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By Yan Ren

Abstract

This article starts with the revisit of Radical Marketing by Sam Hill studying 10 businesses successfully abandoning traditional mass marketing and making it big. 12 years after the book was published, The Boston Beer Company not only continues the success but also thrives as a miracle. The article drills into the industry and the company’s evolvement, and discovers the secrets that make the company sustainable in three aspects: culture revolution, marketplace innovation and operational innovation. In conclusion, it is the constant radical change that makes the magic happen.

Radical Marketing Revisit

Sam Hill and Glenn Rifkin wrote a book called Radical Marketing in 1999 and reviewed the success of 10 small businesses that broke the rules of traditional marketing methods and made it big. The ten businesses, from Harvard to Harley, by targeting the true believers who cared deeply about the quality of identity of the product, build loyalty and profitability with little expenses and resources. And more importantly, it is the chief executives that personally led the effort with their passion and long-term view of the marketplace.

12 years later, once I revisit the ten companies, it’s a whole different story. Out of the ten companies, some of them are barely known by people or no longer independent, such as Providian Financial, the Iams Company, and the Grateful Dead. For example, Providian Financial, known for the credit card service to low-income customers, was sold to Washington Mutual in 2005, which was filed for bankruptcy in 2008 and taken over by JP Morgan Chase.

Some companies are still alive but being through all kinds of challenges, such as Harley-Davidson, Virgin Atlantic Airway, the National Basketball Association, and Snap-on Tools. For example, Harley-Davidson, credited for having a loyal brand community, because of the financial crisis, their stock price fell from $70 to $10 during 2007 and 2009 (Appendix A). And the constant profit loss wakes a massive company-wide restructuring began in early 2009.

Some companies, are not only little affected by the economic environment, but also able to keep constant growing, such as Boston Beer, EMC, and Harvard Business School. For example, Boston Beer Company, maker of the Samuel Adams and the leading craft brewer, has become a prince of beers recently, as the specialty segment has exploded while the mass market has barely grown. After more than a quarter century, Boston Beer now has 780 employees, makes more than 30 styles of beer, and has market capitalization of about $820 million. Since 2004, the revenue doubled and the stock price increased from $19 to $102.51 (as of Dec 2, 2011) (Appendix B). Jim Koch (pronounced “Cook”), the founder of The Boston Beer Company, has built a fast-growing, highly profitable company and carved out a much-envied niche. In pioneering the craft beer market, Koch and Sam Adams did nothing less than change the American beer landscape, and certainly in attitude.

Largely impressed by performance of Boston Beer, I decided to dive into the company and find out the secrets that make this company not only grow but also sustainable in the long run.

Boston Beer in the Market

Boston Beer is the largest craft brewer in the United States. Craft breweries’ operations are typically small and independent, but notable for the quality, consistency, freshness and taste of their beer. Boston Beer cannot compete with price with large breweries due to their advantages with higher economies of scale, but by highly involving with the local communities they serve, they have brand loyalty among their customers.

In terms of volumes, the two big beer makers, the MillerCoors venture (the merger of SABMiller and Molson Coors) in South Africa has market share of 28.9% in the U.S., and Anheuser-Busch InBev in Belgium takes up another 47.9% (Appendix C). Craft beer is only left with 4.9% of the total U.S. beer market. Having only 1.1% market share, Boston Beer is the nation’s leading independent brewer.

Although craft brewing segment is very small, in 2010, 1716 of 1759 breweries operating in U.S. were craft breweries (Craft Brewing Statistics – Number of Breweries). In the craft brewing segment, Boston Beer is the largest having 20.20% share producing over 1.8 million barrels annually. Sierra Nevada Brewing Co. with 7.94% is in the 2nd place and New Belgium Brewing Co. with 6.40% share in the 3rd place (Toscano, 2010).

The Magic

Jim Koch started the Boston Beer in his own kitchen back in 1984, when very few people thought about beer as having quality differences. Over time, Sam Adams and the whole craft movement began to slowly change the way Americans think about their own beer.

