Is Samuel Adams in trouble?
There’s been a lot of talk about Samuel Adams, the flagship brand of the Boston Beer Company, lately.
There are two reasons for this.
One is that Boston Beer’s Chairman and founder, Jim Koch, recently launched his autobiography/business advice tome, called Quench Your Own Thirst. He has therefore been popping up a lot to publicize it.
(I attended the New York launch event and picked up a signed copy. It’s a great read.)
The second is that Boston Beer’s stock price hit a 4 year low following its first quarter performance report for 2016. Jim Koch himself summed up the issue for shareholders on the quarterly conference call:
“Our total company depletion trends declined 5% in the first quarter even as the better beer and craft categories appear healthy.”
Despite rumblings for some time about Sam Adams and other Boston Beer brands (mainly hard iced tea brand, Twisted Tea, and cider, Angry Orchard) having hit the rocks, this statement caused many investors to lose faith, so they sold shares in a mini stampede and provoked a 10% drop in the stock’s price in one day. (It has since recovered slightly.)
To investors, most of whom are not Twitter-obsessed beer geeks, Jim Koch – a self-made billionaire and a pioneer of the craft movement in beer – seemed to have lost his touch. They all know that craft beer is growing, and yet Sam Adams is in decline. The rising tide of the market should be lifting all boats, but here is this luxury yacht of a brand slowly sinking while smaller vessels head skyward.
But if investors paid more attention to beer-Twitter, they would have seen this coming a mile off.
In January 2015 Boston Magazine published a piece by Andy Crouch looking at why Boston’s hippest beer bars weren’t listing Sam Adams, which deservedly got a lot of pick up. More recently, one of this author’s favorite beer bloggers, Bryan Roth, has written a couple of articles looking beneath the hood of Sam Adams’s struggles to stay relevant with Beer Geek Nation. (Read them here and here.) All the evidence points in one direction: Sam Adams is not one of the hot brands in craft beer. Many people no longer even consider it a craft beer. Jim Koch’s strategy for Samuel Adams is off.
Except I don’t think it is. Jim himself sums up the original strategy for Samuel Adams in Quench Your Own Thirst:
“Let’s make the top of our mountain [our objective] be the largest and most respected ‘better beer’ in America. Let’s aim to outsell all the imports.”
This was Jim talking to Rhonda Kallman, his then head of sales and partner in the Boston Beer Co., sometime in the late 1980s. The largest import was and is Heineken, and Heineken remains significantly bigger than Sam Adams. But Heineken too has stalled lately – Heineken is ripe for the taking; or shall I say, Heineken is ripe to be replaced.
Here’s my soon-to-be-patented analogy for the dynamics of the beer market in 2016: it’s whales being eaten by sharks being eaten by piranhas.
Bear with me here.
The whales are the big domestic, mainstream brands: Bud, Miller and Coors and their respective light beer variants. These guys make up almost 70% of the volume of beer sold in the US, but they’re also screwed.
People now want better. And better is Heineken (which grew like crazy through the ’90s and ’00s), Corona, Stella Artois, Dos Equis and Modelo. These are the sharks eating the big, slow domestic beer whales. These imports are telling people they can make a more premium choice for a backyard grill or a Sunday football session.
Then there are the piranhas, a ferocious shoal of craft beer brands, nipping and tugging at the sharks (yes, and probably the whales a bit too) state by state, town by town, with beers that are tasty, unique, premium and local. Great beers made by folks up the road who your cousin maybe went to school with. These days there are hyper-local, super limited, one-off beers being made in almost every town which people are prepared to line up early on a Saturday morning just to have a chance to buy.
Which of the three ocean-dwelling creatures (you know, what with whales being mammals I can’t say fish) in my analogy do you think Sam Adams is? Clearly it was a piranha. (And I feel like maybe that’s what Jim Koch thinks it still is.) But for continued growth, I believe the Boston Beer Company now needs to think of Sam Adams as a shark and get to the business of eating those big juicy whales that are mainstream domestic lagers. It needs to get on with the task of beating the imports – per Jim’s barroom conversation with Rhonda Kallman – only it can’t do it how it used to, by eating them. It must do it by eating their prey.
To illustrate my point yet further, here’s a little chart I made. And bear in mind, the market for beer in America is flat, maybe even declining a little, so there isn’t enough business for everyone to grow. There must be winners and losers.
Despite all the noise and buzz about better beer (let’s call that imports and craft – including “crafty” brands like Blue Moon, Lagunitas, Elysian et al) the vast majority of beer sold in America is still Bud, Bud Light, Coors, Coors Light, Miller and Miller Lite. And these guys are declining: ABI reported Bud Light and Budweiser down “low single digits” in 2015, MillerCoors reported the same for its premium light and “premium regular” business for 2015. Low single digits may sound small, but it’s billions of bottles of beer when brands are this big.
