Rev. 11/13/01
The Boston Beer Company (A) Jim Koch, president and founder of the Boston Beer Company, of Boston, Massachusetts, prepared his thoughts before a meeting with the company’s investment bankers in early November, 1995. On August 24, 1995, Boston Beer, the maker of Samuel Adams brand beer and the beer industry’s leading craft brewer, had filed a registration statement with the U.S. Securities and Exchange Commission (SEC) for an initial public stock offering that aimed to raise between $26 million and $34 million.
Koch could not restrict his optimism for the IPO’s success, given the stock market’s recent appetite for new beer issues and the market’s overwhelming subscription response to Boston Beer’s proposed stock. Competitors Redhook Ale Brewery and Pete’s Brewing Company had each conducted very successful IPOs in the previous three months. The two beer stocks went public at $17 and $18 per share, respectively, and had since maintained share prices in the mid-$20s. Koch’s thoughts centered on the price at which Boston Beer should go public. The company’s bankers initially had set a price range of $10 to $15 per share. Koch wanted to be sure that the share price established by the bankers reflected the appropriate market value of his company.
The Craft Brewing Industry
In the early 1900’s, over two thousand breweries, most of which served local markets, operated throughout the United States. The advent of Prohibition, however, forced the closing of most of these breweries. The post-Prohibition period marked the beginning of a long consolidation of the beer industry during which the few brewers that reopened after Prohibition sought to take advantage of economies of scale in production, distribution, and advertising. These brewers used low-cost ingredients to mass-produce milder and lighter beer. They used preservatives to maintain the taste of the beer over a longer shelf life. The consolidation of breweries and these practices initiated a convergence of brewers’ products to relatively undistinctive premium pilsners and lagers.1 By 1995, the three largest brewers, Anheuser-Busch, 1
Premium pilsner is a bottom fermented beer that is the style of beer brewed by most American mass-producers.
MBA student Michael Winton and Professor Jennifer E. Bethel, Babson College, prepared this case as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The authors thank Professor Richard Mandel of Babson College for his helpful insights
Copyright © by Babson College 1996 and licensed for publication to Harvard Business School Publishing. To order copies or request permission to reproduce materials, call (800) 545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of copyright holders.
The Boston Beer Company (A) BAB026
Adolph Coors Co., and Miller Brewing Co., shipped over 75 percent of the beer in the United States.
The re-emergence of the craft breweries segment in the 1990s was directly related to a decline in mass-produced beer consumption during the period. An increase in health and safety consciousness among beer drinkers caused consumers to drink less beer, while a rise in affluence focused them on more distinctive and flavorful brews. Imported beers from Canada, Germany, Holland, and Mexico initially satisfied this niche. Consumers thus learned to distinguish the flavor of a beer, which eased them through a transition from promotion-based to taste-based purchases. The imports, however, were vulnerable to competition from domestic craft brewers. Craft brewers, which specialized in producing full-flavored ales, stouts, and amber-colored beers from superior hops, malted barley, yeast, and water, did not utilize ingredients such as rice, corn, and stabilizers to dilute and preserve their beer for mass production and consumption. Long shipping times for imports which compromised freshness, coupled with high transportation costs, allowed craft brewers to invade the market segment previously dominated by imported beers. The craft beer segment was comprised of four distinct categories, including regional specialty brewers, microbrewers, contract brewers, and brewpubs. Exhibit 1 depicts the breakdown of these four segments and the growth in number of barrels shipped from 1985 to 1994. Craft brewers that produced between 15,000 and 1,000,000 barrels of beer per year were classified as regional specialty brewers. Distribution for this type of craft brewer, which currently included 30 breweries, was typically limited to the region in which it was produced. However, several larger regional specialty breweries, such as Redhook Ale Brewery, had begun national distribution. Regional specialty brewers produced 29 percent of the total barrels shipped for craft brewers in 1994, up 70 percent from 1993. Craft brewers that produced less than 15,000 barrels per year were classified as microbrewers. Contract brewing companies marketed and sold under their own labels craft beers that had been produced other brewers. By utilizing the excess capacity of existing brewers, contract brewers avoided the high capital expense of developing and owning production facilities, often maintaining lower production and distribution costs than regional specialty brewers. The Boston Beer Company and Pete’s Brewing Company were two of approximately 100 contract brewers in the United States. This segment represented 42 percent of the total volume of craft brewers and had grown 57 percent in 1994. Brewpubs were breweries that brewed and sold or served their beer at the same location and were generally considered a restaurant concept.
