Jim Koch: Beer Biz Would be 15-18% Smaller Without Hard Seltzer, FMBs and Cider; Traditional Beer Unlikely ‘to Grow Again In Our Lifetimes’

Boston Beer Company founder and chairman Jim Koch discussed the future of core beer and his company’s fourth category offerings – including the forthcoming Hard Mtn Dew collaboration with PepsiCo – during Beer Business Daily’s annual Beer Industry Summit earlier this week.

Below is a lightly edited account of Koch’s answers during a conversation with executive editor Jenn Litz-Kirk.

On whether core beer can return to growth: To me, beer needs to be more than traditional beer. To me, I think our opportunity in the beer business is the opportunity to make products that are made in a brewery, that go through beer wholesalers to largely beer retailers and to people who drink beer in one way, shape or form. We’ve really thought about it that way for several decades, and out of that, has come things like obviously Truly Hard Seltzer, before that, Angry Orchard, before that, Twisted Tea. Those have really opened up the beer category and opened up growth. I mean, for people in this room, think about if there was no hard seltzer, no FMB, no hard cider. The beer business would be 15 to 18% smaller.

But because of this different approach, thinking about beer not just as this beautiful beverage from malt and hops, but products that we can make — we collectively as the beer industry can make – at very high quality, and deliver nice margins, but still quite cost effectively for something that is heavy.

That gives us a really different industry dynamic because, if what you’re thinking about is traditional beer, it’s probably not going to grow again in our lifetimes. But if you think about it as something bigger, that can and will and should grow. I call this the fourth category. Other people call it beyond beer, but that name can be a little inadequate because what we’re talking about is not just beyond beer, it’s beyond liquor. It’s beyond wine. It’s this intermediate category that is up for grabs, and we should win. It’s in our sweet spot. It’s things that are heavy, that are mass produced, that have beer tight margins that are sold in the cold box. We should win that category, and that category is really the biggest growth area in alcohol beverages. It’s just not recognized and defined for what it is.

Why beer’s future is in the fourth category: What’s really triggered it is now this emergence of this fourth category, and that’s like a blue ocean. That’s big vistas and long horizons and lots of opportunities that can be created by enterprising people either with big companies, little companies, medium companies like us.

I just see that being a very, very significant environment of alcoholic beverages, maybe a quarter of it, which would be the size of the wine category over the next 15 years. So I think everybody’s jumping into it.

One thing I like about it is it goes after spirits on their turf. I believe one of the underlying success factors for liquor is that it is not sold or consumed as liquor. Beer, people drink it and it’s beer, but we make it, we put it in a bottle and they drink that. Wine, what they make, they put in a bottle, they drink that. Vodka. I mean, who drinks vodka by the shot? Not very many people. Most liquor – 80% of hard liquor – is consumed in the form of a mixed drink. So that gives liquor this flavor plasticity, if you will. You can make liquor taste like all kinds of different things. And that’s driven, I believe, a lot of the growth in the liquor category. Beer and wine have not been able to leverage that flavor plasticity. Well, with this fourth category, we can all do that.

Can Boston Beer duplicate Truly Hard Seltzer’s success with another new product soon? Don’t hold your breath. I mean, I would love to say that we’re so good, we’re gonna be able to do one of those every five years but to be honest, hard seltzer and Truly as a brand – these are once in a lifetime. Not even just once in a generation, not once in 20 years, but hard seltzer got to 10% of the category by dollars in less than five years.

On Truly’s genesis story: Hard seltzer came out of a conference room at Boston Beer Company in January of 2016. And we came up with this idea to use our clear malt base and put flavors in it like LaCroix. There was Spiked and Sparkling Water out, but they weren’t doing that well because they got it wrong. It was 160 calories and 8 grams of carbs. It was wrong. And we looked at it and said That wants to be 100 calories. That wants to be 0 or 1 grams of carbs and wants to be 5% alcohol.”

