Capstone Project

Thursday March 15th, 2012

Boston Beer Company

MGMT 162 – Capstone

Group 6 - 3:40-5:25 Class

M. Levenhagen – Winter 2012

Katrina Jaber, Christine Matsuda, Lauren Ching, Jocelyn Wu, & Michael Meissner

Executive Summary

Boston Beer Company’s main challenge is building strong relationships with distributors, which can cause hold up in the company if not done successfully. The company is dependent on distributors in order to get their beer out to the market; however they have little power over them. As the largest craft brewer in the US, Boston Beer’s main threats come from their competition, with the challenge of beating out others in the industry for contracts with buyers in a highly concentrated market.

Boston Beer is a successful firm with strong external performance and organizational health. It is number one in market share in terms of barrels sold and revenue, as well as stock appreciation and profitability. The company’s boasts many awards, including “The Best Beer in America” in the Great American Beer Festival six times. Its human resource management, rising rankings, effectiveness of management, philanthropy, and CEO approval displays great organizational health as well.  

Boston Beer’s industry is the craft beer industry. Although craft beers only account for 5% of the total U.S. beer volume, it is a growing industry.  In 2010, it grew 111% in volume and 12% in dollars compared to 7.2% and 10.3% respectively in 2009. It is also highly fragmented, with over 1,900 breweries as of November 2011 and 900 more in the planning stages. The industry is fairly favorable to incumbents, ranking 2.5 stars. It has low barriers to entry and low rivalry, but high barriers to imitation, high bargaining power of buyers, low bargaining power of suppliers, and low threat of substitutes.  

Boston Beer’s customers are those looking for high-quality, fresh tasting beer. They are willing to pay the premium prices that come with craft beers. Most are well-educated professionals who grew up with craft beers, and are in the 24-35 age group. These consumers are brand loyal and through taste tests that we conducted ourselves, we found that between the top four brands, many can distinguish the different tastes.  

Although there are many breweries in the industry, Boston Beer only has a handful of direct competitors. Through segmentation based on scale and scope, its closest competitors are Sierra Nevada, Craft Brew Alliance, and New Belgium Brewing. By comparison, Boston Beer is the largest brewery with almost 25% of the craft beer industry market share, having brewed over 100 different styles of beer and distributed to all 50 states with their 400 wholesale distributors.  

Boston Beer Company creates value through superior outbound logistics—their Freshest Beer and Draft Quality Audit Programs—and inbound logistics of having the freshest ingredients for their beer as well as services such as their buyback program. Boston Beer also excels in operations through inventory management of supplies, and a marketing and sales focus on patriotism, campaign contests, an educated sales force, and the “freshness code”. These activities satisfy the consumers’ needs for fresh, high-quality beer.

Table of Contents

1 COMPANY OVERVIEW…………..………………….…………………………….4

2 PERFORMANCE ANALYSIS.....………………………...…………………….…..4

2.1 External Performance………….……………………………..………………………………………………..4

2.2 Organizational Health……………………………………………………………..…………………………...6

2.3 Performance Grid……………………………………………………………………………………..….……7

3 INDUSTRY OVERVIEW…………..……………………………………………………..8

3.1 Craft Beer Industry……………………………………………………………………..……………………..8

3.2 Industry Life Cycle Analysis……………………………………………………………………………….....9

3.3 Industry Analysis……………………………………………………………………….................................10

3.4 Industry Trends ……………………………………………………………………………………………...13

3.5 Industry Consumer Segmentation…………………………………………………....……………………....13

3.6 Key Factors of Success………………………………………………………………………………………14

4 INDUSTRY COMPETITORS…………………………………………………………...17

4.1 Strategic Competitor Grouping………………………………………………………………….…………..17

4.2 Main Competitors……………………………………………………………………………………………17

4.3 Competitor Analysis…………………………………………………………………………………………19

5 STRATEGY ANALYSES………………………………………………………………..24

5.1 Organizational Goals…………………………………………………………………………….…………..24

5.2 Competitive Premise………………………………………………………………….……………..……….25

5.3 Value Chain…………………………………………………………………………….................................26

6 CHALLENGES…………………………...………………………………………………29

6.1 Threats to Sustainability……………………………………………………………………………………..29

Table of Exhibits

Exhibit 1 – Craft Breweries Market Share

Exhibit 2 – 5 Year Stock Performance

Exhibit 3 – Profitability between Samuel Adams and Hook

Exhibit 4 – Analyst Recommendations

Exhibit 5 – Boston Beer Company’s rank in America’s best small Companies  

Exhibit 6 – Growth Rate for Craft Beer Industry

Exhibit 7 – Performance Grid

Exhibit 8 – Growth in Barrels Sold in Craft Industry

Exhibit 9 – Craft Beer Industry Life Cycle

Exhibit 10 – Market Share by Volume of Craft Breweries

Exhibit 11 – Craft Beer Industry Analysis

Exhibit 12 – Boston Beer Company’s Cost Savings Due to Economies of Scale

Exhibit 13 – Craft Beer Industry Strategic Competitor Grouping

Exhibit 14 – Conclusion for Competitor Analysis

Exhibit 15 – Conclusion of competitors marketing and advertising

Exhibit 16 – Conclusion for Scope in Craft Breweries  

1. Company Overview

 Boston Beer Company was founded by Jim Koch, who first brewed the famous Sam Adams beer in his kitchen in 1984. At this time, the beer industry was dominated by macro breweries that offered low differentiation and low cost beers. Jim, however, was convinced there was a market for high quality, flavorful beer. He began his brewing process by using only the highest quality ingredients and traditional brewing methods to enhance flavor. The brand’s name was derived from the Boston patriot who was incredibly influential in the American Revolution. The company’s name, as well as patriotism, has been an important marketing message utilized by Boston Beer Company.

Today, the company has grown to become the largest craft brewer in the United States. In 2010, Boston Beer Company sold approximately 2.3 million barrels of beer. 95% of its beer is brewed in company-owned breweries located in Boston, Massachusetts, Cincinnati, Ohio, and Breinigsville, Pennsylvania. The firm created its image from high quality, hand-crafted beer. Jim supports this image by personally traveling to Bavaria to select the best quality hops each year.

