The Boston Beer Company: The largest microbrewery in the world.

The Boston Beer Company was founded by Jim Koch and two of his Harvard Business School classmates in late 1984. By the end of FY2014, the company consisted of more than 1,300 employees, achieving $903 million in annual sales in all 50 U.S. states and 30 countries (2014 Letter to Shareholders). The company sold more than 4.1 million barrels of beer and other beverages in FY2014 while maintaining a remarkable 51% gross margin—offering more than 60 flavors of beer under its Sam Adams brand, 11 flavors of malt beverage under its Twisted Tea label, and 10 flavors of hard cider under its Angry Orchard label (page 2,4,16; 2014 10-K). By all definitions, the Boston Beer Company is now a dominant player in the global beer market, and likely the only one of its size that has consistently marketed itself as a craft brewery. It has enjoyed such outsized success because of Jim Koch’s alignment of his company’s craft brewery business model with its unique operating model.

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Business Model

Embracing the mission statement “to seek long term profitable growth by offering the highest quality products to the U.S. Beer Drinker,” (2014 Letter to Shareholders) along with an unwavering “passion for innovation” (page 1, 2014 10-K), Jim Koch built a beer empire known for its immense variety of flavors and styles, and quirky “craft brew” image. His current strategy is to “create and offer a world-class variety of traditional and innovative beers and hard ciders, with a focus on promoting the Samuel Adams product line, but supported by a portfolio of complementary brands” (page 2, 2014 10-K)

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When he first founded the company, Koch described the domestic beer market as “basically a wasteland” [3]. His model was, and continues to be to produce a quality, flavorful beer as an alternative to the flavorless light beer that dominated the market. While “craft beer” is traditionally regarded as beer produced in small quantities by microbreweries, it is also a segment of the market defined by unique varieties of flavor and seasonal offerings. As The Boston Beer Company grew, it could no longer be considered a microbrewery, but its business model remained focused on marketing its product as craft beer through a large stable of innovative flavor offerings and local New England brand image.  

Officially positioning his flagship product, Sam Adams in the “better beer” category of the beer market, Koch estimated that the category represented 25% of the overall market in 2014, growing 7% in in the year while the overall market remained flat. Furthermore, he estimated that the craft beer segment grew by 19% (page 1, 2014 10-K). These trends have been relatively consistent over the life of Koch’s company, and his business model has always been to access these segments regardless of the current scale of the business.

Although a much smaller driver of revenue for the company, The Boston Beer Company has also applied its innovative products to the flavored malt beverage and hard cider markets, which grew 15% and 60% respectively in FY2014 (ibid.).

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Operating Model

In order to realize its business model, the Boston Beer Company prioritizes continuous product innovation. In 2011 the company created a “craft brew incubator” in order to locate and capture innovation in brewing from around the country—leading to several acquisitions since its inception. The Company regularly test brews new flavors, and even solicits beer submissions from home brewers to its annual contest for possible inclusion in the Company’s product line (page 2, 2014 10-K).

Additionally, the Boston Beer Company offers a variety of seasonal and other limited edition flavors (such as Samuel Adams Harvest Pumpkin and Samuel Adams White Christmas), and continues to launch innovative long-term offerings (such as Rebel IPA in 2014). It periodically reevaluates its offerings, regularly discontinuing or reissuing flavors based on measured performance. Additionally, the company enters its beers into hundreds of competitions yearly in order to strengthen its quality, innovative image (ibid.). In FY2014 alone, the company won 462 awards 2014 Letter to Shareholders).

Ingredients are sourced from a variety of locations, both domestic and international, are of the finest quality (page 2, 2014 10-K). The company brews 95% of its products in fully owned facilities, dedicating almost the entirety of its Boston brewery facility capacity to experimenting with new flavors (page 4, 2014 10-K).

To promote the Company’s image as an innovated “craft brand”, it relies upon well-developed distributor relationships, and a sales force of more than 400 employees who are well educated on brewing processes, and who are equipped with samples of the finished beer, as well as the core ingredients (malt, hops) in order to educate distributors (page 4, 2014 10-K). The company achieves a competitive edge through its “ability to distribute and promote its products on a more cost effective basis” than its competition (page 5, 2014 10-K). This is likely the Boston Beer Company’s greatest operating advantage: it competes against smaller, regional craft breweries while enjoying massive scale in its marketing and distribution.

Advertising extends beyond traditional media into “participation in sponsorship of cultural and community events, local beer festivals, industry-related trade shows and promotional events at local establishments” (page 3, 2014 10-K). This comprehensive strategy of positioning, advertising, and distribution is consistent with the company’s model being the dominant, large, quality craft brew offering in the beer market.

 

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Conclusion

The Boston Beer Company’s amazing success is due to its effective alignment of its business model with its operating model. Its strategy of targeting customers who are seeking craft beer alternatives effectively leverages the unique capabilities of its operating model—primarily the systematic way in which it continuously experiments with different flavor offerings while increasingly realizing greater economies of scale.

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Cover Picture Source.