From 1984 to 1999 – the story behind radical marketing

Jim Koch, with the Harvard MBA degree, quit the well-paid consultant job at Boston Consulting Group, started the legend with his great-great-grandfather’s recipe and the ambition of making the No. 1 better beer in the United States, ignoring his father’s asking him to stay out of the beer business.

In order to get his Samuel Adams sold, Koch launched a grassroots marketing campaign, going bar-to-bar in Boston, letting bartenders taste for themselves. He believes: If bartenders liked it, they’d recommend it to customers. With the right product and radical marketing, the sale soared. “I thought by 1990, we might be able to sell 5000 barrels a year, Koch reminded. “We sold almost 5000 barrels in the first eight months Sam was on the market.”

In 1987, Koch decided to take advantage of contract brewing, selling beer without making beer. They utilized the excess capacity of other breweries, which provides the Company flexibility as well as cost advantages, while focusing on the quality and maintaining full control over the brewing process for the Company’s beers. During the first decade, Boston Beer was growing 40 to 60 percent per year and the company successfully went public in 1995.

From 1999 to 2011 – the legend of radical change

From 1999 to 2004, the company struggled to increase revenue and attract young people to Samuel Adams. But from 2005, the sales soar again, increasing to $506 million in 2010 comparing $240 million in 2004 (Appendix D). Meanwhile, the U.S. beer market has declined 7% over the last decade, according to IBISWorld. Overall, in 2010 U.S. beer sales were down an estimated 1.0% by volume. But the growth of the craft brewing industry in 2010 was 11% compared to growth in 2009 of 7.2% by volume  (Craft Brewing Statistics – Facts, 2011).

U.S. beer drinkers are more and more prefer to new, tasty beers, and they’re not dissuaded by the weak economy or higher prices. The increasing popularity of craft beers reflects an attitude change among U.S. consumers that has played out over several years. Koch says, “Twentysomethings are adopting craft beer in the same way that baby boomers adopted wine.” In 2008, Bon Appetit Magazine honored Koch as its “Wine and Spirits Professional of the Year.” When an award that doesn’t even mention beer goes to a craft brewer it is saying how successful Koch has been in changing Americans’ perceptions about beer.

The Secrets behind the Magic

If we say Boston Beer’s success of becoming a national craft brewery before 1999 is because of Koch’s great-great grandfather’s recipe and the word-of-mouth marketing, then what makes the Boston Beer constantly fast growing and more importantly change the image of American beer? There are three areas I am going to explore, culture revolution, marketing innovation and operational innovation. The first area focuses on the health side and the last two talk about the performance side of the change management.

Culture Revolution – “Beer is the new wine”

Aspire. “Our mission is to brew and sell the best craft beers in America.” From the birth of Boston Beer, Koch has put his aspiration high. But only with the good quality of beer is not enough, what he wants to achieve is way more than just the best beer. “My objective was bigger, prove that beer had all the quality and dignity and wonderfulness of any alcoholic beverage,” Koch said in 2006. In 2008, he added up, “I’m trying to change the way Americans think about beer.” “I want American craft brewing and American beer culture to be recognized all over the world as the epitome of the brewer’s art. I want the rest of the world to look at America and go, ‘That’s where the best beers in the world come from.’” Koch continued in 2010.

Diagnose. During 1999 to 2004, though the revenue was steady increasing, Boston Beer was stuck at about $200 million in sales. Among young males for whom beer is something like a fashion accessory, Sam Adams is the brand their fathers drink. To sell Sam Adams to twentysomethings, Koch had been rethinking everything from his advertising to his assortment of beers. He had tilted the marketing budget toward noisy TV commercials rather than the conversational first-person radio ads that helped establish the brand. He had been flaunting his brewing prowess with 50-proof, $100-a-bottle Utopias, probably the strongest beer ever made. He even launched Sam Adams Light in 2002, after years of deriding the very idea of a light beer. Although Koch bridled at the “father’s beer” tag, he admitted that trying to reach a new generation has been a humbling experience. “I know that Sam Adams still stands for quality, passion, authenticity, and innovation, but I don’t know how to communicate that to a 23-year-old,” he said in 2003.

