Beer Business Unplugged

Tomorrow is Jim Koch’s 71st birthday, and as is tradition with these posts, we will visit Jim and Boston Brewing.

The transformation of the Boston Brewing Company in recent years has been truly remarkable. Not long ago, industry pundits questioned the success of the company, and rumors circulated within the industry regarding who would lead the establishment. That was then and this is now. In 2019, Jim acquired DogFish Head, the highly successful Delaware Brewery.  The acquisition enhanced Boston’s high-end beer portfolio, a transaction that, even within a short period of time, was positive for both corporations. Boston Beers’ continued success, however, is best explained in a recent video posted on the Wall Street Journal entitled From Beer to Hard Seltzer, A Culture Pivot Finds a New Market, by Dave Burwick, President, and CEO of Boston Beers. According to Dave, in 2016, the company jumped into the hard seltzer business and targeted predominantly females.  By 2017, however, the strategy had changed to gender-neutral marketing and encompassed the well-educated, upscale consumer. As of this year, the seltzer market has grown from a one percent market share in 2016 to a potential 10% share of the market.  

According to Dave, until recently, Sam Adams had been the favorite child of the Boston Beers; but with the growth of Angry Orchard, Twisted Tea, and Truly, the hard seltzer; Boston Beers needed a culture change.  The company’s stated goal was to be number one in the seltzer category, but to achieve the said objective; it had to be the number one priority of the company. The dollar amount to achieve this goal was not an issue with management, but given the increased competition from both Bud Light Seltzer and Corona Seltzer; it became necessary for Boston to reformulate their liquid and thereby improve the overall taste.

The seltzer category is dominated by two brands, White Claw made by Mike’s, and Truly, brewed by Boston. Both brands have continued their meteoric growth within the category despite the Coronavirus and the multitude of closed trade channels. As seltzers continue to expand, expect additional competitors to jump in the mix, including MillerCoors’ Coors Seltzer, which will arrive later this summer.

In his Wall Street Journal post, Dave goes on to highlight the importance of understanding a company’s culture and one’s commitment to that culture. Boston Beers has certainly been able to make the necessary transitions, while continuing to be a leader in the industry.

It is doubtful that Jim envisioned the success of Boston Beers when he first began the adventure in the early 1980s, but it is easy to see that Jim’s greatest strength is his vision and his ability to recognize change when needed. Let’s wait to see what Boston Beers looks like when Jim turns 80!

Happy 71^st, Jim.

May 27th, 2020

During college, while working for Willowbrook, the Dallas Coors distributor, some of my time was devoted to keg routes. This somehow “qualified” me to be my fraternity’s official keg buyer for our renowned Ice Cream Socials which entailed 15 kegs of Coors and 10 kegs of Budweiser or Schlitz. Thankfully for me, the pledges were in charge of returning the empty kegs and equipment.

Over the years, kegs have played a large role in the success of the companies I worked with, whether it was running beer distributorships or as an importer. At some companies, the kegs were as much as 40% of a company’s total volume, something that was especially true at Warsteiner. Kegs have always been a profitable item for the three tiers, particularly during the years that wholesalers and brewers did not split handles. Throughout my time at Schlitz in Louisiana, the company enjoyed a 70% draft market share, while in some parts of Kansas, Coors also benefited from a 70% draft market share. Today, one can find accounts with more than 100 different flavors on tap from a variety of wholesalers. Some large on-premise accounts, like the Flying Saucer, honor those customers who work their way through the brands on tap by placing an honoree plaque on the wall of the establishment.  

As important as the keg segment has been in past decades, the current Coronavirus pandemic might change that model. Closing the on-premise killed both that segment and kegs. The cost of closing kegs is now surfacing.  MolsonCoors’ Q1 results show kegs’ aggregate costs in the $50 million range, with an additional $18 million lost in finished keg inventories which are not expected to sell. As bad as MC’s results are, wait until AB reports on their keg losses and write-downs.  The question is: how does the industry evolve the keg segment now assuming the on-premise business will not return to its previous state?  One can assume that in the immediate future, the on-premise keg segment will be much smaller due simply to mandated capacity restrictions.  Expect that both wholesalers and brewers are creating plans to mitigate any future catastrophes. The financial losses are staggering.

Is it reasonable to believe that the PTR for kegs might double? If the current margins increase from 35% – 40% to 70% – 80%, or more for both tiers, any future disasters might not be as expensive. If the overall percentages of keg business drops to five percent or less, will that be considered good or bad? Even with keg cost increases; retail could add an increase of a dollar per glass and still provide a good margin.

Ordering a pint in the future might be getting a pint glass and a 16 ounce can of beer, while some enterprising retailers might create this program with a 19.2 can.  Even pint glasses may disappear and be replaced by 16-ounce plastic cups.  No kegs, no pint glasses, just a 16 ounce can and a plastic cup.  All of which could decrease the retailers’ overall volume, but increase profit and minimize future losses due to closing and the resulting loss of business.

It is fair to say that, at least in the short term, the on-premise business will change, and it may never return to its previous state. For hundreds of years this country has socialized in taverns, now we are socializing over Zoom.

The way prices are increasing, the good old days have passed us by.

Editor’s Note: During the past week, the industry lost two former Coors wholesalers: Willie Davis, the Green Bay Packers Hall of Fame football player and former President of West Coast Beverages, and R.D.Hubbard, the previous owner of Coors of Kansas, owner of Safelite Auto Glass and horse racing tracks across the nation.

I worked for, or with both gentlemen. They were special people and will be missed.