The Boston Beer Company Essay Example for Free

The capital of Massachusetts Beer family EssayThe capital of Massachusetts Beer Compevery has had amazing success in its transition from a niggling scale microbrewer to a broad scale national brewery. Al most(prenominal) all of the friendships success is out-of-pocket to the surface-to-air missileuel Adams Lager product line, which has hardly changed from the first appearance of the familiarity in 1984, to the IPO in 1995, to the present day. In fact, much of the appeal of surface-to-air missileuel Adams comes from its microbrew go out and the founder, Jim Kochs, commitment to the brewing process and a premium beer. In recent years, however, the companionship has implemented a new strategy for gain which has included introducing a light beer that will have more mainstream appeal.While this has join on profits for the company, it has also left the company vulner equal to(p) to entry by diluting its brand name. For this reason, the companys strategy for the immediate fu ture has to make a earthshaking shift, from a strategy of growth to a strategy of protection. It must center on on maintaining its current profits by preventing entry both from wasted breweries looking to copy the BBCs strategy and from rotund breweries looking to use their expansive resources to slew some of BBCs market sh be. History of capital of Massachusetts Beer The Boston Beer phoner began as a microbrewery in Boston, Massachusetts in 1984.Its first cases of beer were only sold to Boston bars, but the company quickly branched let on geographically. Fueled by awards and recognition from prestigious beer festivals, Samuel Adams Boston Lager was avail satisfactory on much of the East Coast by the late 1980s and nationally by 1992. The company went public on the New York Stock Exchange in 1995. The Boston Beer Companys strategy for growth was 1 of differentiation. The company created a high whole step beer than the major(ip)ity of American beers by using more expensi ve ingredients and less piss, and it used its packaging and its commercials to advertise this commitment to uality.In fact, be start out of its use of only barley, record hop, yeast, and water as its ingredients, Samuel Adams won the honor of being the first American beer to be sold in Germany, a distinction that helped its image in America even more. One business strategy that the company employed as it started to grow was using unneeded brewing space in other companys breweries to brew their beer. Since the company was growing at a double digit rate, it didnt have a lot of extra capital to build its own breweries, so this was a nigh(a) strategy for them during their period of growth.And, since these breweries were distributed throughout the country, this strategy al wiped out(p)ed the Boston Beer Company to maximize the insolence of the beer it sold. In fact, the this instant famous practice of printing a freshness label on bottled beer was started by the Boston Beer Company on its Samuel Adams Boston Lager. The company ensured select production in these disperse breweries by hiring experienced brewmasters to oversee the contract brewing. The company also brewed some beer on its own property, both in Boston and later in a plant they corruptd in Cincinnati, Ohio.In 2002, the company took a risk by introducing Sam Adams fresh, a light beer version of their Samuel Adams Lager. They had neer produced a light beer before, and it was Kochs stance that the company couldnt brew a light beer that would be up to their standards of flavor. The expanded customer base that the company would target with the sale of a light beer was too lucrative a market to ignore, however, and the light beer market was roughly devoid of any reform Beers, so after three years of development Sam Adams Light was born.The ad expenditures for 2002 increase by 25. 7% or $20. 6 million over 2001 due to the promotion of Sam Adams Light2, which magnified the financial risk of producin g and selling it. The new beer had the short term effect of attracting new consumers to the Samuel Adams brand, although the long term effect has and to be seen. The growth of the Boston Beer Company was in truth impressive, and can be attributed to a superior product, peachy business strategy, and an unsaturated market for high-quality beer. But now at that place atomic number 18 new challenges facing the company.There are always new fads in the beer industry current trends are low-carb beers and fruityflavored malt beverages. The Boston Beer Company needs to decide which of these trends to respond to, and how to respond to each. Above all the company needs to continue its strategy of differentiation that allowed it to achieve its current profitability. It is its image for quality above major American beers like Budweiser, Coors, and Miller that allows it to keep its prices, and its profits, high. Current Industry Analysis The Boston Beer Companys product is a demote beer.A b etter beer is defined as either a trickery beer or an import, and is characterized by higher prices and quality. A imposture beer is defined as one which is brewed with 100% malted barley as its grain. The major American beer companies typically use a mixture of malted barley along with other grains such as rice or corn, since these are less expensive and have less full-bodied flavors. Rivals in the better beer industry include such foreign companies as Corona, Heineken, and Guinness, as well as domestic companies such as Sierra Nevada, Petes, and a number of microbreweries around the country.While the beer industry overall is very rivalrous, the better beer industry is not so, as evidenced by high profit margins (the Boston Beer Company routinely posts profit margins of over 50%). The contest that does exist tends to revolve around quality competition rather than price competition. There are numerous substitutes for better beer. All alcoholic beverages are substitutes for the Boston Beer Companys product, although the two closest substitutes are major American beers and flavored malt beverages wine and inspirit are less relevant substitutes for the purposes of this analysis.Budweiser, Coors, and Miller are all large brand name beers which have low prices and low quality compared to better beers. Price sensitive consumers typically buy these beers. Smirnoff Ice, Skyy Blue, and Bacardi Silver are all similarly priced to the better beers, but they have fruitier flavors and therefore appeal to consumers with a different taste preference. The suppliers for the Boston Beer Company are similar to the suppliers