Transform. From 2005 to 2010, Boston Beer’s sale has been through average 13 present annually growth. What did Koch do to achieve this? He started with glassware, aiming at wine, and working on people’s minds. After two year effort to improve the glassware with which the beers are tasted, Boston Beer completed the research and development of what they believe is the perfect pint glass for Samuel Adams Boston Lager in 2006. No matter whether the new glass really did showcase the aroma and flavor, (and it did), what Boston Beer achieved was they improved the Samuel Adams Boston Lager drinking experience, as the way wine glass serves. “It’s shocking to people who hold wine and spirits in very high esteem, but don’t consider beer to be equal,” Koch says. Boston Beer is putting beer in a trading-up position with wine, leading the revolutionary thinking – “beer is the new wine”, and pushing the boundaries of beer lovers’ appreciation for the brewer’s art. Koch said in 2010, “twentysomethings are adopting craft beer in the same way that baby boomers adopted wine.”

Learn. The soft stuff – people’s beliefs and behaviors– is at least as important as the hard stuff (Keller, 2011). The “beer is new wine” attitude revolution lively demonstrated how health is as important as, or even more important than performance. Koch tried all kinds of means to improve their stagnant growth, but not quite working. In contrast, with the improving image of better beer, consumers are more and more getting to know and willing to accept better beer, resulting in the whole craft brewing industry being through a huge booming, while the beer sales market is experiencing a downturn. In 2006, the reported number of craft breweries in the U.S. was 1370, and in 2010 1625 craft breweries were reported. This represents a growth of over 18% in less than five years, the highest growth rate in U.S. history since before the prohibition era (Kleban & Nickerson, 2011). There’s an old African proverb that says “If you want to go quickly, go alone. If you want to go far, go together.” With the improvement of the overall health of the craft brewing industry, eventually Boston Beer, as the biggest player (20.20%) in this sweet niche, is the biggest winner, and naturally welcoming the significant performance growth.

Advance. “Beer is where wine was 25 years ago. We are at the beginning of an explosion in interest in beer. There’s a generation of beer drinkers who have grown up expecting to get great beer. They are really driving the market,” says Koch, “I hope to be part of this next wave of creating this new beer culture In the United States”. And more importantly, people do believe in him; the stock price of Boston Beer ($102.51 as of Dec 2, 2011) is four times that of the beginning of 2009 (Appendix B).

Marketplace Innovation – “Every great beer that could possibly be made hadn’t yet been made”

Marketplace Innovation is all about devising new ways to reach and delight the customer in engaging ways (Stevenson & Kaafarani, 2011). Boston Beer is neither the first craft brewer not the first contract brewer, but Koch is definitely the marketplace leader and changed the way Americans think about their own beer. If you don’t innovate continuously, someday you may find that even your most secure offerings are obsolete. Boston Beer constantly invents new products since the very first day. From the 2010 product portfolio (Appendix E), you can find beers introduced in almost every year back to 1984. To create new beers, Koch has used ingredients including chocolate, lemon zest, tamarind, and anise. “I want Sam Adams to continue to be known as one of the most interesting and innovative brewers both in creating new styles of beer and continually raising the bar for quality,” Koch says.

“The real breakthrough was the realization that every great beer that could possibly be made hadn’t yet been made,” Koch says. The company always occasionally releases “extreme beers” to push the boundaries of beer brewing, which could be traced back to the introduction of Triple Bock in 1994. Triple Bock “was actually the first time that anybody had aged beer in used spirit barrels. We started aging in used bourbon barrels, and now that’s become the norm” Koch says. Boston Beer also seeks partnership in innovation. In 2007, they started the collaboration with Germany’s Weihenstephan Brewery, the oldest brewery in the world, to make the first new style of beer under the German beer purity law which allows the use of only water, malt, hops and yeast. The new beer, Infinium, was released in a limited edition in the United States in November 2010 and sold out in a few weeks. “We’ll do Infinium again next year. We learned some things” says Koch. Boston Beer’s innovation road never stops. In 2011, they launched another collaboration project with Sam Calagione’s Dogfish Head, to create SAVOR Flowers, aged with jasmine. “The addition of jasmine was inspired by the search for floral elements that would complement the natural floral character of hops,” Koch explains. It’s the proactive customer activation and continual marketplace innovation that keeps Samuel Adams alive over half a century.