The craft segment of the domestic beer industry represented an explosive niche in an otherwise lethargic industry. In 1994, the overall U.S. beer industry totaled $5 billion in revenues, and analysts forecast flat growth of 0 to 1 percent compounded annually through the year 2000. The number of craft brewers, however, had escalated to over 750, 165 of which opened in 1994. Beer industry analysts estimated that craft brewers, which represented 1.4 percent of the domestic beer market in 1994, up from 0.9 percent in 1993, would expand to 5 percent by the end of the decade.
Despite their relatively minor market share of the total beer industry, the success of craft breweries had created pressure for change throughout the beer industry, including a proliferation of new, small breweries throughout the United States. In addition, national brewers had
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The Boston Beer Company (A) BAB026
introduced fuller-flavored beers to compete with craft brewers’ products. Consequently, the market for premium quality beer had become highly competitive and the success of a craft brewer was now contingent on its ability to continuously introduce new products and compete on price, while maintaining the neighborhood character that originally made it successful. History of the Boston Beer Company
Boston Beer Company was founded in 1984 by Jim Koch and Rhonda Kallman. Koch started the company using his great-great-grandfather’s recipe for a hearty, full-flavored beer. Koch had a successful career working as a management consultant with the Boston Consulting Group, but wanted to brew and distribute his family’s recipe. He believed that a domestic microbrewery could capitalize on the vulnerabilities of imported beers by making a consistently high quality product whose marketing emphasized local character. When Boston Beer began distributing its Samuel Adams brand beer in 1985, there were few craft brewers. These breweries tended to produce beers of erratic quality and taste, due to the handcrafted process, and virtually none of them distributed their beer outside of local territory.
A critical element of Koch’s plan for Boston Beer was the company’s use of established brewers’ production facilities. Koch hired the Pittsburgh Brewing Company, a thirty-year-old brewer with state-of-the-art equipment, to brew his beer. Establishing Boston Beer as a contract brewer allowed Koch two distinct benefits. First, he was able to start the company with only $240,000 of initial capital, $100,000 from his own savings and $140,000 from friends and family. This amount was far short of the $10 million capital investment required to build or buy a brewing facility. Second, outsourcing production freed Koch to focus on selling his product and, most importantly, on organizing a distribution network not only in New England, but also in the metropolitan areas of Washington, D.C., New York, Illinois, and California.
Boston Beer’s marketing approach stressed the product’s premium ingredients and quality brewing process and attacked the imported beers by appealing to consumers’ sense of patriotism. Koch was successful in educating beer drinkers on the flavor, ingredients, and characteristics of good beer, establishing Samuel Adams beer as an alternative to imports. The beer earned recognition within the beer industry as well. Samuel Adams Boston Lager, the company’s flagship beer, received six gold medals and was voted “Best Beer in America” in 1985, 1986, 1987, and 1989 at the annual Great American Beer Festival in Denver, Colorado. Additionally, in January 1990, Time magazine rated it the best beer of the decade. Boston Beer Company, 1995
In ten years, Boston Beer had grown from a seven thousand-barrel microbrewer to the largest craft brewer in the United States. Exhibit 2 summarizes Boston Beer Company’s volume growth over the last five years in comparison to other leading craft brewers. There was little doubt that the 45-year-old Koch was the driving force behind Boston Beer and almost every aspect of the company reflected his fingerprint. Koch’s initial vision of a market-driven microbrewery with a wide distribution for its beers had essentially pioneered the way in which contemporary craft brewers practiced business. Boston Beer distributed its products in 50 states, the District of Columbia, Puerto Rico, and seven other countries. The company employed a sales
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The Boston Beer Company (A) BAB026
force of over 120 direct salespeople, the same as the domestic sales force of the beer industry giant, Anheuser-Busch, a company that shipped 88 million barrels of beer in 1994 compared to Boston Beer’s 714,000 barrels.