Boston Beer Company is focused on innovation. This includes ongoing research and development within the company, and promotional contests with customers and employees. This has helped it to develop its 48 different types of beer including core beers, seasonal beers, the Brew Master’s collection, the Imperial series, the Barrel Room collection, and limited edition beers.  

2. Performance Analysis

2.1 External Performance

+Market Share: Boston Beer Company is number one in market share in terms of volume (barrels sold) and revenue. In addition, the number two company, Sierra Nevada, is far behind with only about ⅓ the market share of Boston Beer both in terms of revenue and volume.

Exhibit 1: Top 4 Craft Breweries’ Market Share in 2010^[1]

+Stock Appreciation: Boston Beer had a 23.99% compound annual growth rate for stock price over the five-year period ending March 5, 2012. Its only other publicly traded competitor, Craft Brew Alliance, had a -2.07% compound annual growth rate for stock price over the same period. See Figure below where SAM denotes Boston Beer and HOOK denotes Craft Brew Alliance.^[2]

Exhibit 2: 5 Year Stock Performance – Sam Adams vs. Craft Brew Alliance

+/- Analysts: Analysts have mixed reviews of Boston Beer. Their most recent reports are summarized in the following table. Although not all analysts recommend Boston Beer as a buy, three of the four analysts who have covered them within the past three months have positive expectations about the company. It is also important to remember that buy recommendations can be influenced by current stock price and neither reflects positive nor negative expectations about the company itself, solely stock price.

Exhibit 3: Analyst Opinions of Boston Beer

+Growth: Boston Beer had a compound annual revenue growth rate of 5.1% over the three-year period of 2008-2010.^[7] Its only other publicly traded competitor, Craft Brew Alliance, had a compound annual growth rate of 17.64% over the same period, but this high rate was due to the alliance forming in 2008. This is evidenced by its year-over-year growth from 2009 to 2010 being only 5.7%. Boston Beer’s growth rate over the same period was 11.6%.^[8] 

+Profitability: Boston Beer Company, denoted in the figure below as SAM, has maintained far better profitability ratios than Craft Brew Alliance, denoted by HOOK, each year for the past three years.

Exhibit 4: Boston Beer Company and Craft Brew Alliance Profitability Ratios^[9]

2.1 Organizational Health

+Award Winning: Boston Beer Company has won “The Best Beer in America” in The Great American Beer Festival six times.^[10] They have also won more awards in international beer-tasting competitions in the last five years than any other brewery in the world.^[11] 

+Excellent Human Resource Management: The Boston Globe ranked Boston Beer Company in the Top 100 Places to Work in 2008.^[12] Boston Beer also encourages employee involvement in operations through programs such as their Longshot Brewing Contest, in which employees can create their own beer recipes and compete for an opportunity to have them produced.^[13] 

+Rising Rankings: Boston Beer Company has been ranked as one of America’s 200 Best Small Companies by Forbes each year from 2008 to 2011. In addition, each year they have risen in the rankings.^[14] (see figure below)

Exhibit 5: Rankings in Forbes America’s 200 Best Small Companies

+Effective Management: Boston Beer is able to execute what it plans, as evidenced by the success of their Freshest Beer initiative. This initiative intended to reduce the time and temperature of beers at wholesaler warehouses before reaching the market. Historically, wholesalers carried three to five weeks of packaged inventory and three to four weeks of draft inventory. The Freshest Beer program succeeded in reducing the inventory time of participating wholesalers by two weeks.^[15] 

+Philanthropy: Boston Beer partnered with ACCION USA, a nonprofit organization, to form a program called “Brewing the American Dream” that offers loans to small entrepreneurs in the food and beverage industry to help them grow and succeed. This shows not only Boston Beer Company’s financial strength in being able to offer these loans, but its philanthropic efforts to help other entrepreneurs succeed as it has.^[16] 

+High CEO Approval by Employees: According to glassdoor.com, which offers an anonymous platform for employees to rate and review their workplaces, 100% of employees approve of CEO Jim Koch.^[17]

+/-Maintain High Levels of Growth in Barrels Sold Each Year: Although Boston Beer Company did not always have the highest growth rate in volume compared to the three other largest players in the industry, it did maintain high growth rates each year except for 2009. See Exhibit 6 on the following page.

Exhibit 6: Growth Rates for Craft Beer Industry and Top 4 Companies

*We were unable to find this data due to the fact that New Belgium Brewing is privately held.

**The large fluctuations in barrels sold by Craft Brewing Alliance are due to their selling and purchasing of different brands. 

2.3 Performance Grid

        Exhibit 7: Performance Grid

External Performance

Organizational Health

Conclusion: From our analyses of Boston Beer Company’s external performance and organizational health, we can conclude that it is a successful firm. It is a successful firm due to strong external performance in factors such as market share, revenue growth, stock appreciation, and profitability. Boston Beer is also successful due to its strong organizational health in factors, including awards, human resource management, rising rankings, effectiveness of management, philanthropy, and CEO approval.    

3. Industry Overview

3.1 Craft Beer Industry

Boston Beer Company is in the craft beer industry. Craft breweries are described as small, independent, and traditional. What this means in more concrete terms is that the brewery is considered a craft brewer if it produces six million barrels or less annually, has less than 25% of the company owned or controlled by an alcoholic beverage industry member who is not a craft brewer, and has at least 50% of its volume in malt beers or in beers that enhance rather than lighten flavor.^[19] Due to the definition of the industry, brewers often have only a regional presence. The size of the industry in 2010 was estimated to be $7.6 billion and the industry has been growing increasingly by volume each year for the past four years^[20] (see Exhibit 6 on page 8). Craft beers only account for 5% of the total U.S. beer volume; however, in 2010 the craft brewing industry grew 11% by volume and 12% by dollars compared to 2009 in which they grew 7.2% by volume and 10.3% by dollars.^[21]Craft beer sales in dollars also grew by 15% in the first six months of 2011, compared with the same period in 2010.^[22] 

3.2 Industry Life Cycle Analysis

Exhibit 8: Craft Beer Industry Life Cycle Analysis

The craft beer industry is currently in the growth stage of the industry life cycle analysis and has not yet hit the inflection point. As seen in Exhibit 6 on page 8, the industry has been growing at an increasing rate. This implies that the focus of the firm at this stage is manufacturing and maintaining market share. However, at this point, due to the nature of the industry, marketing and definition of the product and value chain are also important for firms to succeed.

