The Audacity of Hops

by Tom Acitelli

  It was hard to argue with. Redhook had a track record that investors could tap into for confidence. Unlike, say, an Internet start-up whose only promise for investors was the expectation of consumer demand for a product either recently or about to be launched, the brewery that had sold fewer than one thousand barrels in that first year from its five-thousand-square-foot plant had grown steadily. It had also racked up critical praise: its Redhook Extra Special Bitter won a bronze medal at the 1991 GABF and had become a standard to measure American-produced bitters against. The brewery had just opened a second location in Woodinville, Washington, that could produce 175,000 barrels annually, doubling its capacity; it would soon be distributed in forty-eight states, and sales in 1994 had topped $16.2 million. They would have been higher, Redhook executives like Shipman said at the time, if it weren’t for capacity constraints; it simply cost a lot to expand while keeping up with rapacious demand. Enter the IPO and its biggest stakeholder. Suddenly, tens of millions were available to boost capacity and distribution. It seemed like a vindication for Shipman, Bowker, and others who had logged the same worrisomely long hours the last decade and a half as any other second- or third-wave craft brewing company; they had survived, and now came the payoff. Their compatriots were paying attention. Other IPOs by big craft names would soon follow. Craft beer seemed as sure a bet suddenly as the much-touted Pets.com. Rock Bottom, the brewpub chain started in Colorado by Frank Day and other investors, had already gone public in 1993, trading two million shares at $8 a piece; the share price was soon up to $27.50. One analyst in New York called Rock Bottom’s IPO “a screaming winner.”

  But it was Redhook’s nine-figure valuation that really served notice to the craft beer movement—that, and who their investors were, namely Anheuser-Busch. Just as with phantom crafts, investment in publicly traded companies seemed like another way for Big Beer to co-opt, even take over, the movement; they could cash in on the sharp growth fomented by techniques and traditions they had scoffed at or ignored for so long. Some in the movement decried the Redhook-Anheuser-Busch deal as a Trojan horse. Jim Koch of Boston Beer told a reporter he was going to go home and watch the second movie in the original Star Wars trilogy, The Empire Strikes Back, because he forgot who won in the end (no one did, but the empire screwed things up royally for the previously successful rebels). He also called the deal’s announcement “a declaration of war” that marked the end of “the cozy, fraternal days of the microbrewery business.” The fear now was that “Budhook,” as a never-shy Koch called it, with its bottomless capital could open breweries all over the country and thereby swamp the craft beer marketplace through almost limitless capacity and steroidal distribution muscle. Redhook’s plans seemed to justify these fears.

  Shortly after the August 1995 IPO, Redhook laid out plans for a $30 million, one-hundred-thousand-square-foot brewery in central Portsmouth on the New Hampshire coast. Ironically enough, the first new brewery in the Granite State since Prohibition had been the Anheuser-Busch plant in Merrimack, which opened in 1970 and had the capacity to produce six hundred million twelve-ounce bottles annually. The first craft operation in New Hampshire had been the Portsmouth Brewery, a brewpub started in 1991 on its namesake’s Market Street by siblings Janet and Peter Egelston and Mark Metzger, a partner of theirs in the Northampton Brewery in western Massachusetts, one of the oldest brewpubs in New England, founded in 1987.

  Peter Egelston, a one-time Manhattan doorman and Brooklyn high school teacher, ended up in 1994 buying at auction equipment from the Frank Jones Brewery, New Hampshire’s last regional, which went out of business in 1950;* from that equipment grew the Smuttynose Brewing Company in Portsmouth’s southern wilds, New Hampshire’s first standalone craft operation, whose Shoals Pale Ale became an instant local favorite upon its July 1994 debut. Some openly worried—complained might be the better word—that Redhook’s planned late-1996 arrival in Portsmouth might doom smaller houses like Smuttynose.

