The Spirits of '76

By Gregory K. Ericksen

His family’s brewery closed long ago, but Jim Koch revived a family tradition of quality—and carved out a revolutionary new market—when he created Samuel Adams Lager from a 150-year-old family recipe.

Since 1860 the Koch family had run its own brewery in St. Louis. Every eldest son had become a brewmaster. Then the big breweries began driving out the little ones. After the family business withered in the shadow of Budweiser across town, the Koch men continued to brew at other large companies. But by the time Jim Koch went to college in the 1970s the nation’s breweries were run by huge national firms. “The romance was gone,” says Jim, great-great-grandson of the founder of the Louis Koch Brewery. It looked as if there was no place left in the world for a Koch master brewer. Jim earned Harvard law and business degrees, and rapidly rose to a high-paying position in a Boston consulting company.

So when he decided in 1985 to suddenly start a brewery, his father thought he was crazy. “My father said, ‘We’ve spent 20 years trying to get the smell of a brewery out of our clothes,’” Jim recalls. “But at some level he must have liked the idea, because he became my first investor.”

Jim Koch (pronounced Cook) was driven to quit his $250,000-a-year job due to family tradition—and a brilliant idea. “I got this notion that it was possible to do with beer what small California wine makers had done with wine: make a world-class product and change the way Americans think about their beer.”

That product—Samuel Adams Boston Lager—is made from the identical, 150-year-old family recipe which Jim exhumed from his father’s attic. Today, the Boston Beer Co. has gone public, has sales of $213 million, and continues to grow at 40 to 50 percent a year. And Jim can take a large part of the credit for sparking the microbrewery revolution that has swept the nation. Jim and his partner, Rhonda Kallman, have proven that it is possible to sell old-style beer in new-style bottles—as long as you have a quality product and a smart marketing campaign.

 

Beer in the blood

 

Jim grew up in Cincinnati, where his father, Charlie, was a brewmaster for several breweries. Charlie made beer at home, too, just to show little Jim what brewing was all about. But as Jim reached adulthood, his father explained why a family brewery was no longer possible.

Earlier in the century, the American public’s taste began to change toward lighter, less flavorful beers. The change occurred in large part because of the unrelenting advertising of the national brewers like Anheuser-Busch and Miller, which promoted cold, clear beer—which had fewer ingredients, was cheaper to produce, and lasted longer due to additives. Feeling that no brewer should sacrifice taste, in 1950 Charlie had resurrected the original recipe for Louis Koch Lager and brewed it for his boss. The owner told him to dump the batch, saying, “Charlie, you don’t understand. People want water that will hold a head.”

Jim decided there was no appeal in brewing bland beer, and went to Harvard. But the scent of opportunity stayed with him, despite his family’s bittersweet experience. Jim decided the only way to produce a world-class beer was to launch his own venture. Like his great-great-grandfather, he had to start fresh as an entrepreneur.

The Boston Beer Company began to take shape when Jim and Rhonda Kallman sat talking at a neighborhood bar. It was not a casual conversation. Jim, then 36, had quit his job and put all his money—$100,000—into the business. Associates, friends, and family had invested an additional $140,000. Rhonda, 24, had quit her job as Jim’s secretary to work with him. They were an unlikely pair of entrepreneurs. Indeed, Jim says, “I didn’t want to be an entrepreneur. I wanted to be a brewer. I wanted to make a great beer.” Jim recognized that Rhonda was “smart, energetic, resourceful, and organized,” but at that point her only sales credential was that she was a single woman who knew the Boston bar scene.

Jim wasn’t worried about making a living. After all, he had degrees from Harvard Business School and Harvard Law School, and had risen quickly at the Boston Consulting Group. He had advised companies like General Electric and International Paper on long-term, global projects. However, in doing so he had been as far from actual customers as a New York Times reader is from a Douglas fir tree. Selling was something he “did his best to avoid.”

In the beginning, Jim and Rhonda were the Boston Beer Company’s entire sales force. Two other people delivered the beer. There wasn’t even a brewery; brewing was contracted out to a Pittsburgh brewer. The company address was that of a defunct brewery in Boston where Jim’s beer was stored.