This industry is highly fragmented in that there are over 1900 craft breweries in the US with 900 more in the planning stages.^[23] While Boston Beer Company does have 24% market share, it is the only brewer with double digit market share, and only six other firms have greater than 2% market share. (see Figure below)

Exhibit 9: Market Share by Volume of Top 20 Craft Breweries^[24]

Fragmentation is a factor of high product differentiation and the definition of the industry limiting companies to small brewers. Image and differentiation is extremely important in the craft beer industry.^[25] 

Conclusion: Due to the fact that the craft beer industry has been growing at an increasing rate each year, we have concluded that the industry is in the growth stage and has not yet reached the inflection point. The industry is still highly fragmented and the focus at this point is manufacturing, maintaining market share, marketing, and definition of the value chain.

3.3 Industry Analysis

Exhibit 10: Five Forces Analysis

Barriers to Entry

Buyers

Rivalry

½

Suppliers

Substitutes

Low Barriers to Entry:

+Highly Regulated Industry: The manufacturing and sale of alcoholic beverages is highly regulated and highly taxed, creating high barriers to entry. Regulations are set by federal, state, and local government entities and these regulations include permitting, licensing, trade practices, labeling, advertising, marketing, and distributor relationships. Brewers who produce more than two million barrels per year are required to pay federal taxes of $18 per barrel in addition to any state taxes.^[26]

Low Rivalry but High Barriers to Imitation:

+Highly fragmented: There are 1,900 craft breweries in the nation with 900 in the planning stages.^[27] Only four of these companies have market share greater than 5%.^[28] The fact that the industry is highly fragmented reduces rivalry.

+High industry growth: In 2010 was the craft beer industry’s sixth consecutive year of growth. In this year, the industry is growing by 11%.^[29] This high growth rate reduces rivalry.

+Product Differences: Due to the lack of taste test data, our group conducted a taste test of the flagship brands of the four largest competitors in the industry and found that 73% of non-craft drinkers and 67% of craft drinkers can distinguish between the beers based on taste.

High Barriers to Imitation:

+Brand identity: Brand identity is very important in this industry. Certain brands are associated with different regions and tastes. During our taste test, we surveyed to ask if craft drinkers had connotations for different brands. 78% said they did. This shows the power of brand identity, which can make it hard for an entrant to the market to be associated with the same region or taste as an incumbent.

+Economies of Scale: Economies of scale are important with regards to cost reduction. This is evidenced by Boston Beer Company’s operating expenses as a fraction of revenue decreasing as their number of barrels sold increased.^[30] (See Figure below)

Exhibit 11: Cost Savings Due to Economies of Scale

*The increase in net revenue per barrel is partially due to an increase in net selling price. However, from 2009 to 2010 net selling price increased by only 1.3% while net revenue per barrel increased by 9.1%.

+Brand: A market research study by Mintel found that craft drinkers can differentiate between brands and often stick to a certain brand.^[31] This creates a high barrier to imitation for market entrants who have not yet established a brand identity. 

+Distribution Networks: Companies compete for the time and attention of their wholesale distributors. Wholesale distributors often sell more then one brand and are able to sell more of the popular brands to retailers. Therefore they focus more of their efforts on selling those brands that are already more popular. This creates a barrier to imitation for new brands that do not yet have significant market share.

+High Transportation Costs: High transportation costs have created a localization effect with many craft brewers remaining regional.^[32] Distributing to the entire nation requires significant resources, creating a barrier to imitation.

High Bargaining Power of Buyers:

-Weak contracts: State laws limit the power of brewing companies over their wholesale distributors. In particular, they limit companies’ abilities to exercise their termination rights and enforcement of contracts. Distribution agreements are terminable by the distributor on short notice.^[33]

+Compete for time and attention: As mentioned in barriers to entry, brewers must compete for the time and attention of their wholesale distributors. Wholesale distributors often sell many brands and it is their efforts that place the brewer’s products in retail locations, bars, and restaurants. Wholesale distributors often put their focus on the brands that sell better, favoring incumbents over new market entrants.

Low Bargaining Power of Most Suppliers:

+Noble hops: Noble hops are more rare and more expensive than most other varieties of hops. The availability of hops may be materially adversely affected by weather and fertilizers and pesticides not permitted in the US. In 2008, there was a hops shortage and some companies were faced with having to change their recipe or go out of business.^[34] 

+Contract negotiation: Larger companies can often negotiate more favorable contracts with suppliers and receive preferable pricing due to their relationships with these suppliers and large volumes purchased.^[35]

-Concentration ratios: For all ingredients and packaging materials besides noble hops, the amount of suppliers is greater than the amount of buyers, making them fairly easy to obtain.

Low Threat of Substitutes:
+Low Propensity to Substitute: There is a low propensity of craft beer drinkers  to substitute with mass produced beers, wine, or spirits.^[36]

Conclusion: We can conclude from our five force analysis that the craft beer industry is fairly favorable for incumbents as a 2.5 star industry. The industry has low barriers to entry, low rivalry but high barriers to imitation, high bargaining power of buyers, low bargaining power of most suppliers, and low threat of substitutes.

3.4 Industry Consumer Segmentation

Customer Profiles and Purchasing Behaviors

People who drink craft beers fall into a different segment than those who consume mass-produced beers. Craft drinkers are generally more knowledgeable in their drink choices and concerned with quality rather than convenience.^[37] Currently, 33% of craft beer drinkers are in the age range of 24-35 and are often known as the Millenials. They show the most interest because they grew up with craft beer.^[38] Because they grew up with craft beer, they are more knowledgeable about it. In addition, the Millenials are able to utilize Internet sites such as beeradvocate.com, ratebeer.com, or beermenus.com to educate themselves.^[39] Most craft beer drinkers are well-educated, employed as professionals, and earn higher-than-average salaries, most over $60,000 annually. They are adventurous in dining habits and like having new experiences. Besides beer, they generally drink all major types of alcoholic beverages. 75% of craft beer drinkers are male, but the number of females who enjoy drinking craft-brewed beers is increasing.^[40] Loyal craft drinkers can differentiate between brands and often stick to a certain brand. 62% of craft drinkers drink craft beers because each brand tastes different.^[41] 

Customer Needs and Wants

Craft beer customers want better tasting, high quality beer. 55% say they drink craft beer because it tastes better than the non-craft domestic beer in the market.^[42] They are willing to pay the higher price that comes with craft-beers. In addition, they are interested in seeking out new tastes and defining their individuality as reflected in their drink choice. These consumers want their palates to be challenged and are eager to learn of all the different beers.^[43] Value for customers is created through marketing and knowledge development. Customer loyalty, brand image, and marketing are the key factors to success in winning customers in the industry. 

