The Audacity of Hops: The History of America's Craft Beer Revolution (21 page)

Koch returned to Harvard after three years and wrapped up his dual degree. He landed a plum job at the Boston Consulting Group, joining the ranks of what was then one of the more coveted post-MBA tracks in the United States: management consulting. It didn't sound sexy, but it placed its people at the nexus of what passed for business innovation at the time. And business was innovating—in Japan. That country's long, Western-backed return from the ruins of World War II was starting to crest in a wave of faster factories and more efficient workers, and Koch studied the trends and causes with a fascination that treated its progenitors like rock stars. This was the business era when
Japanese automobile manufacturers cut the hours it takes to make a car from eighty to thirty-five—something, to Koch's consternation, that most American executives dismissed as the results of anything but greater efficiency: robotics, docile unions, calisthenics. Japan's economy, with far fewer domestic resources (that nylon-string lesson again), was on its way to growing at a much faster pace than that of the United States by the end of the decade.

Koch's focus was American companies, and his base was one of the world's most prestigious management consultancies. BCG was a rapidly growing concern founded by fellow Harvard Business alum and former Bible salesman Bruce Henderson in the early 1960s; by the early 1980s it had offices as far afield as Dusseldorf, Tokyo, and Los Angeles, with ones planned for New York and San Francisco. The names of the firm's hundreds of consultants read like a crystal ball Who's Who of American business: alumni would include Jeffrey Immelt, CEO of General Electric; Indra Nooyi, CEO of PepsiCo; Austin Ligon, cofounder of CarMax; George David, chairman of United Technologies; and Mitt Romney, of Bain Capital and the Massachusetts governorship. (Koch, after returning to school, had interviewed with Romney, an old Harvard classmate, for a summer position at Bain; he didn't get it.
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) Their missions were simple while at BCG: to make their clients' businesses run more profitably. Strategies included the “advantage matrix,” introduced a few years into Koch's tenure. The advantage matrix was:

a framework that categorizes competitive business environments in four distinct categories or quadrants. It correlates the size of the competitive advantage each offers with the number of possible approaches to achieve that advantage available in that quadrant. The resulting matrix helps companies recognize when their strategies are or are not appropriate for their competitive environments.

This was the environment in which Jim Koch, soon to become the most successful craft brewer in America, worked. The environment paid handsome returns on both macro and micro levels. BCG's revenue from consulting topped $50 million in 1982, right as its growth really took off; Koch himself was pulling in at least $250,000 annually after six years of advising clients as prominent as General Electric and International Paper on manufacturing efficiency and quality control. He developed a fervent belief in what made a
company successful: the product it made or service it provided had to be better or cheaper. Marketing didn't matter; quality mattered, and quality could be measured by whether a company made or provided what it intended to. Koch liked that his work afforded him these insights; he liked learning about how things were made and how they could be made better; he even liked, on occasion, the traveling. It was during these travels that he encountered the craft beer movement. The background noise of his youth grew loud again—he read about Fritz Maytag and Anchor; he sampled what he found, particularly in the Northwest. He began to think it through. He would give the American consumer the freshest glass of beer he or she could get. That was his epiphany: a better product no matter where it was encountered, and the product was beer.

His father thought he was crazy. “We've spent twenty years trying to get the smell of a brewery out of our clothes,” Charles Koch said.

Born a few years into Prohibition, the elder Koch's own beer career had run the industry's very timeline, from work as a brewmaster at independent regional breweries (he had a BS in chemical engineering as well as a degree from the prestigious Siebel Institute in Chicago) to disenchantment with Big Beer's rapacious consolidation and the bland-tasting beers that resulted. Koch, who was the fourth-eldest son in a row in his German-American family to become a brewmaster, left the industry in the late 1950s to cofound a company in Cincinnati that distributed brewing and industrial chemicals.

As trepidatious as he was about his eldest son's decision, he became his first investor and an informal adviser—an unpaid management consultant, if you will. Charles Koch had two pieces of advice upfront. They were meant to defray the costs of a start-up brewery, especially in the postrecessionary climate of 1983, one that would see the closings of more craft breweries, including the Real Ale Company in Michigan, and the near-closings of others like River City in California and Boulder Brewing in Colorado. “Don't worry about the marketing,” Charles Koch said. “People don't drink the marketing, they drink the beer. Make sure the beer is good.” That was the first piece of advice, given as the younger Koch was considering plans to open a physical brewery with whatever parts he could find. His father had a way through that challenge, too. “Look,” he said, “there are plenty of breweries that can make really good beer. You don't need to a build a brewery. There are plenty of breweries with quality control and excess capacity.”

Charles Koch was right. The American brewing industry—Big Beer, the regionals, and the fledgling craft movement—was nearing an all-time production peak in 1983 of more than 195 million barrels; but most of that—nearly all of it—was produced by a handful of brewers. Jim Koch would discover what
Matthew Reich had a couple of years before in New York: the smaller breweries, especially the regional ones built out in past decades to handle many more accounts and customers, simply did not have as much need of their equipment or as much work for their employees as they once did; another brewer, then, could rent the equipment and the labor. Koch intended to do just that. First, he needed to find some investors beyond his father. And he needed to join his patrilineage—it was time to brew.

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Koch actually ran against—and lost to—Mitt Romney for the presidency of their Harvard Business School class. It has been the only election, other than that for Massachusetts governor in 2002, that Romney has won.