The team had a good brand name, though. Samuel Adams was a fellow Bostonian, Harvard graduate, and brewer who organized the Boston Tea Party and signed the Declaration of Independence. So 237 years after Samuel Adams inherited his father’s brewery on State Street in Boston, a lager with his name on the bottle was introduced at 25 restaurants and bars on Patriots’ Day, the holiday commemorating the Battle of Lexington and Concord that touched off the Revolution.

Small as the company was, Jim and Rhonda were certain of one thing: They were selling a great beer. This was confirmed only three months after they went to market in April 1985. The Great American Beer Festival in Denver voted their lager the best beer in the land. Ninety-three national and regional beers competed, and 4,000 brewers, beer writers, and beer lovers picked Jim’s brew as the best of all.

Still, as an entrepreneur, Jim had to speculate on an ambition worthy of his brew. “We knew we weren’t going to outsell Bud, because there’s a lot more beer drinkers than there ever will be Sam Adams drinkers. We set our ambition as equaling Heineken, which was and still is the top-selling quality beer in the United States. I wanted to stand alongside Heineken in sales. We thought about how long to give ourselves to do that. We said 20 years. So we have until the year 2005. We’re on schedule; we’re about halfway there.”

 

From brewer to salesman

 

The longest walk Jim ever took was the 50 yards from his office, where he was a high-powered consultant, to the nearest bar, where he was “just another beer salesman.” He was winding up his tenure at Boston Consulting and trying to line up customers for the first batch of Samuel Adams, which was in the aging tanks and would be ready for delivery in five weeks. He had talked to his uncle—a partner at Goldman Sachs and one of his backers—and the conversation had shaken him. He told his uncle that he had been out shopping for a computer to keep track of sales to customers, but then admitted that he still had no customers. “So what the hell are you doing buying a computer?” his uncle barked. He gruffly reminded Jim that many more businesses had gone broke for a lack of customers than for the lack of a computer.

At that moment, Jim realized he had better transform himself from a brewer into a salesman. He set a target of one account a day; he’d need 30 to make a go of it. His first target was the bar near the office. In his dark pin-striped suit, he headed there with six cold bottles of Samuel Adams in his briefcase and “a lump in my throat.”

Jim approached the man behind the bar and started to make his pitch, only to learn that the man was not the bartender. He was just stacking the glasses and, besides, he didn’t speak English. Out came the manager, eyeing Jim suspiciously and asking what he wanted. Jim told him about Samuel Adams, opened his briefcase and poured a glass. The manager looked at the beer, sniffed it, drank it, and immediately ordered 25 cases. For Jim, “It was an amazing feeling. In the space of 10 minutes I went from sheer terror to ecstasy.” A salesman was born.

It was something he had never learned at Harvard Business School. He remembers a dozen courses on marketing, but not one on selling, which he says was “considered beneath anyone with an MBA.”

Nonetheless, a successful business boiled down to making either a cheaper product or a better one. As a dedicated brewer, Jim saw a better product as the key. The choice was not obvious to a new generation of marketers. Jim recalls his appearance before the new-ventures club at Harvard Business School one year after starting Boston Beer. He asked the future MBAs what they thought he should have done first. Back came vintage business school answers: “good market research,” “hire an ad agency,” “find a good PR firm,” “locate the hot buttons for the quality vector.” No one mentioned brewing a better beer.

“I told them their responses were a perfect reflection of where American business was: looking to sell me-too products through better marketing.” For Jim, marketing concepts such as “niches” don’t exist. Beer drinkers do. The words that are far more powerful than any advertising jingle are a bartender’s advice to try a Sam Adams. That, in a nutshell, is the Boston Beer scenario for success: quality, plus word-of-mouth, with fanfare added.

As Boston Beer grew, Jim was soon out shopping for a brewery that would follow his recipe and meet his standards for quality. Buying a brewery was far beyond his means, so he found one in Pittsburgh whose own label was in decline. Since then other breweries have come on board in Oregon, Washington, and New York. They brew, and Jim checks on everything they do, providing the art and science of brewing. If they don’t deliver quality, they lose his business. “They know the formula,” Jim says, “but since each brewery is different, each one has to do things a little differently to get the exact same taste. And as the malt and hop crops change each year, I have to make minor modifications to keep the taste consistent.”

