Why Sharing with Competitors Is Smart
Jim Koch, founder and chairman of Boston Beer Co., explains why it shared 10 tons of hops at cost with craft brewers
Posted on Conversation Starter: May 16, 2008 9:57 AM
Earlier this spring, we at Samuel Adams decided to share 10 tons of hops at cost with other craft brewers whose businesses had been imperiled by price hikes and crop shortages. Some business leaders may see this as enabling the competition at the precise moment we could have beaten it. I see it as both the right thing to do and smart business.
The craft beer segment is championed by a fairly close knit group of passionate brewers who operate as much like colleagues as competitors. Brewers are entrepreneurs, but they are also craftsmen and artisans who love comparing brewing tips, ingredients and beers. We also love educating consumers about what makes beer great. In turn, those curious consumers seek the variety we tell them is a hallmark of craft brewing. Variety comes through having many entrepreneurs, competitors, simultaneously innovating with new recipes.
There's a palpable sense that we succeed together or not at all. This is true for many business sectors that have a core of small, entrepreneurial players, but it's especially true when those small businesses have to compete with giants one hundred times their size, the way craft brewers have to compete with multi-national breweries like Anheuser-Busch, SAB Miller-Coors and Diageo.
Indeed, I believe it's precisely this collegial approach to business and commitment to innovation that has encouraged robust growth in craft brewing for the past five years. In 2007 alone, sales of craft beers increased 12 percent while mass domestic beer sales remained flat.
Craft brewers had been expanding and preparing to meet this increasing demand when, late last year, several new realities converged to create the industry's most clear-cut moment of vulnerability in 25 years.
The downturn struck craft brewers swiftly. First, prices for wheat and barley increased significantly as farmers opted to switch crops and grow corn to satisfy the burgeoning market for corn-based ethanol. Then, transportation costs increased dramatically due to oil and gas prices. Finally, the weak dollar combined with several seasons of low yields to send prices soaring for the aromatic hops that craft brewers prefer.
Last fall, Noble Bavarian Hops that had been selling for $6/pound were rumored to be selling for $30/pound. Samuel Adams has been fortunate. We've been around longer than most craft brewers, and we have long term contracts with hops growers, so our supplies were secure.
In mid-January we hosted a meeting of the Massachusetts Brewers' Guild, and the hops crisis was the primary topic. I heard about brew pubs that changed their recipes, small breweries that discontinued brewing some styles and others that were poised to shut their doors. It was then I realized that as the category leader it was time for us to step in and lend a hand. We decided to suspend brewing of one of our beers, the very hoppy Imperial Pilsner, and offer 20,000 pounds of German Tettnang Tettnanger and English East Kent Goldings hops to craft brewers in need.
So, I posted a message on a craft brewers' message board, and we set up a system on our Web site where brewers could apply. We didn't publicize it outside the brewers' forum.
The response was overwhelming. In short order, we received applications for 75,000 pounds of hops from nearly a quarter of the nation's 1,400 craft brewers. We felt a lottery was the fair way to distribute the hops we set aside, and in the end 108 breweries received between 88 and 528 pounds each. Worth Brewing Company, for example, a tiny brewery in Iowa that brews beer ten gallons at a time, will receive 88 pounds of hops, which Peter Ausenhus and his wife Margaret Bishop who own Worth Brewing, say will keep them in business for a year. In all, the hops we distributed will make approximately 36,000 barrels of craft beer, or 10 million pints.
Since we held the lottery, many people have asked me about the idea of helping competitors. Certainly part of the decision came from an instinctual sense of obligation. While the Boston Beer Company is one of the more senior members in this fraternity of craft brewers, I always feel close to the harsh challenges that many of these smaller breweries face as they grow, because it wasn't so long ago that I was in their shoes.
But I believe that that taking one of my beers off the market temporarily so that dozens of other beers could stay on the market was smart business, too. Of course it seemed risky for us to part with our most important ingredient—especially without yet knowing if the 2008 hops crop will be healthy. But I knew it was riskier for Sam Adams if the choices in craft beers diminish or the quality deteriorates. Rather than worrying about stealing share from each other, I was thinking about craft beers losing share overall. With just under 4 percent of the beer market, we all have plenty of room to grow.
What can leaders in other industries take away from our experience? Of course a rising tide lifts all boat, but more than that, leaders can be the gravity that lifts that tide. Leaders need to be alert to situations in which the long-term interests of their companies are best served by putting the needs of their segments or industries first, even when that means enabling competitors to better compete for your customers in the short-term.
Provided by Harvard Business—Where Leaders Get Their Edge