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Chapter 4 Boston Beer—Is Greater Growth Possible?
Information Box Strategic Window of Opportunity and SWOT Analysis While your students may come up with a number of reasons why the big brewers overlooked the possibilities of the highest-priced end of the market, the answer is rather obvious. They simply did not think it had enough sales potential to be worth the effort. The highest-price segment of the beer market is not where the volume is. Albeit it may contribute a higher profit margin per bottle, but still this pales in comparison with the mass market for beer. Don’t you think this was probably the reasoning of the big brewers? And this opened the door to specialty brewers like Boston.
Information Box Competing on Price: The Price/Quality Perception The question of how does one determine the quality of a product usually arouses lively class discussion. I ask students how they themselves determine the highest quality products and then we evaluate the validity of these sources of information. Advertising is quickly ruled out as a good source of information, as are the recommendations of salespeople, since these are seen as biased and one-sided. Personal experiences of oneself as well as friends is only a limited sample of experience and may be either dated or not representative. Sources such as Consumer Reports are cited as good for higher priced products, but their detailed investigations provide only a limited sample and may not be representative of all the output of that brand. For beer and other alcoholic products taste is often mentioned. And yet in blindfold tests most people cannot distinguish among brands. Finally, the consensus gradually develops that price is the single most common factor in our judgment of which is the highest quality—the higher the price, the higher the quality. At this point you may want to steer the discussion to whether we can be deceived in this price/quality perception.
Information Box The Merits of Expanding Slowly and Keeping Fixed Costs To a Minimum
and took years of a bull market to regain its initial luster. Always an interesting question for classroom discussion. The possibility of a new trend being short-lived is always a worry. Other consumers. 2. the bulk of beer drinkers. based on their own preferences. 3. My prediction is that the future growth prospects of such beers is rather limited to a particular segment of beer drinkers. What do you think? (A similar question is the subject of the Team Debate Exercise at the end of the chapter. some of them a lot. this. What do you think? . The initial reaction of investors regarding the public offering of Boston Beer had to be highly positive. Ask them if they always buy it. And when the issue came to market it was bid up to a strong 50 percent gain in only a few days. Ask them if they would consume a lot more if it were more modestly priced. and sometimes a rather heated argument ensues. The stock over the next several years dropped to $8 from a high of $33. This group will like strong-flavored beer.Boston Beer -2- Here we are asked to speculate on the $100 million that Boston Beer received from its initial public offering of stock. Your students may find it interesting to speculate on this. in this case the expensive. It certainly invites a number of different ideas. or use it only for special occasions and for entertaining. But the enthusiasm was not sustained. and someplace along the line you may want these ideas to be evaluated. Does this mean that investors became doubtful of Boston Beer's growth potential? Probably. Most of my students admit to liking the taste of Boston Beer brews. Is some or much of this likely to go for "stones and mortar"? My guess would be that much of it did. and defended. They are more likely to ponder a bit whether these are worth the higher price. Questions 1. The innovative coupon offer was quickly sold out. although they may not always purchase it because of the cost. prioritized. But then investors are not always right. And no one can predict with certainty the durability of demand for a new and different product.) Do you think the physical plant is that important to the public image of a brewer? Invitation for Your Own Analysis and Conclusions Do you see any business plan that would have made Koch more successful? This could be a topic for impromptu class discussion. or you might consider a homework assignment. You may want to press further those who express strong liking for this Samuel Adams brand. may sample but not switch. strong-flavored beers.