Taste Tests 

With the lack of taste tests for craft beers, we decided to conduct our own. Our test consisted of the flagship brands of four craft brewed beers: Boston Beer Company’s Samuel Adams Boston Lager, Sierra Nevada’s Pale Ale, New Belgium’s Fat Tire, and Redhook’s ESB.

We had two different sets of consumers: those who had never tried a craft beer before and craft beer drinkers. For the first timers, we told them which beer was which, had them try each one, and then select which one they liked the best. Then we mixed up the beers so they could not tell which one was which and had them try to choose which one they had initially selected based on the taste.  73% of the sample was able to distinguish the different tastes between each beer and pick their favorite. For the craft drinkers, we asked them to choose their favorite of the four and then taste each beer to see if they were able to select their beer of choice. 67% of our sample was able to distinguish between each beer and pick their preference, but had a little more difficulty in pinpointing which one was their favorite than those that had just tried their favorite.

This test shows that craft brewed beers are distinguishable by taste. However there were many biases to our taste test since our sample consisted of only college students. Also, this sample group may have not been exposed to craft beers because of the higher price and the amount of brands there are to select from.  

Conclusion: Craft beer drinkers distinguish themselves from regular beer drinkers with their ability to be able to differentiate the tastes of each brand. Many are well-educated professionals in the 24-35 year-old age group and are willing to pay the premium price for fresh, high-quality beer.   

3.5 Key Factors of Success

• Distribution Networks

Distribution networks refer to the channels through which companies deliver their beer to retailers who then sell it to consumers. There are only three to four distributors per geographic region, so the network of distributors is highly concentrated compared to the number of brewers in the industry. It is therefore important for firms to establish relationships with these distributors early on. The larger brewers often have a sales force that provides educational and promotional programs to distributors, retailers, and consumers in order to gain their attention. Breweries must establish and retain their distribution network, and constantly work to get their beer on store shelves.^[44] 

• Economies of Scale
  Economies of scale are important because it lowers unit cost by increasing production. For example, Boston Beer Company was able to lower their operating expenses from 2008 to 2010 while still increasing the number of barrels sold. (See Exhibit 11 on page 12)
  
• Customer Loyalty
  Customers in this industry are very brand loyal. Almost all craft beer drinkers have one or two beers that they regularly order or stock in their refrigerator. Their loyalty to the beer or beers they identify with creates a devoted consumer base that the craft brewery can use to grow and expand.^[45] 67% of craft drinkers said a reason why they drink craft brewed beers is because they are brewed locally and often unavailable anywhere else.^[46]
  
• Brand Image
  Brand image is the ability of the beer to be recognized from the packaging to the taste. People will choose the beer that they recognize. In 2012, the Brand Keys report by CNN, a consumer survey that examined customer loyalty and brand satisfaction of 600 brands in 83 categories, ranked Sam Adams as the number two brand. Consumers were asked to rank the brands based on perceived quality, level of enjoyment, ease of use, respectability, and other factors.^[47] 

• Well-positioned geographic location of breweries to reduce transportation costs
  Well-positioned geographic locations can reduce transportation costs. Transporting barrels of beer to different regions across the country, much less the globe is expensive.^[48] Having a brewery in a central location is ideal. Boston Beer has breweries located in Massachusetts, Ohio, and Pennsylvania, thus making it easier for to distribute to those regions and giving them ease of access into multiple regions. 
  
• Marketing
  Marketing is one of the most important activities in the beer industry to gain customer awareness and make the brand memorable. Craft drinkers, however, pay less attention to traditional marketing, instead relying on word of mouth and the Internet for information. As many craft brewers have never had large marketing budgets, they were early adopters of social marketing.^[49] Using mass social media, brewers have found a new way of marketing to the rising consumer base. 
  
• Relationships with Suppliers
  Strong relationships with suppliers are extremely important to have a successful brewery. Without strong supplier relationships, it would be difficult to obtain the ingredients needed to make the freshest beer with the best ingredients. For example, during the hops shortage of 2008, Boston Beer was able to obtain enough to continue operations due to their relationships with multiple suppliers while many other firms had trouble obtaining the necessary ingredients for their recipes.
  
• Scope
  Scope is how many different consumers the company’s products can appeal to, geographically and taste-wise. The majority of craft breweries only sell their beers locally, usually only in the city that their brewery is located. In order to gain market share and customers, breweries must be able to get their beer to as many consumers as possible through a strong distribution network.   

Unique Flavors

Craft beers are known for their unique flavors and different tastes. Seasonal and limited-edition brews are also popular. Seasonal beers are interesting and changing, and they have a sense of being special to drink because once they are gone, they are gone.^[50] 67% of craft drinkers said they enjoy trying seasonal craft beers and cannot wait to try new products, and 61% wish they were offered year round.^[51]

• Strategic Alliances

For craft breweries, remaining independent is important. However, forming strategic alliances with other breweries and companies both in and out of the industry give craft brewers a competitive advantage. It creates synergies through knowledge sharing and they are able to produce products that they may otherwise have not been able to make. Sierra Nevada has relationships with various sustainability companies to work on energy and cost savings. In addition, Craft Brew Alliance is the result of a merging of three brands who utilize shared resources. Craft Brew Alliance also works with Anheuser- Busch to gain from their extensive distribution network. In addition, breweries many times work together for a period of time to create a specialty beer.

• Logistics of Manufacturing, Distribution, and Inventory Management

IT solutions and systems that effectively manage the logistics for manufacturing, distributing, and managing product inventory are crucial to a better-tasting product. With better forecasting, production planning, and cooperation with distributors, firms in the industry work to lessen inventory and speed up their beer’s movement through the supply chain, resulting in fresher beer being delivered to retail.

