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Chapter 4

Boston Beer—Is Greater Growth Possible?

Information BoxStrategic Window of Opportunity and SWOT Analysis

While your students may come up with a number of reasons why the big brewers overlooked the possibilities of the highest-priced end of the market, the answer is rather obvious. They simply did not think it had enough sales potential to be worth the effort. The highest-price segment of the beer market is not where the volume is. Albeit it may contribute a higher profit margin per bottle, but still this pales in comparison with the mass market for beer. Don’t you think this was probably the reasoning of the big brewers? And this opened the door to specialty brewers like Boston.

Information BoxCompeting on Price: The Price/Quality Perception

The question of how does one determine the quality of a product usually arouses lively class discussion. I ask students how they themselves determine the highest quality products and then we evaluate the validity of these sources of information. Advertising is quickly ruled out as a good source of information, as are the recommendations of salespeople, since these are seen as biased and one-sided. Personal experiences of oneself as well as friends is only a limited sample of experience and may be either dated or not representative. Sources such as Consumer Reports are cited as good for higher priced products, but their detailed investigations provide only a limited sample and may not be representative of all the output of that brand. For beer and other alcoholic products taste is often mentioned. And yet in blindfold tests most people cannot distinguish among brands. Finally, the consensus gradually develops that price is the single most common factor in our judgment of which is the highest quality—the higher the price, the higher the quality. At this point you may want to steer the discussion to whether we can be deceived in this price/quality perception.

Information BoxThe Merits of Expanding Slowly and Keeping Fixed Costs To a Minimum

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Here we are asked to speculate on the $100 million that Boston Beer received from its initial public offering of stock. Is some or much of this likely to go for "stones and mortar"? My guess would be that much of it did. What do you think? (A similar question is the subject of the Team Debate Exercise at the end of the chapter.) Do you think the physical plant is that important to the public image of a brewer?

Invitation for Your Own Analysis and ConclusionsDo you see any business plan that would have made Koch more successful?

This could be a topic for impromptu class discussion, or you might consider a homework assignment. It certainly invites a number of different ideas, and someplace along the line you may want these ideas to be evaluated, prioritized, and defended.

Questions

1. Always an interesting question for classroom discussion, this. Most of my students admit to liking the taste of Boston Beer brews, some of them a lot. They are more likely to ponder a bit whether these are worth the higher price, and sometimes a rather heated argument ensues. You may want to press further those who express strong liking for this Samuel Adams brand. Ask them if they always buy it, or use it only for special occasions and for entertaining. Ask them if they would consume a lot more if it were more modestly priced.

2. The initial reaction of investors regarding the public offering of Boston Beer had to be highly positive. The innovative coupon offer was quickly sold out. And when the issue came to market it was bid up to a strong 50 percent gain in only a few days. But the enthusiasm was not sustained. The stock over the next several years dropped to $8 from a high of $33, and took years of a bull market to regain its initial luster. Does this mean that investors became doubtful of Boston Beer's growth potential? Probably. But then investors are not always right.

3. The possibility of a new trend being short-lived is always a worry. And no one can predict with certainty the durability of demand for a new and different product, in this case the expensive, strong-flavored beers. Your students may find it interesting to speculate on this, based on their own preferences. My prediction is that the future growth prospects of such beers is rather limited to a particular segment of beer drinkers. This group will like strong-flavored beer, although they may not always purchase it because of the cost. Other consumers, the bulk of beer drinkers, may sample but not switch. What do you think?

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4. Whenever there is a great proliferation of different products within a category, retailers feel abused. They have limited space to stock so many brands, and such diversity also raises their inventory and stocking costs. It is to their best interest to have fewer brands and less different items. Eventually, as the proliferation continues, retailers will have to discriminate among their choices, and only try to handle what they think are the most popular. Smaller manufacturers and less-than-well-known brands will have a difficult time persuading retailers to handle.