We thought we had this great idea and it was gonna sell a million cases. And for us, that was significant and it was going to sell to white blouse women after they played tennis instead of a vodka soda or chardonnay on the rocks. So, we got it half right. It came out, it was somewhat more feminine. We realized very, very early that this was way bigger than we thought.

I don’t expect that to happen again. Honestly. Our pattern for innovation has not been brilliant marketing and some genius ideas and becomes huge. We come up with something new, maybe it’s pretty good. And we make a really high quality product and we put it in the market and we adjust, we learn. We’re very good at staying close to the customer. We’ve got lots of sales people. We listen to our wholesalers. We listen to our retailers.

On the resilience of Twisted Tea: Twisted Tea is now the No. 1 FMB, but it failed twice. It failed as Bodean’s and failed as Twisted Tea, but we had some belief in it. We thought it was gonna be yuppies who drink Snapple, and it turned out to be blue collar guys.

On Twisted Tea’s core markets: It’s been somewhat spotty. It has some huge share in the state of Maine – 5% of the beer business. There are whole doors in c-stores of just Twisted Tea.

We’ve failed five times in California. This was our fifth launch. And on the fifth time it succeeded, and now it’s really starting to get traction, so we know lots of opportunity and runroom.

On winning in the field: We build our business through retail execution, working with our wholesalers, primarily. Our business model is somewhat unique, and we’ve got over 500 salespeople, which is twice as many as anybody else.

We do it the way we’ve always done it, which is retail execution, one display at a time, one shelf at a time, one draft line at a time. And that’s really what’s going to drive our innovation in the future, just like it did in the past.

On Hard Mtn Dew, which will flow through Pepsi’s newly created Blue Cloud Distribution network: It’s just very different. We are the supplier and we’re doing the marketing for it. And they’re in the middle. They’re the distributor, which is different than everything else.

That difference comes from two things that aren’t necessarily obvious. No. 1 is Pepsi was very committed to putting alcohol through their distribution network. My reading of it is the board was wanting to see what growth there was. There’s a lot of things that one can roll the dice on, but putting alcohol through the bottlers, which they own, was certainly one thing that anybody looking at this from the outside would say, “Give that a try.” This is not a strategic necessity for them. If it doesn’t work, it’s not a big deal. They don’t have to invest much. So they came to us and they decided that they were going to do this. Whatever we did wasn’t going to stop them. They were going to do this experiment.

The second piece is that they wanted to do it with Hard Mtn Dew and they were going to turn the brand over to somebody to market it, and they wanted it to be us because our CEO Dave Burwick, who many of you know, was at Pepsi for 20 years. His biggest claim to fame there is he basically created Mountain Dew as you know it as a brand back in the ’90s. They had the Dew Dudes, there was “Do the Dew.” They got involved in all these extreme sports.

Dave turned it into what you know today, so they felt very comfortable doing business with us and having us do the marketing, frankly, because he’s the best marketer Mountain Dew’s ever had. So out of those things we looked at it and said, “Well, they’re gonna get into this with or without us.”

They don’t need us and we felt like it could be very disruptive if they do it wrong.

On the complications of crossing into bev-alc in the trade: They have been very scrupulous about the trade practice issues because frankly for all of us, it’s a little scary to have not just Pepsi, but Coke and Monster as suppliers that are now in there. Pepsi has got enough clout with retailers – Coke has much, much more. And that is a little bit scary in companies that spend hundreds of millions of dollars on slotting allowances and buying displays, that some of that influence could spill over into illegal trade practices in beer.

On Mountain Dew drinkers: The core demographic for Mountain Dew now is 30 years old, 30 to 35. About 80% of the consumers and Mountain Dew are legal drinking age. We’ve got to remember it came of age in the ’90s, so a lot of the people who adopted it then and in the first part of the century are still drinking it because it is a very strong brand, a unique brand. There’s nothing else like it in soft drinks.