Koch’s commitment to marketing was overshadowed only by his commitment to the production of fine beer. Each year, he traveled to Germany to hand-select the noble hops that gave the company’s beers their unique flavor. In 1987, the company invested $3 million in a research and development facility for new product development. In retrospect, the R&D facility was key to Boston Beer’s growth and success. The eruption of competition in the craft beer industry had increased the pressure to introduce new beers to maintain and grow market share. Boston Beer had utilized the facility to develop new flavors and seasonal beers, and had 14 varieties of beer in the marketplace by 1995.
The company had grown its sales volume by over 200 percent since 1992. In 1994, Boston Beer established a 26 percent market share in the craft beer industry and its sales volume was higher than the next six largest domestic craft breweries combined. As shown in Exhibit 3, it shipped 714,000 barrels of beer for $114.8 million in revenues and generated $4.75 million of net income in 1994. The company continued its explosive growth through the first 9 months of 1995. Sales volume was 688,000 barrels, a 35 percent increase over the volume for the same time period in 1994, and revenues were $108,905,000. Industry observers anticipated that Boston Beer would continue to grow its sales volume at a rate similar to its historical pace through 1997, and then experience lower growth through the end of the century. The company expected its profit margins to decline slightly due to competitive pressures on prices, higher production costs on specialty beers, and increased advertising, promotional, and selling expenses related to new product introductions. Additionally, Boston Beer planned capital expenditures of $4.5 million in the last quarter of 1995 and, in 1996, planned to invest another $13 million for bottling, kegging, packaging, and brewing equipment at its contract brewing facilities. The company expected to fund approximately $10,300,000 of the expenditures through asset-based financing arrangements.
Boston Beer had historically financed its working capital requirements and capital expenditures using cash flow from operations and currently maintained only $1.95 million in long-term debt. It borrowed $2.2 million at 11.5% in 1988 from the Massachusetts Industrial Finance Authority to finance engineering and design improvements to its production facilities. The repayment agreement called for principal payments of $50,000 in 1995, $75,000 in 1996 through 1998, $100,000 in 1999 and 2000, and the balance paid, thereafter. In May 1995, the company also entered into a $14 million line of credit agreement with Fleet Bank of Massachusetts. It could borrow at an interest rate equal to the bank’s prime rate, currently 8.75%, but had to pay a fee of 0.15 percent on the unused portion of the line. The company’s balance sheet before the initial public offering is shown in Exhibit 4. Use of Proceeds
Boston Beer filed an initial public offering prospectus with the SEC on August 24, 1995. The company was seeking to raise between $26 million and $34 million (after deducting the estimated underwriting expenses and related costs) to make capital investments in equipment and
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The Boston Beer Company (A) BAB026
to fund working capital and general corporate purposes.
Boston Beer currently was organized as a limited partnership, which would be dissolved in November 1995 before the initial public stock offering. As shown in Exhibit 4, at the time of the dissolution, the company would distribute $12.5 million to its existing partners by using $1,552,000 in cash and borrowing $10,948,000 against its line of credit at Fleet Bank. The IPO proceeds would be used to immediately repay the debt incurred in dissolving the original partnership. The company was also planning to use $7 million of the proceeds to fund capital expenditures in 1996. The remaining proceeds were to be used to fund working capital expenses or invested in investment grade securities. Boston Beer did not intend to issue dividends. The Initial Public Offering
Only five domestic brewers’ stocks traded on the market in 1995. These included Anheuser-Busch, Adolph Coors, Mendocino Brewing, Redhook Ale Brewery, and Pete’s Brewing Company. The latter two companies took advantage of the red-hot IPO market in 1995 (see Exhibit 5) to raise approximately $100 million. Redhook was a regional specialty brewer that had $16.21 million in sales, $6.24 million in gross profit, $3.44 million in operating income, and $2.13 million in net income in 1994. The company went public on August 17, 1995 at a price of $17 per share; its price jumped to a first day high of $27 per share. Pete’s Brewing, which had $33.62 million in sales, $13.94 million in gross profit, $603 thousand in operating income, and $551 thousand in net income in 1994, went public November 6, 1995 at $18 per share, closing at $25.25. These two transactions are summarized in Exhibit 6.