5. Such a high-price strategy certainly limits the number of customers. But it is a way to differentiate a brand from competitors. And most people associate high price with high quality. Several conditions seem needed for such a high-price strategy to be viable. First, it helps if the quality difference is fairly obvious and can be maintained, and second, it is more desirable when the production capability is limited and economies of scale are not relevant. A devil's advocate may make the most telling points by suggesting a less-high pricing strategy (not low-price, but something less extreme), since this should expand potential demand, and tap into the mass market. On the other hand, supporters of the very high-price strategy can counter this by suggesting that reducing the price somewhat might mean facing much greater competition and losing the uniqueness.

6. It may not be possible to fully eliminate incidents affecting the quality of Boston Beer, particularly as to freshness. The company can stress this with its distributors, but they are independent and can hardly be controlled. Still, they should recognize that it is to their mutual best interest to be sure that the quality standards of BB are maintained. BB can certainly step up communication about the damage done by lack of freshness or prescribed refrigeration to its distributors. It can offer complete replacement of dated products, no questions asked. And it can have company employees monitor as best they can. What BB cannot do is assure that such incidents will never occur.

7. Student opinions may differ on whether BB can compete effectively when the big brewers invade its turf with their own microbrews. The evidence suggests that it can because it has built up a good image for its Samuel Adams brand. However, BB can hardly let down its advertising if its position is not to be overwhelmed by the big brewers. It looks like BB has assured itself of a nice niche in this high-price market. I suspect that future growth prospects are limited to this market. I do not see BB becoming a major player in the brewing industry. What are your thoughts on this?

8. The proliferation of different kinds of beer by BB--some two dozen--in my judgment was a major mistake. It increased production and distribution costs, antagonized most retailers because of greater stocking requirements, and was confusing to customers. What do you and your students think about so many brands? What do they think would be a more ideal number?

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Hands-On Exercises

1. Success is all relative, isn't it. By most standards, Jim Koch is a highly successful entrepreneur. But he can find others who are more successful, just as in all walks of life we find others who are more successful. What to do? The worst thing is to embark on an ambitious growth program to the limit, and beyond, of one's resources. This is like gambling at the crap table. Such efforts sacrifice profitability for growth, and may even bring down the company. The most practical specifics for attaining great growth would seem to lie in acquisitions and/or expanding the market beyond the United States. Both are fraught with some peril, although if done through controlled growth rather than reckless growth they may be achievable. What seems delimiting in BB’s case is that venturing more into the mass market for beer brings BB right up against the might of the major brewers where its resources would be outgunned. To try to grow more in the high-end part of the market comes up against the limits of how much more growth there is in this sector. You may want to invite your students—of whom many are likely to be experienced beer drinkers—to come up with their own ideas for generating growth for this company.

2. "How are you to monitor the Pittsburgh Brewery, the contract brewery for Boston Beer, to assure the high quality standards that are essential? This is an assignment of the highest order. You will be reporting directly to Jim Koch."

This is the charge to your students. What ideas do they have for such quality assurance? You may want to ask for suggestions and jot these on the blackboard for later evaluation.

Certainly, Pittsburgh Brewery has to be fully informed of the standards needed, and of the importance of these standards being met if the positioning of Samuel Adams as the highest quality in the industry is not to be undermined. We have to assume that both Pittsburgh Brewery and Jim Koch believe this can be done. It would seem wise, with so much at stake, to assign one or more Boston Beer technicians to work with the Pittsburgh people, or else to visit very frequently. The whole process should be monitored, from the raw materials used, through the manufacturing, to the distribution from the brewery. Taste testing would seem a vital part of this monitoring. Your students may come up with other and more specific ideas, especially if any have experience with the brewing process and know where glitches are most likely to occur.

Team Debate

An interesting decision this is: how to spend $100 million. Should it mostly be spent on brick and mortar—building Boston Beer's own brewery—or on more advertising, seeking new markets, such as the international, or judiciously acquiring some other small microbreweries? In particular, your students can debate the advantages to BB of having its own brewery, the advantages of geographic expansion, and advantages of growth through acquisitions.

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