If all your competitors were hurting badly, would you help out?
The beer industry is as tough as any. It's dominated by a handful of big players, and the remaining craft and microbrewers -- some 1,400 businesses, most of which are local or regional -- must fight with them (and with one another) for every bar tap and every inch of shelf space. So when the market for hops went haywire last spring and panic buying ensued, you had to wonder how cutthroat the competition would get.
Hops are the conical green flowers that function as a preservative and also add flavor and aroma in beer. For the past decade, there has been a glut of hops, and prices have reflected that. But lately, as with so many commodities, the prices of some popular varieties of hops have jumped: They are going for $15 to $24 a pound, up from $3 or $4 a pound.
Several factors led to the run-up in prices, according to Julia Herz, the head of the craft beer marketing program at the Brewers Association, an industry group. Fed up with habitually low prices, some farmers pulled out their hop vines and trellises to plant other crops, thus reducing the total acreage of hops in cultivation worldwide by roughly half. Key growing regions in the Czech Republic and Slovenia were hit by bad weather, further reducing the supply. Meanwhile, consumers were developing a taste for rich, aromatic beer -- think of all those pungent summer and winter ales -- leading craft beer makers to use more hops in their recipes. Prices skyrocketed, and brokers began to run alarmingly low on inventory.
The situation was particularly dire for small American brewers. Big producers and even most large regional players sign long-term contracts that provide them with an annual supply at a fixed price. Many craft brewers, on the other hand, buy hops as they go. Now, suddenly, there was nothing to buy. At an industry event in Germany last fall, "it was clear that some of the small brewers were desperate," says Jim Koch, founder of Boston Beer (NYSE:SAM).
Koch's company, which makes Sam Adams, is the largest craft brewer in the U.S., with $341.6 million in sales in 2007. Koch has seen this before: He founded the company in 1984, at the tail end of another bad hops market. So Boston Beer had long since signed contracts with growers, and it maintained a big inventory of refrigerated hops. Still, Koch knew what the small breweries were going through.
He considered his options. He could sit on his stockpile, or he could sell it on the open market. But neither of those choices felt right. So he came up with the idea of a hop-sharing program.
In a posting on the Brewers Association's online forum, Koch outlined his plan. He would sell 20,000 pounds of British and German hops at his cost -- about $5 a pound, plus shipping. Koch asked his colleagues to limit their request for assistance to six boxes (528 pounds total) and to ask for only what they absolutely needed. If the total amount requested exceeded 20,000 pounds, Boston Beer would hold a lottery.
In all, 400 small beer companies submitted requests, so a lottery was held in March in Boston Beer's brewery in Jamaica Plain, Massachusetts. Slips of paper were pulled from a bucket, and 132 breweries were sold hops. The recipients hailed from all over the U.S.: Bar Harbor, Maine; Wausau, Wisconsin; Ukiah, California; Marietta, Ohio. The hops were shipped in May, and brewers made beer with them through the summer. Koch estimates that as many as 10 million pints of craft beer could be produced from those hops. Meanwhile, the worldwide harvest looks to be much better this year than last.
"Craft brewing has gotten big," Koch says. "We used to all know each other, but that's not the case anymore. I saw this as a way of reminding people that this isn't just a business. We're craftsmen, too, and we help each other."
Ken Grossman of Sierra Nevada Brewing also made spare hops available at cost to small brewers. "The sales guys may not all get along," says Grossman, "but on the production side, there's a fair amount of cooperation in the industry."
As a matter of fact, Sierra Nevada sold 150,000 pounds of hops without much fanfare. "Jim's much better at figuring out how to market the thing and take credit," Grossman says.
Beer makers compete. In this case, it's over who's more generous.