The process of issuing public stock for the first time begins when a company engages an investment bank to serve as its lead underwriter. The investment bank advises the company through the offering process, assists in preparing documents, and finally, commits to selling the offering’s shares. A company initiates the formal process by filing a registration statement with the SEC for approval to sell stock to the public.2 The registration statement is comprised of two parts. The first part is a prospectus that contains items such as audited financial statements, a disclosure of the number of shares being offered for sale, and management’s discussion of the company’s business, capital structure, risk factors, and intended use of proceeds from the sale of the shares. The second part varies depending on the nature of the security, size of the offering, and the type of company and industry. The SEC generally reviews initial public offering registration statements and may request (through comment letters) that issuers amend documents. This process generally lasts between one and six months; as of mid-October, 1995 Boston Beer had not yet received SEC approval.
Meanwhile, the lead underwriter organizes a syndicate of investors that commit to buy or subscribe to specific blocks of shares. During the organization of the syndicate, the lead underwriter conducts price discovery. The underwriter estimates a range for the offering price based on the syndicate’s feedback and current market conditions. Boston Beer Company’s underwriters estimated an initial price range of $10 to $15 per share in August 1995.
Once the SEC approves the registration statement, declaring it “effective,” the company 2
Boston Beer Company filed a registration statement with the SEC on August 24, 1995.
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The Boston Beer Company (A) BAB026
has 20 days to sells its shares of stock. The company meets with its lead underwriter the day before or morning of the IPO to establish the final offering price, so that the price best reflects market conditions. The underwriter, because it facilitates the sale of the shares, typically has significant power in determining the offering price. Underwriters tend to underprice IPOs, anticipating immediate price increases that generate gains for syndicate members. Then the stock hits the market.
A total of 3,984,215 shares were to be offered in Boston Beer’s IPO, of which the company would issue 2,540,379 shares to raise capital for expansion. In addition, existing partners would sell 1,443836 shares. The breakdown of shares being offered is shown in Exhibit 9.
The Market Value
Although Jim Koch originally estimated that an IPO would net the company between $26 million and $34 million, the company might have a unique opportunity to raise substantially more money given current market conditions. The aggregate U.S. stock market was up 37 percent from 1994, and through September 1995, 225 companies had raised over $13 billion in initial public stock offerings. Market analysts projected that an additional $12 billion would be raised during the fourth quarter in 1995, making it the largest quarter ever for IPOs. Exhibit 5 illustrates the quarterly dollar volume of IPOs from 1993 to 1995. In the craft brewing industry, Boston Beer rivals, Redhook Ale Brewery and Pete’s Brewing Company, had recently conducted successful IPOs. Many institutional and retail investors did not have an opportunity to purchase the stocks during those initial offerings and were anticipating the offering of Boston Beer’s stock. Jim Koch was growing anxious as he and his underwriter anticipated the SEC’s approval of the registration statement. He was wary of the $10 to $15 per share price range that the investment bankers initially disclosed. There was always the potential that the IPO could be under-subscribed and therefore pulled from the market: The company would thus miss an opportunity to raise much-needed capital. However, he could not keep himself from dreaming about the amount of money that Boston Beer Company would raise if it sold its stock for a higher price. The challenge now was for him and the company’s underwriter to determine the appropriate price for the offering.