Conclusion: There are many factors to being successful in the craft beer industry. Because of the high concentration in the market, breweries must establish strong distribution networks, economies of scale, customer loyalty, a brand image, and well-positioned geographic locations. Having marketing strategies that will make the firm stand out from its competitors, good relationships with suppliers, scope to reach as many consumers as possible, utilizing strategic alliances, and managing inventory as efficiently as possible are crucial as well.

4. Industry Competitors 

Because the craft beer industry is highly fragmented, we chose to analyze the top 20 breweries by barrels sold. These 20 breweries make up 76% of the total industry by volume.

4.1 Strategic Competitor Grouping 

Exhibit 12: Craft Beer Industry Strategic Competitor Grouping


To measure scope, we used the number of product offerings of each company. To measure scale we used the number of barrels sold in 2011. Data can be found in Appendix 1.

Conclusion: By segmenting the largest 20 craft breweries by scope and scale, we are able to narrow down Boston Beer’s closest competitors to be Sierra Nevada, Craft Brew Alliance, and New Belgium Brewing.

4.2 Main Competitors

Boston Beer Company
Boston Beer Company is America’s leading and largest-selling craft brewer. In 2011, it sold approximately 2.4 million barrels of its core beer brands.^[52] Boston Beer operates three company-owned breweries located in Boston, Massachusetts, Cincinnati, Ohio and Breinigsville, Pennsylvania. It sells its products to a distribution network of about 400 wholesale distributors predominantly in the United States.^[53] Boston Beer is committed to brewing the highest quality and best tasting beer for all beer drinkers, which is reason for its broad-line of traditional beers. 

In recent years, Boston Beer has focused on its differentiation strategy by switching production to company-owned breweries and introducing its Freshest Beer Program to ensure the highest quality of its products.

Sierra Nevada Brewing Company
Sierra Nevada Brewing Company, situated in Chico, California, is one of the largest privately-held craft brewers in the US. In 2011, it sold 858,000 barrels, a 9% increase from 2010.^[54] It has about 250 distributors throughout 50 states and limited distribution to England. Located near its brewery, the Sierra Nevada Taproom and Restaurant and The Big Room (a 350-seat music venue) are destinations of their own and have become vital marketing tools for the company. The brewery’s entire line of premium ales and lagers, and the hard-to-find specialty drafts can be found at the Taproom and Restaurant.^[55]

Sierra Nevada has committed itself to being a sustainable brewery, reducing its impacts on the environment. Its efforts have not only led to reduced environmental impacts but major cost reductions as well. It has one of the largest privately owned solar installations in the country which produced about 19% of the brewery’s total electricity need in 2010. It has a fleet of less than 20 trucks, which consists of a hybrid truck that delivers 30% better fuel efficiency.^[56]  Also, Sierra Nevada began to experiment with homegrown ingredients in 2002. This reduces its dependence on suppliers as well as purchase and transportation costs.

New Belgium Brewery
New Belgium Brewery, located in Fort Collins, Colorado, is a privately-held and employee-owned company. With ownership awarded at one year of employment, management aims to foster a motivated and entrepreneurial corporate culture. All of its beer is brewed in Fort Collins. In 2011, it sold 582,797 barrels, an 8% growth from 2010.^[57] New Belgium focuses on growth in distribution, and since 2008 has begun distribution in seven new states. At the end of 2010, New Belgium distributed its beer to 185 distributors in 26 states.^[58] Similar to Sierra Nevada, New Belgium advocates for sustainability and strives to be environmental stewards. It prides itself in being the first wind powered brewery in the United States. It has also designed and implemented an on-site Process Water Treatment Plant that turns the brewery’s waste stream into a source of energy, producing up to 15% of electrical needs.^[59] 

Craft Brew Alliance
Craft Brew Alliance’s present operations reflect the merger of Widmer Brothers Brewing Company and Redhook Ale Brewery in 2008, and the acquisition of Kona Brewing Company in 2010. It has four company-owned and operated breweries: The Hawaiian Brewery, The New Hampshire Brewery, The Oregon Brewery, and The Washington Brewery. Each brewery also has its own restaurant pub. Craft Brew Alliance also owns and operates a pilot 10-barrel brewpub-style brewing system in Rose Quarter.^[60] In 2011, Craft Brew Alliance sold 635,000 barrels.^[61] They are committed to brewing high-quality craft beers through utilizing company-owned and operated breweries, contract brewing, as well as collaborations with brewing partners. It offers a broad-line and large variety of beers under its three brand families.

An essential factor to Craft Brew Alliance’s distribution strategy is its relationship with Anheuser-Busch, which began in 1994. With this distribution agreement, Craft Brew Alliance is able to distribute in the majority of its markets through Anheuser-Busch’s wholesale distribution network, which consists of more than 525 wholesale distributors. In 2010, 574,900 barrels were distributed through this agreement, accounting for 94.6% of Craft Brew Alliance’s shipment volume.^[62] 

4.3 Competitor Analysis

The principal factors of competition for craft breweries in the Better Beer segment in particular include product quality and taste, brand advertising and imagery, trade and drinker promotions, pricing, packaging, and new products.^[63] As shown in Exhibits 1 & 9, Boston Beer Company has the largest market share by volume and revenue within the craft beer industry. To further compare Boston Beer with its competitors’ strategies and performance, we analyzed three of these principle factors: product quality, brand advertising/marketing, and scope.

Product Quality
Craft brewers in the Better Beer segment aim to differentiate their beer through high-quality and superior taste.   

• Boston Beer Company

Jim Koch, founder and chairman of Boston Beer Company, considers freshness paramount to beer quality. In the mid-1980’s, Boston Beer Company was the first brewer to implement the “freshness code” on each of its bottles to monitor and ensure the freshness of its beer. To further these efforts, it implemented its Freshest Beer Program in 2010, enabling Boston Beer to reduce inventory holding time with wholesalers by about two weeks, resulting in fresher beer to consumers. Also, through its Draft Quality Audit Program, Boston Beer Company representatives conduct approximately 20,000 draft quality audits per year, visiting any restaurant that serves significant quantities of Sam Adams.^[64] These representatives evaluate the taste quality of the draft beers and recommend solutions if any problems are evident. In addition, the company prides itself in the quality of the ingredients that it uses in its beers. It uses Noble hops from specific locations in Germany and the Czech Republic that have been recognized by the industry for superior taste and aroma. The Samuel Adams brand line is Kosher certified. Kosher certification evaluates the quality and reliability of three elements: the ingredients in the beer, the brewing process, and the condition of the brewery itself.^[65]

• Sierra Nevada

Sierra Nevada’s Estate Homegrown ale is one of the few estate-made ales produced in the world. With all of its ingredients homegrown near the brewery in Chico, Sierra Nevada can ensure the quality of its ingredients and beer. It has also designed and implemented a very comprehensive quality control program that analyzes the raw ingredients and monitors all stages of the brewing process. Over 200 individual tests are run on every batch, checking pH and dissolved oxygen levels, bitterness, color, and taste.^[66] In addition, all of Sierra Nevada’s products are dated when packaged to ensure the product’s freshness.