Then you have the beers that are sucking people out of mainstream lager: imports and what I’ll call “soft craft”. Stella Artois, Corona, Modelo, Dos Equis, Yuengling and Blue Moon are all in growth. (Heineken is flat to small growth, but it’s also way bigger than these other guys.) These are the beers that people choose when they want to take a step up; accessible, easy-drinking options, but with hallmarks of foreign sophistication and greater flavor and complexity. Combined they make up about 20% of beer sold in the States.
Finally, at the sharp end of the market, you have what I’ll term “hard craft” – the beers that you, dear reader, are most likely very familiar with. This is almost all the beer made by members of the Brewers Association, the famous 12% and growing market share. In my simple model, they don’t suck sales volume directly from big domestic lagers but from the already premium “a step up” imports. Not many people jump right from Coors Light to Dogfish Head 120 Minute IPA, you sort of have to work your way up.
Where does the opportunity for Sam Adams sit? Is it fighting for so-called share-of-throat from the beer geeks who fly across the country just to buy fresh Heady Topper? Or is it by stepping confidently into “soft craft” and persuading habitual Bud drinkers to try something with a bit more oomph? In my opinion, the choice is clear.
Other people are already doing it really well. Ever heard of 805, the super-drinkable golden ale that sells as much beer in California as Ballast Point’s Sculpin IPA does in the whole country? If not, go look for it (in California: sorry, should have pointed out it’s only sold there) and see why it’s huge and growing more than 20%. Then be shocked that it’s made by GABF- and World Beer Cup-dominating powerhouse Firestone Walker. (Amazingly, according to some numbers I’ve seen, 805 makes up over 80% of Firestone Walker’s output. Parabola that, my friends.)
Or check out House Beer, the “premium crafted lager” from LA whose founder pointedly said, “We drank Coors Light…because it’s refreshing and easy to drink, but big breweries weren’t directing their message at our generation.”.
Alas, Boston Beer is instead doing things like championing nitrogen with its Nitro Project, or launching its own hop-charged “New England IPA” in Samuel Adams Rebel Raw. Yes, Boston Beer is going after the Heady Topper drinker by making its own version. And while it’s a delicious and very well made double IPA, appeal to Mr Miller Time it won’t.
As Andy Crouch eloquently pointed out, for Sam Adams to take on the little local guy is a very tough fight, especially as Boston Beer is a massive public company with national and international distribution. Its beers are fantastic, but it just can’t compete in the other areas that drive craft beer: being local, highly experimental, super nimble and, above all, new. (I mean, the fact it even has a quarterly conference call for investors is enough for most craft zealots.)
Why might Boston Beer be so adamant it needs to stay in the shallow waters competing with the little guys? Well, given he still has all the controlling shares in the company, let’s assume it’s down to Jim Koch himself. I’m guessing it’s his decision.
So let’s look at the man’s character. Reading Quench Your Own Thirst, two things about Mr Koch are very apparent. First, Jim’s a beer guy. His passion and enthusiasm for beer and everything about it jump off the page. Making and selling tasty beer is clearly his life’s ambition.
But, second, he’s also one competitive son-of-a-gun. You don’t get into Harvard (twice: as an undergrad and then for a joint MBA/JD postgrad degree), launch your career alongside Mitt Romney at the Boston Consulting Group then build a multi-billion-dollar business from scratch unless you are remarkably bright and fiercely competitive.
Quite simply, I don’t think Jim Koch wants to stop playing the craft beer game. I’m not even sure he can. (Who can blame him? I’ll bet it’s a pretty awesome game to play.) Jim Koch wants to be the “best” craft brewer in the world. He wants to keep winning best-in-show at GABF, keep making the hottest new beers, keep making the beer writers pay attention to every move; all the things he’s been doing since 1984. But Boston Beer has grown to a scale and a place in the market where that isn’t possible anymore.
Is Samuel Adams in trouble? Well it needn’t be. There are many millions of beer drinkers out there who feel the urge to graduate from mainstream domestic lager, but who need a bit of a prod to tip them over. Go join the shark tank, Jim, and persuade those guys to drink Boston Lager and Summer Ale and your other well-made, approachable brews.
If those piranhas nibbling at your tail get annoying, resist the urge to turn around and snap at them. Just take another big bite of tasty whale meat and keep on growing. Feed the better beer machine, and be proud of your role in doing so.