch charges, Anheuser-Busch recently tried to cut him off from a critical source of raw materials by bullying the farmers who supply him with rare Bavarian hops. Koch didn't blink. He flew to Hallertau, Germany, and invoked his family's longstanding relationship with the farmers themselves: "It's likely my great-great-grandfather bought hops from their great-great grandfathers. I maintain good relationships with those farmers because to me, part of being a strong competitor is making sure you take care of the people you need." August Busch "is as tough a competitor as there is in American business today," Koch concedes. "But I'm a tough competitor, too. I enjoy the challenge. Let me answer them this way: we still have the hops."
And they're no ordinary hops. Koch spends as much as 20 times the going rate for "really elegant" varieties. Without costlier ingredients, he insists, BBC's 14 offerings -- from a light lager to a 34-proof syrupy distillate that Koch invented and has applied for a patent on -- would fall short of the distinctive tastes he claims BBC customers expect. "People ask how come Sam Adams is so expensive. My response is, how come it's so cheap, when we have higher ingredient costs by far? World-class beer for a buck more a bottle!"
Koch's excited admiration of his own products may or may not be just another promotional posture; regardless, he's found a way to make it feel infectious. Those who share a sample with him in his model pub at BBC's R&D site receive an education in sight as well as taste. Here's Koch pouring cream stout: "See how it forms! It's almost like a parfait. It's beautiful! A well-made, well-served stout will have a head like that. This has an acid bite to it. When you smell it, the fermentation smell should be a little like black coffee." His guest tastes. "Get that bite!!"
Thus ads and promotional pieces stress a painstaking brewing process that Koch himself supervises, standing by contractors' vats and tanks as a given recipe is nursed into fruition. While the rest of the industry's marketing features the party-thick lifestyle one's beer choice supposedly guarantees, BBC's emphasizes freshness, rich and complex tastes and fragrances, and exquisite ingredients. Samuel Adams's tabletop menu cards for restaurants picture a patriot with fire in his eye, not a terrier with a black eye. Explains Koch: "I'm trying to educate American beer drinkers the same way California wine makers changed people's minds about American wines 15 years ago. Creating trust in the market is a competitive advantage against the big guys. They're still trying to figure out how to make something that looks and tastes like Samuel Adams."
Accordingly, Koch has been acclaimed for innovative marketing. But he insists the acclaimers have it wrong. He's an innovative salesman and deems the person-to-person aspect so important to the soundness of a business that he still goes on the road two days a week. "At the start," he concedes, "I focused on selling because I couldn't afford advertising or marketing. Other microbreweries didn't have brewing backgrounds, so they were into the marketing aspect: 'We have to have a little local brewery because that's what people are buying,' they figured. I said, 'That's not right. People buy beer, not shtick. I can sell beer in Boston if it's great beer. But I can make it anywhere." BBC didn't add a marketing director until last year. "We became a household word without a marketing department," boasts Koch.
The marketing department was added only after "there was more stuff than I could do anymore," he says. BBC now has some 400 collateral items with which it supports its sales staff, including the samples of fresh malts and hops salespeople bring with them for accounts' hands-on chewing and sniffing. Koch insists he still doesn't understand marketing -- billboards, commercials, and the like. "I understand beer. The rest has gone beyond me. For years there wasn't a job in the company I couldn't do better than the person who was doing it. That's not true anymore. We'll get to a point where there's not a job that I can do as well as the person who's doing it. The sooner that comes, the better," says Koch.
Despite his business-school education, Koch favors simple rules throughout, "so people can understand and visualize and don't have to try to imagine what you mean." One area is hiring and firing, where the rule is, Don't hire anybody unless it improves the average of the company. "It's a wonderful rule because administrators can imagine what the average person is like; there's a fairly clear standard in their head. They look at this person and they can say, 'Yeah, they're better,' -- or, more likely, 'No, they're not better than our average.' If you don't do that, what happens," Koch explains, in a hipbone's-connected-to cadence, "is, when you start on a scale of one to 10, you hire 8s and 9s and 10s. Then you start hiring 7s, and the 7s hire 6s, and the 6s start hiring 4s and 5s. And before you know it, what started out as 8s, 9s, and 10s is 4s, 5s, and 6s on their way to becoming ones and 2s and 3s." BBC's three full-time recruiters wait -- and wait some more -- to find someone who ups the average. They recently took two years and went through 2,000 rÉsumÉs to hire a sales rep for Arizona.
Patience must be a virtue, because no one has quit the BBC office in five years. The turnover rate in the sales force is less than 15%, and among salespeople there for at least three years, virtually zero. Although BBC has a professional tour director who walks visitors through the brewing process at its showcase plant, the company also encourages employees to put in some overtime as tour guides. "It's important to get everyone in the company involved in presenting us to the public," says Koch. "When your employees are proud of what they do, and what they make, and the company they're a part of, it shows; it's an unquantifiable asset. So I'm happy when truck drivers ask to do tours."
In its fundamentals, brewing parallels what Koch already had learned about manufacturing when he was a consultant to paper mills and chemical plants. "I respond to the romance, the soul, the heritage of beer, but also to the unromantic adherence to details, the nitty-gritty that leads to quality," he reflects. "For quality to have meaning, it has to have a definition. In manufacturing, quality means conformance to specifications. In that mundane sense, Samuel Adams is a beer that's consistently good, that therefore conforms to specifications, that thus has quality."
But for all his determination and celebrity, Koch isn't satisfied. "I come from a German brewing tradition, not an English brewing tradition. English batches taste different; some are better than others, and that's part of their fun. My brewer's ethic is that every batch should be the best, should even be perfect. There is a perfect Samuel Adams. I can define it analytically, and I can taste it. My job as a brewer is to get as close as I can to the perfect Samuel Adams in every bottle. How often do I get that close? Maybe only 10% of the time. But the fraction I'm off by, you couldn't tell the difference."
C. JAMES KOCH
Boston Beer Co., Boston; founded in 1984
$180 million in 1995 revenues; $14 million in pretax profits
Born: Cincinnati, 1950
Parents: Father, brewer; mother, schoolteacher
Education: B.A., Harvard, 1971; J.D./M.B.A., Harvard Law and Business Schools, 1978
First Job: Corporate adviser, Boston Consulting Group, 1978-1984; compensation approximately $250,000 a year
Other Experience: Instructor in mountaineering, Outward Bound, 1973-1976; compensation $0
Other Companies Started: None
Role as CEO: "To create change, to make Boston Beer a constantly different company. I like challenges; I like building. I get up in the morning to build. When I look at a garden, I want to see what grew, what blossomed, that's different from the week before."
Failures: Writing off $2.2 million in 1988 when he scrapped brewery-construction project. Realized that at that moment he had made negative contribution to economy by writing off more money than he'd ever earned (an imbalance since corrected).
Family: Married to Cynthia A. Fisher, CEO of Viacord, a biomedical firm; two teenage children from previous marriage
Heroes: Eric Shipton, "the last great explorer," who at age 75 became first to cross Patagonia ice cap. William Butler Yeats, because he wrote his own epitaph
Hobbies: Flower gardening; participation in inner-city youth programs
Quote: "What do I regret? I worked for [GE's] Jack Welch, and I competed against August Busch. I'd rather have had it the other way around."