Operational Innovation – “Freshest Beer in Town”

“The reason that we’ve become the leading craft brewery is because we have always given the consumer the best possible experience and they have rewarded us with their loyalty,” One aspect of the best experience is the freshness; delivering fresh beer to customer is always the mission of Boston Beer. “If my beer isn’t fresh, I want the consumer to buy something else,” Koch says. For Koch refused to add preservative to his brew, he knew the beer would not be as fresh after four or five months on a store shelf. Boston Beer is the first beer company to stamp a freshness date on its bottles with a promise that its beer would be in the marketplace within twenty-four hours of being brewed. And bottles of Samuel Adams that passed the “Best if Enjoyed by” dates on the labels are also taken back. “No store is going to always have nothing but fresh beer,” he says. “The last line of defense is consumers.”

What can keep the beer fresher is the supply chain, which contrarily is filled with “deliberate inefficiencies”. At the speech at the National Beer Wholesalers Association annual convention in 2009, Koch said, “Distributors should redesign their businesses to slash 20% from existing cost structures.” He proposed an idea as having competing distributors in the same city use a single warehouse and fleet of trucks to deliver their respective brands to bars and stores. Such “shared services” would spare fuel, labor and equipment expenses that are passed along to retailers.

Operational Innovation has to be tied to more than saving or making money; it has to benefit the customer as well (Scott Keller, 2010). Koch understands this in the first place. To speed up the supply chain and make it more efficient, Boston Beer started to work on themselves with its “Freshest Beer in Town Program” in 2010. “We want every Samuel Adams beer to reach our drinkers with the same fresh taste we enjoy when we have a beer at one of our breweries,” says Koch. “We achieve this by reducing wholesaler inventory from one month to one week. For this program to succeed we needed new IT solutions and systems.” Boston Beer is switching its wholesalers over to just-in-time delivery by shipping what the distributor sold rather than having the wholesaler order in advance. With the high visibility of information, it allows the company to anticipate how much beer it will need to produce over time. The company is continuing to rollout the program, which maintains the brewery’s focus of delivering fresh beer to its consumers. “The results of the pilot program with five of our wholesalers were impressive. Our goal is to distribute 50% of our volume through this program by the end of 2011,” Koch says.

Conclusion

The journey of this article started with Hill’s radical marketing, revisiting the ten case studies in the 12 years after the book was published. The Boston Beer Company stands out for its continual success no matter in finance or marketplace. Then the article drills into the industry and examined the two successful transformations of the company before and after 1999.

If the early success is because of the good product and the radical marketing strategy, then the later success is for the radical change led by the founder, Jim Koch. Koch changed the way American think of their beer and boosted the overall health of the craft brewing industry. He keeps pushing the boundaries of brewing and constantly inventing new products to the market. In order to let the drinker have the freshest beer, he internally started the IT-enabled supply chain change management, and externally urged the industry supply chain integration. The radical change spirit embedded in the company and its founder is the secret of the Boston Beer’s sustainability in the long term.

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Appendix A   Stock Price of Harley-Davidson over a Decade

Chart is created by: Standard & Poor’s NetAdvantage tool.

Appendix B    Stock Price of Boston Beer over a Decade

Chart is created by: Standard & Poor’s NetAdvantage tool.

Appendix C   Major Suppliers Shipments and Share of the Beer MarketCopyright 2011 by Beer Marketer’s INSIGHTS, Inc. All Rights Reserved.

Data is retrieved from: http://www.beerinsights.com/popups/majorshipments.html

Appendix D    Boston Beer’s Operating Data from 1999 to 2010

Data is retrieved from Mergent Online database.(All figures in thousands)

(All figures in thousands)

Appendix E    Boston Beer’s Product Portfolio in 2010

Source: The Boston Beer Company. (2010). Annual Report.

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