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Chapter 4

Boston Beer—Is Greater Growth Possible?

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Strategic 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.

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Competing 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.

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The 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 Conclusions

Do 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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