Boston Beer Continues Hot Run

Dear Client:

You can’t keep a good man down. Or you can’t keep a down man good. Or something. Anyway, Jim Koch’s Boston Beer posted another rocking quarter, with core shipments and depletions up around 12%. But orders-in-hand are quite slower (against tough comps), with expected shipments through April only up 6%, and BBC doesn’t see a lot of pricing or mix improvement in 2011, with revenue per barrel only expected to be around 1%. Meh, I don’t buy it. Revs per hecto, as the cool beer industry call it now, will be more that that trust me. That lower estimate may be due to draft or Twisted Tea mix shift or something. If, with this year’s expected inflation, we don’t get an average of 2% revenue per barrel average for all brands, I’ll be surprised. But perhaps BBC has a special circumstance (like rapid growth of Twisted Tea, for instance) that will keep revs per hecto down. By the way, “revs per hecto” is another name for average price per unit of beer.

As analyst Carolyne Levy at CLSA says, “Jim Koch under-promises and over-delivers.” So true. I think he’s sandbagging. But that’s the way to play it. I never understood these CEOs who way overtalk their stock, just to watch it crater later. Tell the truth, and maybe be a little bearish on the truth. That’s the Koch way it seems. Jim expects to spend up to $40 million implementing its just-in-time delivery system for fresh beer. But hey, they don’t have debt, and about $50 million of cash just sitting there. Let’s spend it.

CRAFT BREWER LEGENDS SPEAK: KIM AND SAM ARE HOT; KEN GREAT TOO

“Everyone knows craft beer is hot. and Kim and Sam are hot. Ken, you have a good personality.” (Yes, that was rude, but Ken is a friend and perhaps is better looking than I, so that should tell you something). Those were the words with which your editor greeted members Kim Jordan, Sam Calagione and Ken Grossman of the Beer Summit’s “The Future of Craft” panel. The three spoke candidly to hot topics on the beer industry’s “it” segment – how it will grow, distributor relations, and whether big beer-brewed knock offs do the industry more harm than good.

ON FINANCING CRAFT’S CLIMB TO 10% SHARE: Ken think’s we’ll get to that number before the next 15 years is up, (probably sooner), driven by craft’s largest players. As for monetary fuel, “a well-run company can generate enough cash flow that it doesn’t need to come from the venture guys,” he said. New Belgium uses traditional bank financing and retained earnings to build the company.

Sam grows with Citizen’s Bank and existing cash flow. He said the company is “catholic ‘small c’ about growing at a manageable level.” For the past few years, the company has grown about 300%, but to “not go public,” 18% – 25% is where they need to be for the next 5 years. (Editor’s note: A truth squader told us that DFH may actually be pulling out of a few markets to this end, including Tennessee except for Nashville, Indiana, and some parts of Illinois.)

Private equity entering the fold was mentioned briefly, but many felt its culture would clash with craft, and turnaround timetables are different.

ON WHAT THEY LOOK FOR IN DISTRIBUTORS. The answer here usually mentions a wholesaler that can focus on the brand in question, as Kim said, but these guys dug still deeper. Kim also looks for a passion for the product and segment, attention to integrity of product (draft line cleaning, rotation), and finally “blocking and tackling” of getting placements in the right accounts and working the trade with integrity. Ken gets approached often about moving houses, and he does his homework when entertaining the idea: a thorough marketplace survey, chats with retailers, and warehouse visits. Sam appreciates when the two big distributor houses invest in educating their staff on the segment via brewing kits et al., due to an increasingly smarter beer enthusiast and retailer. All agreed that interviewing retailers about distributors execution was a key.

ON FRANCHISE REFORM AND OTHER DISTRIB-BREWER LEGISLATION. All the brewers on stage, not surprisingly, were stanchly for franchise law reform at the state level, so that craft brands can change houses. However, Kim was emphatic that craft brewers are not opposed to paying fair market value to move the brands. “Great distributors will win in this scenario. Because brands should only be able to move for fair market value,” she said. As for self-distribution, Sam doesn’t do it but helped pass legislation in his state to allow it. Ken said they wouldn’t have survived the first year without it. Bottom line: Self distribution carve-outs are important to small brewers.

Asked about distributor consolidation scenarios, the group responded unfavorably. The less options they have to market, the worse. Especially in the hypothetical case of some monster “AB, Pepsi and Oscar Meyer Weiner” house. “A branch [like that] is likely to think it doesn’t need craft beer, and then where do we go? We’re a family business and we have a fondness for other family businesses,” said Kim.

ON WHETHER BLUE MOON ET AL. IS GOOD FOR CRAFT. “If a Blue Moon gets them to cheat on the light lager juggernaut … then maybe they’ll come over to the giant orgy of 1,600 independent brewers,” said Sam. That was the consensus, but Ken diplomatically suggested there could be more truth in labeling on what some would call faux craft bottles. Kim has issues with people ripping her bottles off, down to the same Pantone colors. Fair, relative pricing was also an issue to the bunch. “It’s difficult to get my [product] on if those Blue Moon kegs are literally a third the cost of ours,” Kim said.

ON WHETHER THERE ARE TOO MANY SKUS IN THE MARKET: “Don’t lobb off the bottom-selling SKUs just because they sell a little slower,” said Ken, who emphasized that esoteric beers have created a lot of excitement for the segment. Kim agreed: “We believe that part of what makes this an incredible growth time is the strength of brands,” which can translate to obscure styles, and tie in with a brewer’s story, she said.

BEER BRIEFS:

BI AND NBWA COMISSIONED A STUDY that found the beer industry contributes $223.8 billion each year to the U.S. economy. It also generates more than 1.8 million American jobs, amounting to $71.2 billion in wages and benefits. The industry also contributed $44.7 billion dollars in the form of business, personal and consumption taxes in 2010. The Economic Impact study was conducted by John Dunham & Associates based in New York City and covers data compiled in 2010. To see the full monty with state-by-state contributions and more breakdowns, visit beerservesamerica.org.

BREWPIC OF THE DAY. Another Beer Summit is in the can. It was a good Summit. Great speakers, a packed house of nearly 500 beer people, a glamorous location – the Fountainebleau Miami Beach – and Dick Yuengling accepting the Maverick Award. I made a joke when handing him the precious plaque, saying “You’ll want to display this in a prominent place. Jim Koch keeps his in the trunk of his car.” He laughed and accepted it graciously. But one of my distributor friends reprimanded me later that I should have better explained what the Maverick Award was and what an honor it is. So here are my reparations: This is an award we created It’s a Texas term (despite the Senator from Arizona appropriating it), referring to unbranded free range cattle, which in tern was named after legendary 19th century cattleman Sam Maverick. The term today refers to somebody who doesn’t play by any preset rules, who has an independent spirit, and who succeeds at what he or she does despite harrowing odds. We select the recipient of our only award each year very carefully. Winners aren’t necessarily the most popular or successful — although they often are — but the ones that, like Frank Sinatra and Sam Maverick, did it “their way.” We could’ve just as easily called it the Rogue Award — and in fact we considered that name, but felt rogue had some negative connotations.

Maverick Award winners have included Norman Adami, Ken Grossman, Jim Koch, and Rhonda Kallman. And now we welcome Dick Yuengling to this exclusive club, and perhaps someday we can get them all together for a beer and a photo op.

But here is myself with Dick Yuengling as he accepts the Maverick Award at theBeer Industry Summit in Miami yesterday.

Until tomorrow, Harry

“While this award was given to me, it really should go to all of the people at the brewery who make Yuengling a success. I’ll accept it on behalf of them.”
-Dick Yuengling

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