  It wasn’t so much that Redhook was going to draw a bead on them but that they would get caught in the crossfire of a war with larger craft concerns like Boston Beer. David Geary, founder of New England’s oldest craft brewery, D. L. Geary in Portland, Maine, was a panelist during the three-day Craft Brewers Conference in Boston in May 1996, organized by the Association of Brewers. There he said Redhook’s Portsmouth opening would spark “a slash-and-burn marketing blitz” between it and Boston Beer. Nick Godfrey, a marketing executive with the Mass. Bay Brewing Company, the makers of Harpoon and Boston’s oldest craft brewery, took it a step further. He verbalized what many in the industry were now thinking, watching both the growth in craft breweries and brewpubs as well as the rise in IPOs and the millions that flowed from them: “Maybe the competition will split the market into different tiers, with Sam Adams and Redhook on one end, but there is going to be a shakeout.”

  A shakeout, as in something had to give—and would give. Look at what happened to Miller. Bob Weinberg, the noted industry analyst and consultant who had predicted but a handful of American breweries would exist by the century’s end, explained to the conference that the Big Beer titan had grown by double-digit percentages throughout its 1970s battle for market share with Anheuser-Busch; then it hit a wall in the early 1980s as its production faltered in keeping up with overall industry growth; it hadn’t had a double-digit year since 1981. “The future is in your hands,” Weinberg told an assemblage of the conference’s more than three thousand attendees. “I have no doubts the market will double in 1996, and I would like to say it will double again, but that is up to you.”

  Wall Street analysts sizing up some of the craft beer IPOs were starting to question the basic premise behind them: how long could this supply-side growth in craft beer be sustained in terms of consumer demand? In other words, just how many craft beer drinkers were there out there, willing to plunk down a premium for what was still an unfamiliar product to many beer drinkers, never mind to most Americans? Stocks rely on profit growth—and confidence in profit growth—to themselves grow in value and to then hold that value. Too much product and too little demand seemed a recipe for disaster. Still, the valuations achieved by Redhook, and the capital infusions that came even with smaller public launches, made the IPO an irresistible siren for craft brewing companies.

  Within seven months of Redhook’s IPO, five more would launch, including Hart Brewing Company (symbol: HOPS), founded eleven years before in an old general store in the Washington State logging town of Kalama by Tom Baune and Beth Hartwell. The husband-and-wife team behind the Pyramid line of ales sold the brewery for one million dollars in 1989 to a group of investors that included John and Peter Morse, owners of the Fratelli Brothers ice cream company. The new owners embarked on an expansion that included not only a new sixty-five-barrel Kalama location but also one in Seattle, Washington, with its own brewpub space and a capacity to brew eighty thousand barrels annually. Hart, which would change its name to Pyramid mid-decade, also snapped up the Thomas Kemper Brewery in northern Washington in 1992, one of the first mergers in the craft beer movement (Thomas Kemper by then, though, was best known for its soda-making spinoff, which was also part of the Hart deal). It was Pyramid’s IPO in early December 1995, with 2.6 million shares offered at nineteen dollars a piece, that allowed it to leap into the hyper-competitive San Francisco Bay Area; its Berkeley brewhouse and brewpub had the capacity to produce another eighty thousand barrels yearly and was part of what executives described at the time as the “primary phase” of a national expansion.

  James Bernau knew something about public offerings and expansion. A one-time lobbyist for independent businesses, he had used an IPO in 1989 to raise funds to open his Willamette Valley Vineyards, selling shares sometimes from booths at county fairs. Indeed, the craft beer IPOs were not happening in a libationary vacuum. Wineries had been going public to similarly ecstatic fist pumps from Wall Street. The Robert Mondavi Corporation offered 3.7 million shares at $13.50 each in June 1993; it was, the winer
y said, to pay off $65 million in debt and to fund an expansion. The Mondavi IPO followed two smaller ones by the Chalone Wine Group, another higher-end winery out of the Bay Area, and the Canandaigua Wine Company, which produced lower-priced bulk wines from a New York headquarters. Bernau turned to beer in 1993, raising $3.6 million through a stock offering to open the Willamette Valley Brewing Company in Portland, Oregon, later called the Nor’wester Brewing Company. Bernau’s endgame was to raise enough money to open a chain of brewpubs, a goal he undertook with yet more stock offerings by 1995 to fund locations in Irvine, California, and Seattle. An IPO for Nor’wester (symbol: ALES) came in January 1996, with shares opening at seven dollars each. It wasn’t all just dollars and shares and expansions for Bernau: he used about $500,000 from that latest offering to endow a fermentation science professorship at Oregon State University.