• New Belgium

To guarantee the freshest quality of its ingredients, New Belgium operates most of its materials under Just In Time inventory, using this method in moving materials from supplier to warehouse to production. On average, the company carries two weeks of raw material inventory. Also, its brewery houses four brewing-related quality assurance labs. In addition to these quality control measures, New Belgium aims to further differentiate its beer quality and taste through using a far broader palette of ingredients to include fruits and spices. Also, its beers are Kosher certified.^[67] 

• Craft Brew Alliance

Similar to Boston Beer Company, Redhook has also taken extra efforts to have its beer Kosher certified to ensure the highest quality. Also, through its relationship with Craft Brew Alliance, Kona Brewing Company is able to produce some of its beer outside their main Hawaii-based brewery and produce in Oregon and New Hampshire to take advantage of the benefits of having a centrally located brewery. Brewing the beer close to its distribution markets is an important aspect of their competitive premise, for it ensures the freshest quality. Kona’s employees and brew masters maintain quality assurance measures from its brewery in Hawaii and are in constant contact with its mainland partner breweries to ensure the quality of beer produced at off-site locations.

Conclusions:

Brand Advertising/Marketing

Brand Advertising and product marketing are essential to creating a brand image that consumers recognize and identify with. Craft breweries rely heavily on word-of mouth buzz and divest capital on a much smaller scale than the larger beer companies.

• Boston Beer Company

2010 advertising expenditures by Boston Beer were $32,959,000, an 11.9% increase from the previous year.^[68] Although craft brewers rarely have the resources to advertise to any large degree and would rather rely on word-of-mouth, Boston Beer Company seems to be an exception. Of the craft brewers, Boston Beer has invested the most capital in advertising, following behind the conglomerates in the mass-produced beer industry, such as Anheuseur-Busch InBev, MillerCoors and Heineken USA. Boston Beer Company’s flagship brand line is Sam Adams, named after the Boston patriot and father of the American Revolution. This fosters a sense of pride in domestic “American” beers. Programs such as its “Brewing the American Dream” and various home brew contests emphasize the company’s values and history of starting out small and growing to become the leading craft brewer in the US.

• Sierra Nevada

With its primary mission statement to produce the highest quality beers and ales without compromising good corporate citizenship and environmental stewardship, Sierra Nevada centers its brand image on sustainability. It has been consistently implementing sustainability policies and projects to reduce its environmental footprint across all aspects of its operations. The company has received recognition for its efforts; in 2010, the Environmental Protection Agency (EPA) named Sierra Nevada as “Green Business of the Year”.^[69] 

To further its brand marketing efforts, Sierra Nevada utilizes its Taproom and Restaurant as well as its music venue, The Big Room. The Big Room has held over 250 artists, becoming an attraction of its own.^[70] The breweries’ beer is served at The Taproom and Restaurant, along with rotational specialty drafts only available on-draft. These rotational beers are constantly changing, giving its visitors a unique opportunity to taste new beer flavors.

• New Belgium

With sustainability also at the core of New Belgium’s company values, the company finds its beer drinkers share an active lifestyle and deep respect for the environment. It has built its brand image around its core values with its trademark logo as a bike, its flagship brand as Fat Tire, and its product promotion through company events such as Tour de Fat, Urban Assault Ride, and Clips of Faith. All of these events emphasize an active and sustainable lifestyle. In 2010, its advertising expenditure was $2,646,000.^[71] New Belgium has also recognized the previously mentioned emerging new consumer segment known as the ‘Millenials’ and the need to advertise through recently evolving social-media channels such as Facebook. In 2011, New Belgium committed about $235,000 to social-media alone.^[72] A significant percentage of their advertising budget also focuses on buying prints in national titles such as Rolling Stone, Men’s Journal, and Wired, which New Belgium considers an outlet to reach the Millenials. With about 400,000 fans across all of its local/regional Facebook pages, it estimates that its fans are responsible for about $50.7 million in yearly sales.^[73] Knowing this, New Belgium specifically enlists local sales people to update its 38 local Facebook pages across 28 states.  

• Craft Brew Alliance

Each of the three brand families that make up Craft Brew Alliance are promoted by one integrated sales and marketing organization. This not only creates cost savings, but has a greater impact on point of sale purchases. Craft Brew Alliance promotes its products through training and educating wholesalers and retailers, offering promotions and experimental beers at local festivals and pubs, and on-premise marketing utilizing the restaurants or pubs adjacent to all of its company-owned breweries, and targeted price discounting to distributors. Additionally, it seeks to identify its products with the local markets through events specific to each of its brewery locations. Each of its brand families have distinctive brand images that these promotional events reinforce. Redhook, located in the heart of Seattle, participates in various local beer festivals and holds events such as the St. Patrick’s Day Dash and Brewfest on the Mountain. Widmer Brothers Brewing, in Portland, Oregon hosts annual events such as Oktoberfest Celebration, and participates in local events such as Bridge to Brews and the country’s largest outdoor craft beer festival, the Oregon Brewer’s Festival. The Kona Brewing Company, located in Kailua-Kona, Hawaii, focuses its brand on “living aloha”. Through hosting annual events such as the Kona Brewers Festival and sponsoring events such as the Honolulu Surf Film Festival and various paddle board competitions, Kona Brewing is able to stay true to its history.

Conclusions:

Scope

Craft brewers’ ability to appeal to all consumer tastes among beer drinkers as a whole is not only dependent on product quality, but also on product variety and diversified market presence.