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The Boston Beer Company (A) BAB026
Exhibit 1
U.S. Craft Brewing Industry Barrels of Beer Shipped
by Segment, 1985-94
27500002,512,47625000002250000Barrels20000001750000150000012500001000000750000491,39450000025000001985198619871988198919901991199219931994126,90875,260220,541316,060634,889854,3371,189,2601,669,982BrewpubsMicrobreweriesRegional Specialty BrewersContract BrewersSource: Institute of Brewing Studies, 1995. 7
The Boston Beer Company (A) BAB026
Exhibit 2
Barrels of Beer Shipped by Craft Brewers 1990-94, and Market Share and Rank, 1994
Company Boston Beer Pete’s Brewing
1990 113,000 11,700
1991 163,000 17,200 45,000 70,200 33,000 11,350 11,000
1992 273,000 35,700 68,039 82,653 49,000 17,861 12,703
1993 450,000 74,800 104,325 92,000 73,000 39,200 13,153
1994 700,000 182,000 155,942 102,462 93,577 72,416 13,600
1994 Market Share 27.9% 7.2% 6.2% 4.1% 3.7% 2.9% 0.5%
1994 Rank 1 2 3 4 5 6 30
Sierra Nevada Brewing 30,500 Anchor Brewing Redhook Ale Brewery Hart Brewing Mendocino Brewing
68,000 23,500 8,200 9,200
Source: Institute of Brewing Studies, 1995.
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The Boston Beer Company (A) BAB026
Exhibit 3
Income Statement and Key Statistics for Boston Beer Company, 1990-94 In thousands, except per share, per barrel, and employees Income Statement Data Gross sales Less excise taxes Net sales Cost of goods sold Gross profit Adv., promotional, selling expenses General & administrative expenses Total operating expenses Operating income Other income (expense) net Net income (1) Pro forma taxes (2) Pro forma net income (3) Pro forma earnings per share (3) (4) Weighted avg. shares outstanding (4) Statistical Data Barrels sold Net sales per barrel Employees Net sales per employee Balance Sheet Data at Period End Working capital Total assets Total debt Total partners’/Stockholders’ equity 12/3190 12/31/91 12/31/92 12/31/93 12/31/94 2,300 18,922 8,109 10,813 8,981 1,817 10,798 15 276 291 130 161 9/30/94 9/30/95 $91,098 9,478 81,620 37,546 44,074 31,734 4,316 36,050 8,024 85 8,109 3,360 4,749 - 12,990 108,905 52,615 56,290 43,408 5,455 48,863 7,427 834 8,261 3,559 4,702 0.26 18,273 2,845 29,457 13,039 16,418 12,105 2,247 14,352 2,066 23 2,089 859 1,230 5,165 48,178 22,028 26,150 21,075 3,306 24,381 1,769 -124 1,645 691 954 8,607 77,151 35,481 41,670 32,669 4,105 36,774 4,896 -2 4,894 2,040 2,854 13,244 114,833 52,851 61,982 46,303 6,793 53,096 8,886 199 9,085 3,765 5,320 0.29 18,268 $21,222 $32,302 $53,343 $85,758 $128,077 121 156 65 291 6,304 11,270 2,200 5,907 174 169 69 427 6,053 11,981 2,150 5,954 294 164 87 554 6,169 15,780 2,100 6,434 475 162 110 701 8,173 24,054 2,050 8,854 714 161 138 832 3,996 31,776 2,000 6,600 510 160 124 658 9,143 35,151 2,000 11,351 688 158 174 626 9,451 33,398 1,950 13,229
(1) Does not reflect any provision for income taxes because the Company, as a partnership, was not subject to income taxes.
(2) The effective derived tax rate for each of the five fiscal years in the periods ended December 31, 1994 and for each of the nine month
periods ended September 30, 1994 and 1995 was 44.7%, 41.1%, 42.0%, 41.7%, 41.4%, 41.4% and 43.1%, respectively.
(3) Reflects pro forma provisions for income taxes using statutory federal and state corporate income tax rates that would have been applied
had the Company been required to file income tax returns during the indicated period.