  The final craft beer IPO in this first wave illustrated that a relatively modest valuation meant staggering growth for even far more fledgling operations. Kevin Brannon, a former corporate attorney and homebrewer from Portland, Oregon, and Marjorie McGinnis, the woman he fell in love with on a trip east, had started the Frederick Brewing Company, located in the central Maryland town of the same name, in the spring of 1992 with $800,000 in loans and private investments. Husband and wife worked out of a brick warehouse that ended up needing tens of thousands of dollars in renovations, though their Blue Ridge brand of beers, overseen by brewmaster Steve Nordahl, was well-received. Seeking to expand, Brannon and McGinnis arranged an IPO in March 1995 (symbol: BLUE) that raised $4.8 million through six-dollar shares. Money in hand, the sky was the limit: They bought top-shelf brewing equipment from JV Northwest and packaging equipment from Krones, they broke ground on a new $7 million brewery that could produce ten times the twelve thousand barrels they were then selling, and the payroll swelled to thirty as the founders were able to also pay themselves salaries for the first time. Frederick Brewing’s distribution grew from five states and the District of Columbia to twenty-one plus DC; they would, for a time, become the biggest craft brewery by sales in the Mid-Atlantic.

  As impressive as these numbers and benchmarks were, they and even those of Redhook paled in comparison with the granddaddies of the craft beer IPO wave: Pete’s Brewing and Boston Beer. Both companies, as we’ve seen, experienced explosive, industry-altering growth through the late 1980s and into the early 1990s; together they now produced nearly one hundred thousand barrels annually (though even in this rarefied air there was a further demarcation: Boston Beer produced four times as much as Pete’s). The two brands had become the ubiquitous symbols of domestic craft beer to Americans, the likeliest non-Big Beer, nonimport labels to be staring out from grocery store and gas station shelves as well as staring back from tap handles and menus. If one in four American beers consumed was from Anheuser-Busch, a back-of-the-envelope estimate for the mid-1990s meant that one of every two American craft beers consumed was a Pete’s or a Samuel Adams. Koch’s vociferous aversion to Anheuser-Busch’s investment in Redhook notwithstanding, their respective public offerings in November 1995 were probably the least surprising—and the most anticipated.

  Mark Bronder and Pete Slosberg didn’t want to leave Pete’s Brewing to any heirs; they didn’t want to own plants in different parts of the country; they didn’t want a fancy office full of mementoes of their climb. They wanted to make great beer, sell it widely—and with not a small dose of panache, as another one of their goals was to have fun—and get out when the getting was good. The IPO was a part of that strategy. So was an undeclared price war with Boston Beer.

  Time was that a six-pack of Samuel Adams Boston Lager, Pete’s Wicked Ale, or one of the two companies’ other brands might run toward seven bucks. Shortly after the turn of the decade, consumers noticed the prices dropping: first below the six-dollar mark, then toward the five-dollar mark, and then, in many locations, below even that, until six-packs of the leading craft beer brands in the United States were flirting with the price points of Big Beer’s cheaper offerings. Competitors figured out what was going on: Boston Beer and Pete’s Brewing were chasing sales volume through lower prices. One company would lower its prices, and the other would soon follow. But neither ever dropped so far as to become confused with a six-pack of Busch Light, and the beer inside was the same quality as that inside higher-priced packs of yesteryear. Still, it was clear the two biggest players were each jockeying for a big valuation post-IPO. And they got it.