• Boston Beer Company

With an experimental and innovative history, Boston Beer Company aims to create new flavors and tastes to appeal to all beer drinkers. Its beer development and marketing strategy usually begins with experimental, limited-edition beers, and if they are well received, become year-round offerings. Over the years, Boston Beer has brewed more than 100 different styles of beer.^[74] Last year it brewed and released over 50 different beers, though the availability of those greatly varied depending on retailer and region.^[75] Through year-round, seasonal, and limited-edition beer varieties, Boston Beer Company’s broad-line strategy aims to appeal to all degrees of craft beer drinkers. Also, as previously mentioned, Boston Beer Company has a distribution network of about 400 wholesale distributors primarily in the United States.

• Sierra Nevada 

Sierra Nevada offers five year round, four seasonal, eight limited selection, and 41 specialty draft beer varieties. These rotating specialty drafts are only available on-draft in the Taproom and Restaurant located at the brewery site. A trademark of Sierra Nevada beer has been the copious quantities of hops used. Bitterness units, or IBU’s, is a standard measurement for the bitterness of beer imparted by hops. A higher IBU indicates more bitterness and higher hop usage. As a scale, IBU is usually capped at around 100. The IBU of Sierra Nevada’s beers range from 15-100. The Sam Adams beer line ranges an average of about 35. Such a range can appeal to the various taste preferences of its consumers. The company also has about 250 distributors throughout 50 states and limited distribution to England.    

• New Belgium 

New Belgium offers 20 year round, two seasonal, and three special release beer varieties. As previously mentioned, New Belgium actively promotes its beer through company events such as Tour de Fat, Urban Assault Ride and Clips of Faith. These annual events are traveling events that are held in various states nationwide. This year, Tour de Fat will appear in 15 states, Urban Assault Ride in 10 cities nationwide, and Clips of Faith in 18 states.^[76] These events are a vital factor of its marketing strategy, for not only are its beers offered and its brand promoted, but it is able to have a much larger geographical presence. Additionally, New Belgium distributes its beer to 185 distributors in 26 states.

• Craft Brew Alliance

Under the Widmer Brothers brand family, Craft Brew Alliance offers eleven year round, five seasonal and two super-premium beer varieties. The Redhook family has four year round, two seasonal and two high-end series of beer. The Kona Brewing brand family brews two year round, three seasonal offerings and five draft only beers. As previously indicated, Craft Brew Alliance owns and operates four company breweries located in Hawaii, New Hampshire, Oregon, and Washington resulting from its mergers. Its strategic locations allow for Craft Brew Alliance’s distribution to be concentrated in the Pacific Northwest and California, which together account for two-thirds of its sales in 2010.^[77] An essential factor of Craft Brew Alliance’s distribution strategy is its relationship with Anheuser-Busch. Through this distribution agreement, Craft Brew Alliance is able to distribute in the majority of its markets through Anheuser-Busch’s wholesale distribution network, which alone consists of more than 525 wholesale distributors.

Conclusions:

5. Strategy Analysis

5.1 Organizational Goals

The Company’s business goal is to become the leading brewer in the Better Beer category by creating and offering high quality full-flavored beers. According to a statement in their 10-K, the goal of its “Freshest Beer Program” is to give their drinkers the freshest beer they can obtain in the market. Boston Beer Company achieves this by reducing wholesaler inventory from one month to two weeks.

Boston Beer strives to maintain its role as the leader in the craft beer category. Small, local craft breweries are opening all over the country and the Company aims to maintain market share based on the quality and the freshness of their beers. It wants every Samuel Adams beer to reach their drinkers with the same fresh taste as if it were just brewed at one of its breweries.

5.2 Competitive Premise

• Brand

Boston Beer Company’s brand image focuses on brewing the highest quality American beer.

• Broad-line/scope

Boston Beer currently offers 48 brand varieties consisting of year-round, seasonal, and limited edition beers. Its broad product line appeals to all degrees of craft beer drinkers.

• Culture 

The company also embraces an entrepreneurial corporate culture that fosters innovation.

• Differentiation

Input Differentiation: Boston Beer uses Noble hops varieties for its beers, which are rare and more expensive than other hops, and known for their quality.

Freshness: Through its Freshest Beer Program and Draft Quality Audit Program, Boston Beer ensures that the freshest beer reaches the consumer.

• Distribution Network

Its distribution network of about 400 wholesale distributors enables its beers to reach all 50 US states.

Distributor Relationships
Boston Beer Company is the only brewery with a cooperative buy-back program with its distributors. This means that the company will repurchase beer that has passed its freshness date.

• Experimentation - Knowledge Development

Boston Beer is constantly innovating and experimenting with new styles of beer. Its Long Shot American Homebrew Contest and strategic alliances with other breweries help create new and innovative styles.

• Inventory Management

Boston Beer Company has always been successful in obtaining sufficient quantities of ingredients for production. To ensure successful inventory management, it maintains multi-year contracts with multiple suppliers in case one supplier should have an issue, others are on contract. In addition to comprehensive contracts, Boston Beer ensures its supply needs are met by maintaining one year’s supply of essential ingredients at all times. It also stores many crucial ingredients such as hops and yeast at multiple cold storage warehouses to reduce the impact of a catastrophe at any one warehouse.^[78] 

• Location – Infrastructure

Boston Beer Company operates three company-owned breweries located in Boston, Massachusetts, Cincinnati, Ohio and Breinigsville, Pennsylvania.

• Quality Assurance Measures

To ensure quality, Boston Beer implements various on-site quality control measures, and programs such as its Freshest Beer Program, Draft Quality Audit Program, and “freshness code”.

• Sales Force

Its sales force of about 275 people are trained in details of all company products and brewing process, and carry out educational and promotional programs with distributors, retailers, and consumers.

5.3 Value Chain

Exhibit 13: Boston Beer’s Value Chain

Primary Activities

The primary activities that distinguish Boston Beer Company as a winner in the craft beer industry include outbound logistics, inbound logistics, operations, marketing, and sales. These activities focus on marketing and delivering the best possible product to its ultimate customer.  

• Outbound Logistics

The special outbound logistics activities that occur at this firm are focused on ensuring quality. The two primary outbound logistics activities that add value are the Freshest Beer Program and the Draft Quality Audit Program.