for any brewery. Supplies that must be purchased include the ingredients like water, barley and hops, the equipment for brewing, and the transportation for distributing beer around the country.The ingredients are actually very inexpensive compared to the other two cost, and suppliers of barley and water dont have a lot of bar get hold ofing power since t hese industries are fragmented. The hops industry, however, is more centralized. In order to ensure adequate hops supplies at prices known in advance the company regularly purchases hops futures. The company also employs an aggressive contract brewing strategy. Under this policy almost 60% of the companys products are brewed at noncompany owned breweries.By utilizing the excess capacity of geographically distributed reweries, the company can keep equipment and transportation costs low while providing a fresher and thus higher quality product. This brewing approach carries inherent risks by giving potential rivals some crack over the companys production capacity. Indeed the company is currently involved in a lawsuit with Miller after Millers attempt to gage out of a brewing contract primaeval. To protect itself from these risks the company enters into contracts with a diverse set of brewers for a much larger cadence of beer than they actually produce.This redundant capacity is me ant to shield the company from any number of contract brewers defaulting on their contracts. Buyer bargaining power doesnt have significant influence on the Boston Beer Company since their buyers are grocery transshipment centers and bars. The grocery industry and the bar industry are both fragmented, so each store or bar that buys from the Boston Beer Company comprises a very small amount of total company sales, and the loss of any one buyer wont significantly hurt the company.Complements in the better beer industry include the popularity of bars, snack foods like pretzels and nachos, and sporting events like football games. While the Boston Beer Company doesnt provide any of these complements, they do provide some amount of customer education. Customer education includes advertising awards the company has won, advertising their brewing processes, and traffic attention to their premium ingredients. This serves to convince people of the superior quality of Samuel Adams, thereby co nvincing them to pay a premium price.Customer education is a somewhat clever and successful strategy for a number of beer companies, but it benefits better beers more than lower quality beers, so the Boston Beer Company could probably con advantage of this by concentrate oning more on customer education. The BBC also has an advantage over small high-quality breweries because its economy of scale allows more customers to be reached per long horse spent on customer education. Any company in the beverage industry has the potential to enter Samuel Adams market, and it is always crucial for a company to be aware of viable entry from all sides.Companies that make wine, spirits, or malt beverages could all enter the market, and we have actually seen in recent years that spirits companies have been expanding into new markets by producing malt beverages under the name of the parent spirits company. However, the most dangerous potential entrants would be other beer companies. Other craft breweries that sell their beer on a small scale might attempt to copy the BBCs strategy to grow into a national brand and steal some of BBCs market partake.Also, major American breweries could use their expansive resources to brew high quality beers that could compete with Samuel Adams on a national level. A third, and even more threatening conjecture, would be the combination of these two forces a major brewery could buy a high quality microbrewery and use their national advertising and distribution infrastructure to market the microbrew to the public on a large scale. Given the Boston Beer Companys high profit margins and the relatively low level of rivalry within their market, it is very likely that entry will occur and erode away at BBCs profits if BBC is unprepared.We believe that responding to this possibility should be at the forefront of the companys business strategy for the immediate future. The Boston Beer Companys Strategy Using Reputation as an Entry Barrier The BBCs initial strategy was one of growth. This was fitting for it when it was a microbrewery looking to gain national and international sales. During its expansion in the early 1990s, the company took advantage of the fact that consumer demand for craft beers was increasing, while there were few other companies doing the same.Since the new market was unsaturated, the Boston Beer Company was able to draw an inexpensive reputation for its Samuel Adams brand name by being the first large scale mover into the national craft beer market. By the late 1990s, the BBCs growth rate had begun to decline. In an effort to keep up growth, the company switched to a strategy of trying to increase the demand for craft beer. It did this through large scale advertising, and most significantly through the introduction of a light beer that brought light beer drinkers over to the better beer market.The Boston Beer Companys strategy was an efficient one for many years, and enabled it to become the profitable national company that it is today. However, if the BBC wants to maintain its profitability, it will need to find a way to protect its market fortune from entrants, and this will require a shift in the companys strategy back to increasing its share of the Better Beer market rather than of the mainstream market. The biggest threats to the BBC are the major American beer companies, which have massive resources that would allow them to compete with the BBC.The BBCs two advantages over these major companies are experience and reputation, and the major companies could easily gain experience by buying an existing craft beer company and utilizing its brewing procedures. Therefore, the BBC must protect its reputation at all costs, since its reputation is the only redoubted entry barrier preventing Budweiser, Coors, and Miller from successfully invading Samuel Adams market. The companys best strategy would be to slow their growth in order to reach on strengthening their Samuel Adams Boston Lager brand name.Additionally, if the BBC diminishes its focus on growth, it could very well have the effect of reducing the incentive for these three major companies to enter the craft beer market, since the BBC will not be seen as so significant a threat. While there is a risk that slowing