Several conditions seem needed for such a high-price strategy to be viable. But it is a way to differentiate a brand from competitors. and only try to handle what they think are the most popular. it helps if the quality difference is fairly obvious and can be maintained. Student opinions may differ on whether BB can compete effectively when the big brewers invade its turf with their own microbrews. The company can stress this with its distributors. and second. It is to their best interest to have fewer brands and less different items. they should recognize that it is to their mutual best interest to be sure that the quality standards of BB are maintained. retailers feel abused. First. but they are independent and can hardly be controlled. A devil's advocate may make the most telling points by suggesting a less-high pricing strategy (not low-price. What are your thoughts on this? 8. and such diversity also raises their inventory and stocking costs. it is more desirable when the production capability is limited and economies of scale are not relevant. antagonized most retailers because of greater stocking requirements. On the other hand. no questions asked. particularly as to freshness. And it can have company employees monitor as best they can. It may not be possible to fully eliminate incidents affecting the quality of Boston Beer. as the proliferation continues. It looks like BB has assured itself of a nice niche in this high-price market. BB can hardly let down its advertising if its position is not to be overwhelmed by the big brewers. It increased production and distribution costs. BB can certainly step up communication about the damage done by lack of freshness or prescribed refrigeration to its distributors. They have limited space to stock so many brands. It can offer complete replacement of dated products. The evidence suggests that it can because it has built up a good image for its Samuel Adams brand. I do not see BB becoming a major player in the brewing industry. supporters of the very high-price strategy can counter this by suggesting that reducing the price somewhat might mean facing much greater competition and losing the uniqueness. The proliferation of different kinds of beer by BB--some two dozen--in my judgment was a major mistake.Boston Beer -3- 4. 7. retailers will have to discriminate among their choices. Smaller manufacturers and less-than-well-known brands will have a difficult time persuading retailers to handle. What BB cannot do is assure that such incidents will never occur. since this should expand potential demand. I suspect that future growth prospects are limited to this market. and tap into the mass market. And most people associate high price with high quality. Still. but something less extreme). 6. What do you and your students think about so many brands? What do they think would be a more ideal number? . 5. However. Whenever there is a great proliferation of different products within a category. and was confusing to customers. Eventually. Such a high-price strategy certainly limits the number of customers.
This is like gambling at the crap table. 2. and may even bring down the company. Pittsburgh Brewery has to be fully informed of the standards needed. You will be reporting directly to Jim Koch. Success is all relative. to assign one or more Boston Beer technicians to work with the Pittsburgh people. What seems delimiting in BB’s case is that venturing more into the mass market for beer brings BB right up against the might of the major brewers where its resources would be outgunned. to assure the high quality standards that are essential? This is an assignment of the highest order. your students can debate the advantages to BB of having its own brewery. The whole process should be monitored. from the raw materials used. such as the international. By most standards. and beyond. of one's resources. ." This is the charge to your students. although if done through controlled growth rather than reckless growth they may be achievable. Jim Koch is a highly successful entrepreneur. the advantages of geographic expansion. isn't it. or else to visit very frequently. What ideas do they have for such quality assurance? You may want to ask for suggestions and jot these on the blackboard for later evaluation. and of the importance of these standards being met if the positioning of Samuel Adams as the highest quality in the industry is not to be undermined. Your students may come up with other and more specific ideas. But he can find others who are more successful. and advantages of growth through acquisitions. or judiciously acquiring some other small microbreweries? In particular. Taste testing would seem a vital part of this monitoring. to the distribution from the brewery. Team Debate An interesting decision this is: how to spend $100 million. Should it mostly be spent on brick and mortar—building Boston Beer's own brewery—or on more advertising. What to do? The worst thing is to embark on an ambitious growth program to the limit. Certainly. seeking new markets. with so much at stake. It would seem wise. through the manufacturing. Both are fraught with some peril.Boston Beer Hands-On Exercises -4- 1. To try to grow more in the highend part of the market comes up against the limits of how much more growth there is in this sector. just as in all walks of life we find others who are more successful. especially if any have experience with the brewing process and know where glitches are most likely to occur. Such efforts sacrifice profitability for growth. You may want to invite your students—of whom many are likely to be experienced beer drinkers—to come up with their own ideas for generating growth for this company. The most practical specifics for attaining great growth would seem to lie in acquisitions and/or expanding the market beyond the United States. the contract brewery for Boston Beer. We have to assume that both Pittsburgh Brewery and Jim Koch believe this can be done. "How are you to monitor the Pittsburgh Brewery.
Boston Beer -5- .
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