Louis Koch’s original family recipe relies purely on four simple ingredients: water, yeast, malt, and hops. It’s the mix and attention to detail that bring them to the heights of traditional mid-19th-century breweries and of late 20th-century acclaim. Quality is further enhanced by a traditional four-vessel brewing process that takes longer than the typical three-vessel mass production technique.

Jim added another dimension to his beer, something that local breweries in the 19th century took for granted: freshness. This has given his beer a significant advantage over his major competition—imported beers. Every bottle of Sam Adams contains the following statement: Purchase before month notched. The date notched on the label is four months after the month the beer was brewed. Jim actually recalls outdated beer and pours it down the drain—about $1 million worth every year. Each summer he dramatizes his drive for freshness with a much-publicized event: He has a huge tub filled with old Samuel Adams beer and sits above it on a dunking stool, dressed in a business suit. He charges onlookers $1 to throw a ball at a target. Hit the bull’s-eye and Jim is dropped into the vat of his own stale beer. Charity gets the proceeds, Jim makes his point, and Samuel Adams gets the publicity.

Jim went further in standing up to imported beers. He invaded the German market “to prove a point” and, inevitably, added to the cachet of Samuel Adams. “For 40 years, American beer drinkers who were looking for quality looked to German beers,” he says. “What they got was stale beer, often modified for American tastes and usually of lower quality than beers of the same name in Germany. In fact, today many of the German beers sold in the United States cannot be legally sold in Germany because of the Reinheitsgebot, a 16th-century purity law. Samuel Adams passed this purity law test in 1985 and became the first American beer to be sold legally in Germany. Almost a decade later, further recognition came from Germany; Der Stern, the country’s newsweekly, reported in 1994 that Samuel Adams Boston Lager had become the favorite brew of “Germany’s beer cognoscenti.”

After 10 years, Boston Beer was distributing eight year-round and seven seasonal beers throughout all 50 states, with sales of $180 million—greater than the sum of the next eight microbreweries combined. President Clinton had singled out Samuel Adams as his favorite beer, and had it served at his first inauguration.

Along the way, Jim Koch placed himself at the forefront of a nationwide boom in microbreweries. Modern Brewery Age, a leading trade journal, singled out Jim’s role: “Arguably, no brewer has done more to advance the cause of these specialty beers than Jim Koch.” In 1992, for the first time, small breweries won market share from the major breweries, whose sales were practically flat, while small breweries increased sales by 17 percent. At Boston Beer, sales jumped 63 percent, surprising even Jim. The company was running out of beer by the end of every month.

In 1995 Boston Beer went public with nearly four million shares of common stock, including 990,000 shares set aside for Samuel Adams beer drinkers. More than 130,000 buyers responded to the offering, and more than 100,000 had to be turned away.

 

Over-reaching

 

Such success can blind even the most focused entrepreneur, and Jim almost lost everything when he set out to build a giant brewery of his own that could produce 250,000 barrels of beer a year. It was a classic mistake: overreaching, straying from a cost-conscious mode of operating, and, most risky, indulging oneself. “You can believe that your judgment is infallible,” Jim says, “and develop a whim of iron which can lead you into making dumb mistakes.” In his case, it was a whim of stainless steel.

In 1987, Jim spent about $2.5 million buying equipment and getting detailed engineering plans for a big new brewery in Boston. Originally, he thought it was going to cost $6 million, then it went up to $9 million. He raised $10 million, but when the actual bids came in the price tag became $15 million. It could easily have ended up costing $20 million.

“I looked at how the business was growing,” Jim recalls, “and said to myself, ‘Wait a minute. If the business keeps growing at this rate, the brewery isn’t going to be nearly big enough anyway. Second, the huge expense jeopardizes the business. Third, it’s not going to make the beer any better or any cheaper.’ Then it dawned on me that I just wanted to have a brewery. I didn’t care whether it was a $2 million plant or a $20 million plant. So we scrapped the plans, sold most of the equipment, and built a small, beautiful, tightly controlled, flexible brewery that we use to develop and perfect our recipes. I remember thinking, ‘Jeez, I’m almost 40 and I just wrote off more than I’ve made in my whole life.’ ”

Despite his success, Jim says he still lives “scared as a little guy in a land of giants.” Anheuser-Busch spills more beer (2 percent) in the process of filling its cans and bottles than Boston Beer makes in a year. So what does Jim do? He watches religiously over his great recipe for a world-class beer. And he counts his blessings: “I’m fortunate in putting together a labor of love and a successful business proposition” and in having as his sales director Rhonda Kallman, who “turned out to be the best salesperson in the business.” Today Rhonda directs a sales force of more than 150, half of them women, which is unique in the industry.