growth will leave the company vulnerable to entry by smaller companies, it is the large companies that have the most resources to compete with the BBC, so reducing the incentive for large companies to enter is worth the possible risk that more small companies will enter.The uniqueness and integrity that allowed the Samuel Adams brand to gain popularity are starting to be overshadowed by the companys attempts to gather more mainstream consumers, and this is hurting the companys brand name. The strategy for the future needs to focus on building back customer loyalty for the companys core product line, i. e. Samuel Adams Boston Lager. First and foremost, the Boston Beer Company needs to continue r educing its expenditures on Sam Adams Light.During the introduction of Sam Adams Light in 2001-02, revenues and gross profit increased, but expenditures on advertising Sam Light were extremely high, and much of the sales of Sam Light were thought to be due to cannibalism of Samuel Adams Boston Lager. In 2003 when advertising of Sam Adams Light was decreased, sales of the light beer dropped significantly. Although Samuel Adams Boston Lager sales increased during the period between the fourth quarters of 2002 and 2003, overall shipments dropped 6% during this period3 because of the lowered demand for Sam Light after the decline of the Sam Light merchandising campaign.However, even though sales were lower, net income was higher after the end of the marketing campaign4. The company should therefore continue to keep its advertising levels for Sam Adams Light low. In addition to the high financial cost of advertising Sam Adams Light, it is likely that the large-scale marketing of Sam Adam s Light could hurt the company in the long run by diluting the Samuel Adams brand name. The purpose of Sam Light is to appeal to mainstream beer drinkers, but the companys consumer base is comprised of individuals who pride themselves on intoxication a beer that is not mainstream.With potential entrants looming from above and below, the Boston Beer Company can not afford to lose its reputation for uniqueness. Still, Sam Light is a good revenue stream as a supplement to Samuel Adams Boston Lager, but it should cease to be the companys main focus. The Twisted Tea and grave Core products are malt beverages that the company produces on a small scale. These brands are unnecessary for the companys success, and if the company adopts a strategy to focus on Samuel Adams Boston Lager then it would be advantageous to eliminate these products.While the products dilute the companys brand name in a similar way to Sam Adams Light, they dont provide nearly the revenue that Sam Light does. By eith er selling or pass completion down these brand names, the Boston Beer Company can distance itself further from the malt beverage industry and improve its positioning as a Better Beer company. Dumping these products would help the BBCs image of integrity in the eyes of their consumers, and this image will be crucial if the company is to protect its market share from entrants.There have been a number of attempted entries into the Sam Adams market which demonstrate the need for quality and reputation. Coors owns Killians Irish Red and Anheuser-Busch owns Michelob and has a mail in Red Hook, all brands that have had poor success in the Better Beer Market. Most consumers are well aware of the fact that Michelob is just other domestic beer sold at a high price, and so its a brand without much of a quality image. On the other hand, its not well known that Coors owns Killians since its brewed in Canada and has an import label.While this abel might signal some quality in many consumers ey es, Killians has no reputation and no customer base. Finally, Red Hook was a quality microbrew ale with a good reputation and customer base that was bought by AB. Since this purchase in 1994 the stock price of Red Hook has plummeted from 30 to 2 and sales have been poor. While the reason for this is not exactly clear, its possible that this failure is due to a loss of integrity that occurred when the microbrew became owned by a major domestic brewer, or that AB simply wasnt able to operate that type of brewery.ABs failure in this attempt doesnt indicate that they will give up on entering the craft beer industry, however, especially if craft beers grow to be more of the national market. With such high profit margins and a strong market position, the BBC might be tempted to increase sales by decreasing prices, but this strategy should definitely be avoided. The high prices for Samuel Adams Boston Lager and Sam Adams Light signal to consumers and other companies that these beers are of higher quality, and since demand in the Better Beer market is relatively inelastic, there would likely be no increase in net income if prices were reduced.Reducing prices would cause the BBC to appear more of a threat to the three major American beer companies, and could therefore expedite the entry of one of these companies into the market. Due to the nature of the Better Beer industry, the company needs to strive for quality competition over price competition. With the introduction of Sam Light in 2002 the percentage of BBCs sales comprised of bottles vs. kegs increased since most Sam Light is sold in bottles, and since Boston Lager sales declined slightly. While revenues are lower per barrel of draft beer, profit margins are higher due to lower costs per barrel.Additionally, beer served on tap is usually able to retain a higher quality than beer served from a bottle. For these reasons and others, it would be a good strategy for the Boston Beer Company to increase its emphasis on selling its beer in kegs to bars. While most grocery stores already carry Samuel Adams Boston Lager, there are still a large number of bars that dont have Boston Lager on draft, and this deprives many consumers of being able to drink the beer in its highest quality form while also depriving the company of the added revenue that bar sales bring in.Since the companys new focus needs to be on emphasizing the quality of its beers, increasing the availability of its draft beer is in line with its strategy. An added benefit of increasing prevalence in bars is the opportunity for bartender education and consequent consumer education. The company should seriously consider providing literature about their beer along with the kegs that they sell to bars, since educating bar owners and bartenders about the premium ingredients and freshness standards that the company holds will have a trickle-down effect to the beer drinkers.