The Audacity of Hops: The History of America's Craft Beer Revolution (40 page)

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.”

Regardless, the first wave of craft beer IPOs that ended in the spring of 1996 with Frederick Brewing raising $4.8 million off $6 shares for a company not even four years old appeared to give an entirely different impression. It was an era, after all, of quick growth and quick profits, of a bull stock market that
everyone could sense was historic, that was seeing more attention than ever thanks to a new medium not only covering it but involved in it as well—the Internet. As incongruous—incomprehensible!—as it might have seemed only a few short years before, craft beer now fit the financial times: fresh, bold, growing by leaps and bounds. And the performance of these stocks and others in the months that followed their initial offerings only confirmed a sense of their staying power: craft beer stocks were trading thirty-seven times higher than projected 1996 earnings, while the average American stock was trading just fourteen times higher. Besides, had Anheuser-Busch not started small, too? Who was to say that Boston Beer's market share would stay around 1 percent? Or that Pete's wouldn't open not only the Northern California brewery but one, two, five more and amp its production exponentially? Or that more Big Beer brands, with a much longer and beefier track record than smaller competitors, would jump in with capital and further investor confidence? To question the wisdom of the market in the mid-1990s, moreover, was to miss out. Wall Street, whose underwriters, lawyers, and analysts were making not-insignificant fees shepherding these IPOs, was bullish on craft beer; that's all a lot of people needed to know. Redhook's IPO, as one analyst put it, “lit the fuse for an exploding new industry. Craft beer has become the ‘in' thing.”

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Frank Jones was resurrected as a brand briefly in the 1980s and early 1990s.

S
ometime in 1984,
after Ron Lindenbusch relocated from St. Louis, where he grew up, to Santa Rosa in Northern California, where he had a job, an old friend put a glass of Anchor Steam in his hand. Lindenbusch's beer curriculum had commenced years before with Busch (it was St. Louis, after all, and there was his surname's third syllable) and then had advanced to Heineken Dark, the most exotic beer he could get for a little bar he owned after college. Now he tried the Anchor Steam. “That's the most bitter beer I've ever tasted,” Lindenbusch thought. He gave it the old postcollege try, though, and halfway through the beer from Fritz Maytag's Mariposa Street operation it began to grow on him. By the end of that first Anchor Steam, Lindenbusch knew it would not be his last. On the way back northward to his friend's place in Humboldt
County they stopped off at the Mendocino Brewing Company's Hopland Brewery, where he tried his first Red Tail Ale; although he liked it well enough, the Black Hawk Stout was the one that really caught his fancy. That, and the surroundings. The brewpub, the second oldest in the nation, struck him as “the coolest place on the planet to drink a beer.” The selection of beer brewed on-site was ahead of its time; there was live music, even a sandbox for the kids; and patrons could pluck a cone from the hop trellises growing over the beer garden and toss it in their beers.

Lindenbusch returned to Hopland time and again over the next few years, blasting through the temperate evenings on his Yamaha 750 shaft drive to take in the beer and more than that the atmosphere, especially the music. He was managing Sizzler restaurants one at a time in Santa Rosa and Petaluma, getting gradually fed up with their corporate approaches and running headlong into a quarter-life crisis. One morning when he had about reached his breaking point, his wife handed him the paper; the Hopland brewpub was hiring a general manager. Lindenbusch got the job. The twenty-eight-year-old took his tie off, put on jeans and an “Eye of the Hawk” T-shirt, and never looked back. After the Hopland, he would eventually land a top position at Tony Magee's equally sartorially laid-back Lagunitas Brewing.

Lindenbusch's story would be familiar to so many others who joined the movement professionally in the late 1980s and early 1990s, a movement that was irreversibly changing—though no one quite knew by how much. The Hopland's status was proof of the change. When it opened off Highway 101 in the summer of 1983, it was a revelation, part of only a handful of craft-brewing operations. Not only that, but Hopland could trace its ancestry through brew-master Don Barkley back to Jack McAuliffe's New Albion Brewing, the first start-up craft brewery in the United States. Fast-forward to just 1989, when Lindenbusch started work there, and several more breweries and brewpubs had joined the party in every region of the country; and, as we've seen, hundreds more would follow in the next five years alone. The Hopland and its ilk no longer seemed so unique.

A newcomer like Lindenbusch, then, caught the craft beer movement at the very end of its innocence. Larger-scale players like Anheuser-Busch had been circling it for years, awaiting their chances, and throughout the mid-1990s they struck.

In the summer of 1997, a reporter from
Forbes
magazine climbed aboard a 165-foot yacht called
Indian Achiever,
moored off the West Side of Manhattan. The yacht's owner, Vijay Mallya, only just on the other side of forty, sat “lord-like” in an ornate chair, beyond him the sun shining upon the imperious
Manhattan skyline dominated by the World Trade Center towers. He talked excitedly about his global conglomerate's latest venture: American craft beer. “The prices at which Bernau was buying glass bottles were ridiculous,” he said. “If I control fifteen or twenty microbreweries, I can negotiate better prices.”

The “Bernau” was James Bernau, who had undertaken multiple public stock offerings to get his various vineyards and breweries off the ground, including Nor'wester in Portland, Oregon. The plan had been to open a chain of brewpubs and breweries, and, for a while, Bernau succeeded. Locations opened as diffusely as Woodinville, Washington, and Saratoga Springs, New York, as well as in Denver and Irvine, California. Then things went from bad to worse: shares in Nor'wester (still trading under ALES) peaked at $9.50 after opening at $7 in January 1996, and then they dropped precipitously to $2. Mallya called him out of the blue that summer; the two men didn't know each other; Mallya was driving around Napa Valley, checking out vineyards, but he told Bernau he wanted to invest in his craft beer chain. Fine by Bernau. He and Mallya arranged a deal that gave the billionaire a 40 percent stake for $5.5 million, while Bernau retained 10 percent and the remaining Nor'wester shareholders 50 percent. The brewery in Saratoga Springs was put up as collateral for Mallya's infusion.

Mallya's interest wasn't entirely incongruous. He headed a multibillion-dollar firm, UB Group, that had been in his family since the birth of modern India in 1947. It dabbled in fertilizer, computer software, and liquor, but perhaps its best-known brand was Kingfisher lager, which had become synonymous in the West with Indian beer. Through it and thirteen other brands, UB dominated more than 40 percent of the Indian beer market and had made significant inroads overseas. In the United States, 115 distributors sold more than fifteen thousand barrels of Kingfisher a year, mostly to restaurants. It was also particularly ubiquitous in South Africa and the United Kingdom, where UB also controlled the venerable Wiltshire Brewing Company, including its dozens of pubs. Mallya, who took over the family business at age twenty-eight, had renamed Wiltshire United Breweries.