M
atthew Reich always intended
to open a physical brewery in New York City. The contract brewing at F. X. Matt in Utica was just supposed to get his Old New York Brewing Company and its flagship New Amsterdam amber lager off the ground. It did. Within two and a half years of the first cases rolling out of that Meatpacking District warehouse, New Amsterdam was available in 350 Manhattan restaurants, with 107 of those carrying it on draft. High-end grocers carried it as well for as much as nine dollars a six-pack (Big Beer brands might go for less than half that). The company in 1983 moved seven thousand barrels for $1.2 million in sales (and a tidy $50,000 in profits). Moreover, New Amsterdam had taken third place in the consumer preference poll at its first-ever GABF appearance in 1984, making it the most popular lager, as the top two finishers were ales from Bert Grant's Yakima Brewing.

It was the sort of chi-chi product Manhattanites, then and now, adore as much for its novelty as for its quality. Reich knew that. “This is yuppie beer, I guess,” he told the
New York Times
in February 1985, rattling off some of the more fashionable neighborhoods where bottles could be had. “Yuppies drink it.” One yuppie in particular, who happened to run a venture-capital firm, had a New Amsterdam one day in 1984 at Harry's Bar on Hanover Square in downtown Manhattan, and called Reich. He told Reich he really liked it, that his firm drank it all the time. What were Reich's plans? What was that about a brewery that he had read about in the papers? The venture-capital firm partnered with Reich and raised $2.2 million toward opening a brewpub at Twenty-Sixth Street and Eleventh Avenue; about $50,000 of that went
into buying equipment from a brewery in southern West Germany. The firm took majority control of Old New York Brewing, with Reich retaining a 25 percent stake and remaining the handsomely young face of an effort to return brewing to New York City for the first time since 1976. The 110,000-square-foot brewpub opened with the capacity to produce thirty thousand barrels annually (it did about one-third of that the first year) and food fare like a sixteen-ounce sirloin for $15.95, blackened filet of redfish for $10.95, homemade quiche for $6.75, and the New Amsterdam Burger, “plain and simple,” for $5.95.

Matthew Reich at his New Amsterdam brewpub on Manhattan's West Side in the mid-1980s.
COURTESY OF CHARLIE PAPAZIAN

The New Amsterdam brewpub also opened with a competitor two miles away. Richard Wrigley, a thirty-seven-year-old British transplant from Manchester who could not find a decent beer in New York (he once likened Michelob to “a soft drink”), cobbled together investors and opened in the fall of 1984 a five-thousand-square-foot brewpub. His Manhattan Brewing Company was located in an old electric-company station at Watts and Thompson Streets in Soho. Wrigley planned to brew up to sixty barrels a day in a system also acquired from a West German brewery. Setting prices at $2.50 a mug, he'd offer two ales and one lager—and maybe even take a stab at a recipe written out by George Washington and archived at the New York Public Library. The opening stole Reich's thunder by almost two years, and the two brewpubs would circle each other in a rocky relationship for years. Most of the rancor, played out in a local media apparently very friendly to the idea of craft beer, stemmed from both companies' use of contract brewing. F. X. Matt continued to brew a lot of New Amsterdam in Utica, and Wrigley contracted with the regional Lion Brewery in Wilkes-Barre, Pennsylvania. This allowed New Amsterdam to claim New York parentage on its bottles (as in New York State). “We were brewing [in the city] first, and Reich copied everything we did,” Robert D'Addona, a Brooklyn businessman and one of Wrigley's partners, told
New York
magazine. The claim of copying seemed especially thin, as Reich had contracted with F. X. Matt before Manhattan Brewing opened. “We didn't deceive anybody,” he told the same magazine. “The label said, ‘Made in New York,' and we always intended to open in the city.” It was a decidedly different atmosphere than the conviviality that prevailed in the San Francisco Bay Area, and the sniping presaged one of the great rifts the following decade in the American craft beer movement.

The move by New Amsterdam also heralded a sea change in the perception of craft beer as a business model. Gone could be the days of do-it-yourself start-ups studying texts by Byron Burch and Fred Eckhardt and the nineteenth-century Brits, cobbling together old dairy barrels and secondhand labelers from dying regional breweries. Partner with private equity or venture capital, and pull the tap on serious cash flow!

The Boulder Brewing Company had undergone something similar some two thousand miles away. After initial success following its July 4, 1980, debut, the brewery born in a goat shed hit some bad batches due to bacterial infections of the beer, and it struggled financially, so much so that Stick Ware had trouble sleeping. How would he and his partners get themselves and their investors out of what looked like a money loser, one as doomed as New Albion, DeBakker, and others of that early era? It was the same damning macroeconomic environment of high interest rates and recession-level unemployment. The path seemed grimly predictable.

Then a chance encounter at a diving-equipment shop changed everything: Ware met a stockbroker with the improbable name of Jerry Smart. The physicist-cum-saxophonist-cum-brewer told Smart what he did; Smart told Ware what he did and suggested that he give him a ring sometime if he needed help. To him, the brewery sounded like a curious idea. Ware did just that in the spring of 1983. By the fall, Smart and his partners had bought control of the company and were preparing to take it public, when it would rake in $1.7 million, enough to unburden Ware and other early investors and to steer it toward a tenfold increase in production. Within a couple of years, the brewery relocated away from Al Nelson's farmland near the Rocky Mountain National Park to a fourteen-thousand-square-foot castle-like structure in northeastern Boulder that cost $1.5 million to build. The brewery was operating with $600,000 of debt and a hungry outlook for growth that included more money for advertising and sponsorships. The Boulder Brewing Company was by mid-decade most definitely still the second word in its name, but it was increasingly the third as well.