Freshest Beer Program

Historically, wholesalers have carried three to five weeks of packaged inventory and three to four weeks of draft inventory.  To increase the freshness of its beer for the final consumer, the company sought to decrease the time beer is kept in the distributors’ inventory. Through better on-time service, forecasting, production, planning, and cooperation with wholesalers, Boston Beer Company has been able to reduce the time beer is stored in wholesalers’ inventory by two weeks.  Through the Freshest Beer Program, the company met its goal of distributing 50% of its volume by 2011.^[79]

 Draft Quality Audit Program

Through its Draft Quality Audit Program, Boston Beer Company ensures the taste quality of draft beers at approximately 20,000 restaurants per year. Representatives visit any restaurant that serves significant quantities of Sam Adams to test the quality and recommend solutions if they recognize problems.^[80] 

• Inbound Logistics

Boston Beer’s inbound logistics differ from industry standards due to its input differentiation and quality-emphasizing activities. The firm boasts that the founder and CEO of the company, Jim Koch, personally travels to his suppliers every year in order to select the highest quality of ingredients for his beer. Considering that they obtain their supplies from around the world, it is impressive that the firm has taken such a strong and dedicated approach to quality. This activity ensures suppliers are meeting Boston Beer Company’s rigorous standards of excellence and adds value for the customer.

• Service

Samuel Adams is the only brewer with a cooperative buy back program with distributors. Should the beer the distributors have on hand pass its peak freshness date, Boston Beer will buy it back at a discounted price. This service helps them keep good relationships with the distributors who have an integral role as they buy products to sell to retailers.^[81]

• Operations

Another activity Boston Beer Company excels in is the inventory management of its supplies. In 2010, the quality and quantity of barley crops in America and Canada were below the ten-year average.  However, the company was unaffected because they contracted with their suppliers, allowing them to purchase the crop at the price of the ten-year average. The yeast used in the brewing process is a proprietary strand and would be impossible to duplicate if it were destroyed. The company stores this strand in several locations including an outside laboratory.^[82]

 Marketing and Sales

The next set of activities that separate Boston Beer Company from industry competitors are its marketing and sales activities. The brand’s marketing focuses on patriotism, campaign contests, an educated sales force, and the “freshness code.”

Patriotism

 The company’s founder, Jim Koch, describes patriotism in his commercials: “Samuel Adams was a patriot and a brewer, that’s why I named my beer after him”.  The logo Jim uses, a picture of an American colonist, also adds to this focus on patriotism. Jim explains that while writing the Constitution in their local pub, these men drank rich flavorful beer, and that is what Samuel Adams is trying to reproduce.  Another indication of the use of patriotism in their advertising is the use of the word independence, boldly stated at the beginning of commercials. This theme is reiterated in all of Samuel Adam’s marketing.^[83]

Campaign Contests

Boston Beer Company utilizes campaign contests to raise awareness and excitement about their beers. For example, it organizes the Longshot American Homebrew Contest, which is a program in which employees and customers have the opportunity to submit their own home-brewed beers to be selected as the year’s longshot 6-pack, which is mass produced and shipped to distributors around the country. 

Educated Sales Force

Boston Beer Company has a sales force of 275 people, one of the largest in the domestic beer industry. They are trained extensively on the brewing and selling processes. The team usually carries hops and barley samples for both wholesalers and retail buyers to demonstrate the importance of quality ingredients, and provide background for the company’s brewing philosophy.^[84] 

“Freshness Code”

Samuel Adams’ products come with a clearly legible “freshness code”.  Boston Beer Company was the first company in America to put a label on every bottle and keg stating its date of production.^[85] This activity demonstrates value to the customer by informing them of the freshness of their beer, which is very important in the craft industry.

Secondary activities

Along with the primary activities listed above, Boston Beer Company distinguishes itself from industry competitors through secondary value chain activities such as knowledge development, infrastructure, and extraordinary procurements.

• Infrastructure

Prior to 2007, the company pursued a mixed strategy of both owning breweries and contracting to third party breweries to fully utilize their excess capacity. In 2007, 2008 Boston Beer decided to rearrange operations to control its brewing within company-owned breweries.^[86] This strategy seeks to better improve efficiency and costs in the long run, despite the large current costs incurred. It also allows them to better control brewing in the future by reducing its dependency on third party breweries, and most importantly, increasing its ability to ensure a high level of quality for its beer. 

• Extraordinary Procurement

 Its strategy to shift to company-owned breweries led to the extraordinary procurement of purchasing all the assets of the Pennsylvania Brewery from Diageo North America Inc.  “From 2007 to 2009 the volume of core brands brewed at company-owned breweries increased from approximately 35% to over 95%.”^[87] 

• Knowledge Development

Boston Beer Company dedicates large amounts of resources to innovation and the creation of new beers.  One such facet is through their three annual brewing contests mentioned in the Marketing & Sales section. Along with the beers produced in these contests, the company uses fabricated brand names to test customer reactions to newly created beers.    

Conclusion: Boston Beer Company distinguishes itself through superior activities with regards to outbound logistics, inbound logistics, operations, infrastructure, marketing and sales, knowledge development, and service. Excelling in so many aspects of the value chain has led them to become the industry leader.

6. Challenges

6.1 Threats to Sustainability

Holdup: Distributor Relationships

Because the wholesaler distributor market is highly concentrated, craft brewers have little power over wholesalers. They must compete for distributor time, attention, and selling efforts. Large-scale beer companies have most of the power over wholesalers, as the distributors are reliant on them for a large percent of their revenue. In addition, distributors can terminate agreements on short notice, which can have greatly adverse affects on the company. Boston Beer is working to strengthen its relationships with distributors, as well as expand on their current connections through its Freshest Beer Program. By improving forecasting and production planning, the firm aims to reduce time between order placement and shipment, thus improving its overall efficiency and attracting the attention of potential distributors. Nevertheless, as a supplier, Boston Beer does not have much power over the concentrated wholesaler market. The company is dependent on its distributors, but no assurance can be given that Boston Beer will have the opportunity to maintain or establish relationships with new distributors that are favorable to the company. As a result, the issue remains a challenge to the company.

Conclusion: As a main player in the craft brewing industry, Boston Beer faces threats to its sustainability from competitors. Other majors in the industry have already established relationships and agreements with buyers, and incumbents are favored over entrants in these negotiations. Although a successful company, Boston Beer faces the challenge of beating out others in the industry for contracts with buyers in a highly concentrated market.