(4) Reflects weighted average number of common and common equivalent shares of the Class A and Class B Common Stock assumed to be
outstanding during the respective periods.
Source: Company documents, 1995.
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The Boston Beer Company (A) BAB026
Exhibit 4
Balance Sheet for Boston Beer Company Before the Initial Public Offering, 1993-94
Pro forma* 12/31/93 12/3194 9/30/95 9/30/95 In thousands Assets Cash and cash equivalents $8,827 $7,801 $1,552 Accounts receivable 8,112 10,060 15,073 Inventory 3,706 7,755 8,485 Prepaid expenses 216 501 907 Other current assets 512 1,105 1,703 1,703 Total current assets 21,373 27,222 27,720 Restricted investments 579 605 602 Equipment, leasehold improvements 1,864 3,539 3,963 Other assets 238 410 1,113 1,113 Total assets 24,054 31,776 33,398 Liabilities and Partners’ Equity Accounts payable $2,917 $9,270 $6,539 Accrued expenses 10,233 13,906 11,680 Current maturities of long-term debt 50 50 50 50 Total current liabilities 13,200 23,226 18,269 Long-term debt - current LTD mat. 2,000 1,950 1,900 Partners’ equity 8,854 6,600 13,229 Total liabilities and partners’ equity 24,054 31,776 33,398 31,846
* Unaudited pro forma balance sheet after the dissolution of the partnership, but before the IPO
Source: Company documents, 1995.
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- 15,073 8,485 907 26,168 602 3,963 31,846 $6,539 11,680 18,269 12,848 729 The Boston Beer Company (A) BAB026
Exhibit 5
Capital Raised from Initial Public Stock Offerings
1993-95 ($ billions)
$15$12$9$6$3$01Q1993* Estimated.2Q3Q4Q1Q19942Q3Q4Q1Q19952Q3Q*4Q
Reprinted by permission of The Wall Street Journal, © 11/27/95 Dow Jones & Company, Inc. All Rights Reserved Worldwide.
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The Boston Beer Company (A) BAB026
Exhibit 6
Comparable Initial Public Stock Offering Transactions
Company
Redhook Ale Brewing Co. Pete’s Brewing Co.
Exhibit 7
Betas, Capitalization, and Taxes of Publicly-Held Breweries
Company Adolph Coors Bass PLC Molson Cos.
Source: Standard & Poor’s Stock Reports, Third Quarter 1995. Reprinted with permission of Standard & Poor’s, a division of The McGraw-Hill Companies.
IPO Date 8/17/95 11/6/95
IPO Market Share Price $17.00 $18.00
IPO First Day High $27.00 $25.25
Estimated 1995 EPS $0.45 $0.15
Beta 0.35 0.77 0.70 Debt 16% 26% 28% Income Equity Tax Rate 84% 74% 72% 43.0% 33.9% 29.0% Anheuser-Busch 1.05 40% 60% 39.5%
Exhibit 8
Financial Market Statistics, Week-End November 21, 1995
Treasury Security
Yield
3-month T-bills 5.55% 10-year T-bonds 5.72% 30-year T-bonds 6.29%
Source: Business Week, November 27, 1995.
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The Boston Beer Company (A) BAB026
Exhibit 9
Boston Beer Company, Proposed Share Offering
Authorized Shares
Shares Sold in IPO
Outstanding Shares after
IPO
Class A Common Stock offered by the Company in the Consumer Offering
Class A Common Stock offered by the Company in the Underwritten Offering
Class A Common Stock offered by the Selling Stockholders in the Underwritten Offering
Class A Common Stock not offered by the Selling Stockholders in the Underwritten Offering Class A Common Stock to be outstanding after the Offerings Class B Common Stock
Class A and Class B Common Stock to be outstanding after the Offerings
Source: Company documents, 1995.
990,000 990,000
1,550,379 1,550,379
1,443,836
12,534,385 20,300,000 15,074,764 4,200,000 4,107,355 4,107,355 24,500,000 19,182,119
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