 

Quest for perfection

 

Each year at harvest time Jim goes to a special 400 acres in Bavaria where he pursues the “world’s finest hops” at a price up to 10 times ordinary hops. It is the home of Hallertau Mittelfrueh hop, which gives Samuel Adams “its flowery aroma and robust taste.” Jim walks among the 15-foot-high plants, smells the hop flowers, and talks to the hop farmers and graders. Then he picks the choicest hop blossoms to make the 6,000-mile journey to Boston.

In 1994, he showed how hard he’s ready to fight for his choice hop. He faced the prospect of losing his special source to Anheuser-Busch. He rushed to Bavaria and invoked his family’s long-standing connection with the dealers. More importantly, he drew on his own carefully cultivated relationship with the farmers. He came away with a guarantee for a hop supply that will hold at least through the end of the century.

Jim took up his quest despite his father’s hard lesson. Charlie’s experience was that big guys drive the little guys out of business, and here was Jim starting as a little guy. “What he didn’t take into account is that I wasn’t competing with the big guys,” Jim notes. “The people who were drinking Budweiser weren’t going to step up to Sam Adams. They weren’t my customers then, and they aren’t today. There is just too much flavor in Sam Adams for your regular beer drinker and your light beer drinker. And that makes up 90 percent of the market. The appeal of my beer is that it has about eight times as much hop as a normal beer and two or three times the malt body. It’s a whole different taste, as different from ordinary beer as filet mignon is from hamburger.”

Jim has succeeded in building a thriving business by returning to the old family brewing tradition, but discarding the old brewery model and designing a radical approach that has spawned a new industry. Jim drew on the accumulated knowledge and skills of his ancestors, but launched his own venture to get away from the family’s past business failure.

A flair for the dramatic has helped the company grow, too. At the end of 1992, Jim decided to celebrate another peak year of sales by climbing to the top of 23,060-foot Aconcagua in the Andes, the world’s highest peak outside the Himalayas. Naturally, Jim brought along two bottles of Samuel Adams Boston Lager, which he protected from freezing by keeping them in his mittens by day and his sleeping bag by night. He reached the peak on New Year’s Eve and celebrated by drinking his favorite beer. “I’ve had Samuel Adams in a lot of places, but it never tasted better than it did at 23,000 feet.”

Jim Koch is undeviating in pursuing his holy grail. Each time a batch of Samuel Adams is brewed to perfection and served to beer drinkers, he achieves his original mission. But continually attaining the goal is an ongoing challenge. “We’re getting to be perfect maybe 15 or 20 percent of the time,” Jim says. “A couple of years ago it was 10 percent. But even when we fail it’s a glorious failure, and you couldn’t tell the fraction that I’m off.” Jim can, and he’ll persist in doing something about it.

His Harvard law and business degrees have been left behind in favor of a simple moniker on the company’s letterhead: “James Koch, Brewer.” He regards brewing as his destiny, going back to the 1840s when his immigrant forebears brought their brewing expertise from Bavaria to the Midwest. That’s what inspired him to start the Boston Beer Company. “I wanted to be the one to bring about a revolution in beer in this country. It sounds odd, but I felt that if this can be done and I don’t do it, no matter what else I did I was going to feel that I wouldn’t have really fulfilled my potential.”

 

Gregory K. Ericksen is national director for entrepreneurial services at Ernst & Young, a leading international provider of professional services. He is also chairman of EY’s Entrepreneur of the Year Institute. This article is adapted with permission from “What’s Luck Got To Do With It?,” about 12 outstanding entrepreneurs, published by John Wiley & Sons. Copyright �(c) 1997 by Ernst & Young U.S. LLP.

 

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