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Growth challenge is brewing at Boston Beer

By Jon Chesto
The Patriot Ledger
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BOSTON — If the craft brewing industry held a popularity contest, Boston Beer would easily win. The South Boston-based company took the No. 1 spot among craft brewers years ago and never looked back, with its shipment volumes of Samuel Adams beers rising by more than 15 percent in the last year alone.

But popularity has its price. The company plans to spend as much as $110 million on the biggest capital project in its 24-year history as it buys and restores an old Diageo brewery near Allentown, Pa., this year.

The brewery could produce more than half of the company’s beer and enable it to wean itself off of contracts with outside brewers. Those are important goals given Boston Beer’s growth rate, especially as a key contract with a Miller plant in Eden, N.C., is set to expire this fall.

That’s why Boston Beer’s product recall of one-fourth of its recently shipped beer bottles comes at a particularly inopportune time. Inspectors at Boston Beer’s main Cincinnati plant found tiny bits of glass had fallen into a few glass bottles shipped from an Owens-Illinois Inc. plant. Although the tests show fewer than 1 percent of the bottles made at the Auburn, N.Y., plant are defective, Boston Beer isn’t taking any chances and is removing all of its bottles that were made at the plant from the market.

A Boston Beer spokeswoman says the recall won’t sidetrack the company’s plans to buy the brewery in June or to start making beer there later in the summer.

But Ann Gilpin, an analyst with Morningstar Inc., sees a potential distraction, given the company’s manufacturing challenges. She says the recall’s bad timing is aggravated by the fact that Boston Beer, like other craft brewers, currently faces steep spikes in the costs of hops and other ingredients.

“This company has a blessing and a curse,” Gilpin says. “The blessing is that their products are so popular and their growth is so fast. But their curse is they’re having a hard time keeping up with it. They don’t have the manufacturing sophistication the bigger brewers have.”

Gilpin cites the production problems that occurred last year at Boston Beer’s overtaxed Cincinnati plant, and a need for a brewery to better serve the West Coast market that dates back to the 2003 closure of a Miller plant that Boston Beer used in Washington.

Gilpin also points to the cost overruns that have plagued Boston Beer’s construction plans: The company scrapped its original plans to build a brewery here in Freetown when the projected price tag exceeded $200 million, and its latest estimates for the project in Pennsylvania easily exceed its initial projections of $30 million to $75 million.

If its growth streak continues, the company could exceed 2 million barrels in volume as soon as this year for the first time – putting it beyond an industry threshold for being considered a craft brewer.

Boston Beer still has the heart of a microbrewer, as evidenced by its generous distribution of hops last month to smaller rivals. The company still maintains the same high flavor standards that founder Jim Koch extols in its ads.

But the company will need to come to grips with some of the challenges that are more common among the big brewers if it wants to continue to be the life of the party.

Link to article.