  “We think that there is substantial volume growth ahead for this company,” rating agency Standard & Poor’s wrote of Pete’s in the second week of November 1995. The agency fretted about the frothy growth in the craft beer industry as a whole and about Pete’s switch the past summer to Stroh’s in St. Paul, Minnesota, for its contract brewing, fearing the Big Beer operation might not keep as watchful an eye on the smaller batches as the Minnesota Brewing Company had. But S&P nonetheless saw the Redhook offering as proof that other established names could be a healthy investment. Besides, in the first nine months of 1995, Pete’s had already surpassed its $30,837,000 revenue figure for all of 1994. It also had its own distribution networks into nearly every state, it was particularly strong sales-wise in California, and it had that national television advertising campaign with Pete Slosberg, a unique thing in the industry.

  As strictly a business proposition, Pete’s Brewing appeared exceedingly smart. Its three million shares were priced at eighteen dollars each, and Stroh’s was given an option to buy 1.1 million; one-third were snapped up by the public (symbol: WIKD). The company emerged from the IPO valued at $254,022,700, and the more than $40 million raised was enough to pay down its debt and get busy building a physical brewery in Northern California that could produce at least 250,000 barrels annually by its launch in 1997. Pete’s CEO, Mark Bozzini, talked of growing the company’s brand line—there were four year-round Pete’s beers and two seasonals—and expanding capacity “at the expense of some of our competitors.” It was time to conquer more markets, “like Chicago, Miami, Houston, and Dallas,” the way they had conquered California, New England, and the Northwest.

  For Jim Koch and Rhonda Kallman at Boston Beer, the summits seemed to have already been scaled by the time of the company’s IPO. Kallman’s sales team was legendary in the industry by that point, with more than 110 reps in nearly every state, one rep to no more than every five hundred retailers, pushing sales growth by double digits for several years in a row. The success seemed to breed success. For 1993, Kallman instituted a “63 in ‘93” campaign: 63 percent sales growth for that year; they ended up with nearly 65. Meanwhile, Koch was not only the company’s but also the entire craft beer sector’s ubiquitous media presence, oft-quoted in print, frequently on the radio or television news, sometimes controversial, invariably self-confident, sunny, and articulate on the merits of his product over Big Beer’s. One of the merits Koch liked to push in particular was Boston Beer’s supposed connection to everyday beer drinkers, who knew what they were getting into with a bottle of Boston Lager or pint of Oktoberfest (the company now had fourteen beer lines, half of them seasonals). Drinkers could also know what they were getting into with the company’s IPO. In a twist, Koch arranged for consumers who were at least twenty-one years old to buy thirty-three shares each at $15 a share ($495 total) through a toll-free number on the beer’s packaging. The move was meant to inspire further brand loyalty, and 990,000 of the four million shares were set aside for callers, who responded in droves.

  The remaining shares in the IPO that raised $60 million for the company right off the bat went to institutional investors, including venture-capital firms, and to the cofounders as well as those involved since the beginning; that included Koch’s father, Charles Koch, who had initially warned his son away from the beer business, then provided key advice; and brewing consultant Joseph Owades, who took the old family lager recipe and turned it into the bestselling craft beer in America. Owades had 162,000 shares; Charles Koch, 500,000;
Kallman, 400,000; and Jim Koch more than three million (together with his father, he owned about 40 percent of the company). Those three-million-plus shares included so-called Class B ones, which would enable Koch to control the company long-term; predictably, he left competitors like Redhook’s Paul Shipman and Gary Bowker in the dust when it came to value post-IPO. Jim Koch—who twelve years ago had been fretting whether to leave his day job, keeping the company books in a shoebox, and schlepping ice-packed bottles of beer door to door in a briefcase—was worth more than August Busch III, as Koch’s Boston Beer shares were worth $189 million, and Busch’s in the Anheuser-Busch that he chaired were worth $108 million. The apples-to-apples comparison could be misleading, though, given the wider Busch family’s holdings, including entire distributorships and a 45 percent share of the American beer market (versus somewhere around 1 percent for Boston Beer). “Comparing the worth of Koch to that of Busch is like a gnat on an elephant’s butt,” said one industry analyst. “Koch has done well, but when comparing the two, the Busch family is on an entirely different plane.”