Boston Beer (NYSE:SAM) helped to create and popularize the craft beer movement in the U.S. through its Samuel Adams brand, and today it is the nation's largest craft brewer. Part of its success is no doubt due to the fact that when it started out, it had few, if any, competitors. However, the craft beer industry has gotten crowded as it gets bigger. There were fewer than 100 breweries total in the U.S. when Sam Adams was first expanding in the 1980s. No more. As craft beer's share of the overall domestic beer market has grown from virtually nothing to 10.2% of all sales in 2012, the number of brewers has exploded to more than 2,500 in 2012, all but 55 of them craft brewers. So how can Boston Beer stand out from the crowd? Simply put, Boston Beer has the best national distribution system of any craft brewer in the country.
Part of Boston Beer's advantage is simply the scale that comes with being a first-mover in the craft beer space and the single largest craft brewer. Of the nearly 2,500 craft brewers in the nation, only about 1,300 have local distribution and fewer than 100 have large-scale distribution. Only two craft brew brands, Sam Adams and Sierra Nevada, are available nationwide. Boston Beer's salesforce of more than 300 representatives is, on its own, larger than the entire workforce of most craft brewers. With this scale comes advantages in getting a product to market quickly and effectively.
For example, Boston Beer noticed the alarming growth in sales of hard cider, a market that is less than 1% of the American beer market but can reach up to 20% of the market in England and Ireland. The heavyweight in the admittedly small category is Woodchuck, a Vermont brand founded in 1990 that has been building up its distribution for two decades, reaching more than 2 million cases sold for the first time in 2011. Coincidentally, 2011 was the first year that Boston Beer began releasing its own cider brand, called Angry Orchard, in its home turf of New England as a test market. That year, Boston Beer sold 40,000 cases of Angry Orchard. People liked it.
Seeing a positive response, Boston Beer capitalized on its best-in-class distribution system to sell Angry Orchard nationwide in 2012. The result? Boston Beer sold 2.2 million cases of cider last year, just a hair under Woodchuck's 2.5 million. That 5,400% increase in sales allowed Boston Beer to leapfrog established cider brands like Strongbow and Magners to become the nation's second-largest cider brand in just a year. No other craft brewer could achieve this kind of national rollout of a popular product in such a short time frame.
But there's another element that sets Boston Beer's distribution system apart. Unlike big brewers like Anheuser-Busch InBev and Molson Coors, which focus on getting their beers to their destinations for the lowest possible cost, Boston Beer is focused on getting its beers to its drinkers at its freshest. Big-name, high-volume brands like Bud Lite and Coors turn over their inventory in stores very quickly. Since the product is not sitting on the shelves for long, the big brewers don't worry so much about freshness. Craft brewers, on the other hand, can struggle with drinkers getting beer that is no longer at its best, since turnover is low enough that the beer might have sat on shelves in warehouses, stockrooms, and stores for the better part of a year.
That's why Boston Beer has implemented the Freshest Beer Program, an initiative designed to ensure that Boston Beer products are the freshest on the shelf. This has been a challenge, as distributors and retailers want to make sure they never run out of product. Often, a brewer will sell a distributor a month's worth or more of beer, while keeping extra as a back stock at the brewery. Distributors will work through their own stock and order more from the back stock as necessary. Boston Beer is trying to break that model through demand forecasting and just-in-time replenishment of existing stocks, with the end result that Boston Beer products spend just one week in a refrigerated warehouse.
Initially, this program has been both expensive and difficult for Boston Beer to implement. Boston Beer usually has to pick up the tab if they incorrectly forecast demand, and distributors would rather be safe than sorry in terms of ordering product. By the end of 2012, Boston Beer had hoped to have 75% of its beer volumes within the Freshest Beer Program, and only managed 59%. The company also incurred short-term losses as distributors within the program began ordering only one week's worth of beer, rather than a month's.
However, by now Boston Beer seems to be turning a corner with the program. In the second quarter of 2013 management reported that 65% of distributors were participating in the program, and they projected that number would reach 75% by the end of the year. And while initial costs are high, the company not only will benefit from the higher, more consistent quality of its products on tap and at store shelves, but will also reap savings thanks to the reduced need to buy back and destroy stale beer, which was costing Boston Beer $2.5 million per year in 2010, the year before the program was implemented.
While Boston Beer's persnickety approach to how wholesalers stock its beers can be taxing, ultimately, when the system works it does save wholesalers money by reducing the amount of shelf space they need to devote to Boston Beer products. It's an approach that requires close cooperation between the supplier and the distributor, but it benefits both parties. It's no surprise, then, that in 2013 wholesalers ranked Boston Beer the No. 1 supplier in the industry, in a poll conducted by Tamarron Consulting.
Boston Beer's unique distribution system will allow it to unlock value from new products and potential acquisitions as it seeks to broaden its portfolio of brands and styles. It also serves as a testament to the company's reputation as a quality-focused craft brewer, a branding asset that will help Boston Beer to fend off competition from multinational brewers seeking to enter the space. Right now, being the biggest little guy around seems to suit Boston Beer just fine.
Fool contributor Daniel Ferry has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.