Koch Raises The Bar For Beer

• Norm Alster
• On 5:46 pm EDT, Tuesday October 20, 2009

As a management consultant in the 1980s, Jim Koch kept things simple.

He told executives weighing new product ideas that they had to make things either cheaper or better than what was on the market.

When he realized he could build a business around his own advice, Jim Koch made his mark.

Convinced that he could make a better beer, Koch in 1984 introduced Sam Adams Boston Lager -- and reshaped the industry.

Koch's family had been in brewing -- first in Germany, then in America -- since the 19th century. Koch believed that a brewing recipe once used by his great-great-grandfather was better than the beer dominating the business.

"The epiphany was: Wow, I can make beer here in the U.S. that is better than the imports that currently constitute the high end of the market," Koch, 60, told IBD.

He has since built Boston Beer (NYSE:SAM - News) into the largest independent U.S.-based brewer, producing just under 2 million barrels of beer each year.

Boston Beer did just under $400 million in sales last year and boasts a market cap of over $500 million.

The company's stock has soared about 480% since the fall of 1998.

Time To Brew

Koch's success helped spawn a dynamic industry of craft brewers who use premium ingredients and time-consuming processes to produce high-end beer. The country now has 1,400 such breweries, most serving regional markets. Emerging from that pack as a national brand is Koch's Boston Beer Co.

"He was a pioneer," said Paul Gatza, director of the Brewer's Association, a trade group representing over 1,000 U.S. breweries.

Said Daniel Bradford, publisher of All About Beer magazine: "He raised the standard for a lot of the industry. He opened up the consumer's eyes to a wider range of beers."

As a youngster in the 1950s, Koch saw his dad, who worked as a brew master for smaller breweries in Ohio, squeezed out of the business.

"He realized there was no future for a brew master in small breweries," Koch recalled. "He could see the big breweries would take over."

So Koch's career plans had nothing to do with the family business. After earning an undergraduate degree from Harvard, he did a three-year stint teaching rock climbing, mountaineering and white-water rafting with Outward Bound.

"You learn about leadership in a high-stress environment," Koch said of the experience.

That included the importance of staying calm. And of working hard.

"If you're the leader, nobody is going to set a higher standard or work harder than you," he said.

Soon Koch enrolled in a Harvard program that let him earn law and business degrees simultaneously. Then he worked at Boston Consulting Group for six years.

As he counseled executives, a question dogged him: "Do I want to do this for the rest of my life?"

The answer was a ringing no. "I wanted to do something I could be excited about every day," he said.

One possibility was to leave BCG and sign on with a corporate client. Koch wasn't into that. "I had seen big companies for six or seven years and did not feel comfortable in a big corporate environment," he said.

Koch pondered the very advice he'd given clients: Could he make something better or cheaper? To the heir of a six-generation brewing family, the answer was obvious. "Wow, I can make the best beer in America," he recalls thinking.

It was 1984, and mass-produced beer dominated the market.

Koch was energized by "the idea of bringing back handcrafted beer with the best ingredients."

He was sure that his great-great-grandfather's recipe for Louis Koch Lager would appeal to modern beer drinkers. Within weeks of its introduction, Sam Adams Boston Lager began to win quality awards.

The premise of Koch and other craft brewers is that mass-produced beer was sacrificing taste and quality on the altar of efficiency.

"The brewers used mass-production processes to take costs out of the beer" while diluting the flavor, Koch said. The way he saw it, his beer would bring back a fuller taste.

The big breweries had squeezed his father out of the business. Now that same dominance opened the way for Jim Koch and other small-scale producers.

He points to hops, the critical ingredient that gives beer its bitter edge. Over the years, brewers developed new strains of hops that lowered their costs through higher yields. Those high-yield varieties don't have the same "aromatics and oils" of the best hops, Koch said.

He sources his beer from older varieties of hops -- female flower clusters of the hop plant -- grown in the Hallertau region of southern Germany. Such hops can cost 10 times as much as those used in mass-produced beer, says Gatza of the Brewers Association.

Koch wanted to avoid another brewer shortcut that degraded flavor. As a source of sugar, beer typically uses barley malt, which is then fermented. Many big beer producers have mixed the barley malt with cheaper sugar sources like corn and rice. The rice and corn, as Gatza explains, lighten the body of the beer. Koch has insisted on malt alone.

It is one thing to make a premium beer. It's another to face two points:

1. It's more expensive.

2. Will people buy it?

Koch made sure the answer to that question would be yes.

Of the more than 1,400 craft brewers in America, most make small batches of product for local or regional markets.

Koch stood out, building Boston Beer into a national brand.

"I think it's a pretty common belief that Jim Koch is one of the best marketing minds out there," Gatza said.

Koch needed marketing savvy and a strong back to peddle his beer.

Distributors in the Boston area declined at first to carry the product. Many bars saw no need for a higher-priced offering.

Koch wouldn't let his venture fizzle. He took to the streets, visiting bar after bar, talking up the new beer. He often visited 15 bars a day.

Joe Salois, president of Atlas Distributing, which delivers liquor in central Massachusetts, remembers Koch on his first sales call. He was carrying a Styrofoam cooler filled with Sam Adams beer.

The beer was "different." Salois recalled. "It was unlike what we as consumers were accustomed to. It was full-bodied beer."

Salois was impressed enough to order almost 1,200 cases. Boston Beer had its first distributor.

The regimen of 15 sales calls a day is one that Koch tries to maintain.

Take 'Em On

Historically, Boston Beer has competed most directly with imports, says David Grinnell, vice president of brewing at the company. Imported beer typically is shipped by boat, a trip taking several weeks.

Salois says Koch stands out among those who followed him into the craft brewing business.

"For Jim, it's all about the beer," Salois said. "For others, it wasn't about the beer. It was probably about making money fast."

Large brewers have expressed an interest in buying Boston Beer, Koch says. But he controls the voting shares in the company and says he's not selling.

He did, after all, leave a lucrative consulting career to do something he could be excited about every day. To this day, he says, he samples every batch of new beer.

And after 25 years, he says he still loves what he's doing.

"I'm continuing a 150-year tradition," he said. "I'm the only sixth-generation brewer in the United States. That's pretty cool."

Buzz up!