A Talk with Boston Beer Chairman and Founder Jim Koch

Volume and retail sales of craft beer surged at double-digit rates in 2010, and demand continues this year while mainstream beers largely languish. Boston Beer Co., marketer of Samuel Adams Boston Lager and the Sam Adams line, is the nation’s leading craft brewer with volume sales of nearly 31 million cases last year. Shanken News Daily talked with Jim Koch, chairman and founder of Boston Beer, about recent trends for his brands and the craft beer segment.

SND: Memorial Day weekend is approaching, which marks the unofficial start of summer. What are your expectations for Boston Beer and the overall beer category this summer?

KOCH: We’ve been on a five-year roll of very strong growth, and I think we’ll continue to do really well. Next week also marks the unofficial start of sales for Sam Adams Summer Ale, our most popular seasonal beer. Seasonal beers are the hottest category in the craft segment, and I think we’ll see strong sales of Summer Ale as well as Sam Adams Boston Lager. I look at the same crystal ball as everyone else in the beer industry, and it’s hard to say how the overall beer category will fare this summer. I’m optimistic. I’d love to see the total category return to growth, as that’s good for all of us.

SND: Boston Beer recently announced its first quarter results and its fiscal 2011 outlook, projecting a 9 percent depletions gain this year. What factors will help drive that performance?

KOCH: We’re seeing continued growth in Boston Lager, the largest craft SKU, as craft beer continues to gain interest among beer consumers. Boston Lager has grown alongside the craft category for 27 years. And we have the most popular seasonal beer program by far. Each of our seasonals is the number-one seasonal in its calendar slot. The entire seasonal category—which we started 23 years ago—has finally come into its own. In addition, Latitude 48 IPA is already one of the top new beers of 2011.

SND: Your Freshest Beer program—which seeks to get the freshest beer to market by reducing wholesaler inventory—is now in place with 15 wholesalers. Which markets are those, and what are the results so far?

KOCH: Markets include Chicago, Washington, DC, Boston, Tampa, New York and California. It’s working well in very different places. Wholesalers are ecstatic. There’s been no drop-out. What makes it so powerful is that wholesalers don’t have to forecast how much beer they’ll sell in the following month. We ship them today what they sold yesterday. With the Freshest Beer program, the guessing game of forecasting has gone away. As with any new initiative, there are wrinkles that need to be ironed out, such as wholesaler coding information, multiple warehouses or transfers to other wholesalers. But the bigger issue is that it changes how we run our breweries. It means we have a lot more changeovers. Now, inventory that previously was in the supply chain is kept in the aging tanks at the brewery. As we roll out the program, we’ll have to spend millions of dollars on more tanks and equipment modifications.

SND: What’s next for this program?

KOCH: We’re now in markets that account for about 20 percent of our volume. We want to get to 50 percent this year.

SND: The U.S. specialty and craft beer segments continue to thrive while most leading domestic brands struggle. Are there any signs that craft beer’s expansion is encroaching on the Sam Adams brand?

KOCH: Historically, there’s been a strong relationship between the performance of Sam Adams and the performance of craft beer. Because Sam Adams has been the leading craft brand since the mid-1980s, if the category continues to grow, we’ll do fine. We’ve always viewed category growth as being important to our success. Other craft brewers tell me the success of Sam Adams helps them, and vice versa.

SND: What are the biggest challenges and opportunities for craft brewers today?

KOCH: At some point—and we may have already reached it—there will be more beers than there is shelf-space or tap handles. One major challenge for craft brewers is that it’s very expensive to add brewery capacity. And if you add it and growth stops, the bank may end up owning your brewery. We all know that at some point growth will slow and then stop. But it’s very hard to predict when that will happen. On the upside, however, millennials are adopting craft beer in the same way that their baby boomer parents adopted wine. When that happened, it led to 30 years of growth for wine. We might be at the beginning of several decades of craft beer growth. This is a profound cultural shift that is spreading across an entire generation.

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