Crafty brew beats big boys in U.S. premium beer game

America's oldest brewery is tasting heady success, becoming the best-selling tipple of its kind in the country thanks to its distinctive flavour

PUBLISHED : Tuesday, 18 December, 2012, 12:00am
UPDATED : Tuesday, 18 December, 2012, 2:33am

As a teenager stacking barrels after school at his family's brewery in Pottsville, Pennsylvania, Richard "Dick" Yuengling, was encouraged by plant workers to avoid a career in the family business. America's taste for national brands such as Budweiser, Coors and Miller, they said, was going to put them all out of a job.

Undeterred, Yuengling bought D.G. Yuengling & Son from his father in 1985, and built it into the maker of the country's best-selling craft beer brand. As the company's value soared in the past decade amid a surge in demand for craft brews, Yuengling became a billionaire.

"We stay nuts and bolts - we make beer," Yuengling, 69, said in on the floor of his brewery in Pottsville, an old coal town 120 kilometres northeast of Philadelphia. "People pick up our products today because they are tasteful and they have character."

D.G. Yuengling & Son sold more than 2.5 million barrels of beer last year, a 15 per cent increase from 2010, according to the company. Its flagship offering, Yuengling Traditional Lager, a medium-body brew, was the best-selling super-premium beer and the fifteenth most-popular beer total in the US in 2011, according to industry researcher Beverage Information Group.

The lager and five other beer varietals helped Yuengling pass Boston Beer, the maker of the Sam Adams brands, as the largest US-owned beer maker by volume sold in 2011.

"Dick is an American original," said Jim Koch, chief executive of Boston Beer. "For years, people thought they were smarter than Dick and told him to do things differently. He never did, and for 27 years he has proved them wrong."

Yuengling said the company had little debt and kept its marketing and distribution costs lower than most of its peers by having a smaller geographic footprint - its beers are only available in 14 US states - and selling more draft beer, which has bigger profit margins and constitutes 30 per cent of its business, three times the industry average, according to Yuengling.

Based on the company's stated 2012 production of 2.9 million barrels and the enterprise value-to-earnings before interest, taxes, depreciation and amortisation multiple of Boston Beer, closely held Yuengling is valued at US$1.8 billion, according to data compiled by Bloomberg. Enterprise value is defined as market capitalisation plus total debt minus cash.

Yuengling declined to comment on the company's value or profitability. He has never appeared on an international wealth ranking.

Together, Belgium-based Anheuser-Busch InBev, which sells more than 200 brands, and MillerCoors, a 70-brand joint venture of London-based SABMiller and Denver-based Miller Coors Brewing, control almost 80 per cent of the US beer market, according to data. Imported beer accounts for about another 14 per cent of the business. Yuengling and other craft breweries make up the rest.

Yuengling's roots in the US date to 1829, when his German immigrant great-great-grandfather, David Yuengling, built a brewery in Pottsville to serve the region's expanding German beer-drinking population. His first year of production yielded 600 barrels.

In 1831, the facility burned down and a new one was built closer to a spring that now lies in the centre of town. That brewery still stands, producing as much as 600,000 barrels annually and giving Yuengling the enviable marketing claim as America's oldest brewery.

The company expanded with the rise in beer-drinking immigrants in the northeastern US. Wagons full of beer from local breweries, including Yuengling, would park outside Pennsylvania coal mines to serve the workers before, during and after work.

Prohibition, a period from 1920 to 1933 when the US outlawed the production and sale of alcoholic beverages, pushed the business to the edge of closure, according to Yuengling: A History of America's Oldest Brewery, by Mark Noon.

The company weathered the period by opening a creamery, producing legal near-beer with 0.5 per cent alcohol, an alcohol-free children's version and a 2 per cent alcohol elixir available only at pharmacies.

Dick Yuengling grew up in Pottsville watching Brooklyn Dodgers and New York Yankees baseball games on the first cable television system, installed in the area in 1948. By the time he was 10, he said knew he wanted to take over the family business.

He began working part time at the brewery with his father and grandfather five years later. At the time, Yuengling and other regional breweries were coming under increasing pressure from national brands, which were expanding amid a barrage of television ads and shifting consumer tastes for lighter-tasting brews.

During the second world war, brands such as Budweiser and Coors began using less grain in their beers as the US government rationed commodities for the war effort. Following the conflict, they did not restore their recipes because their customers liked the lighter beers. Yuengling, which did not alter its recipe much during or after the war, was getting bypassed in the market.

"We were out of business and too dumb to know it," Yuengling said. "All the breweries in the '60s and early '70s were going under.''

Yuengling pushed his father to cut costs by automating their bottling operations, one of many initiatives that the two butted heads over. Tired of the fighting, Yuengling left the business in 1973 to start a beer and wine distributorship. He returned to the family business 11 years later as his father developed Alzheimer's disease.

In 1985, he sold the distribution firm and bought the company from his father for an undisclosed sum. Annual production was 137,000 barrels that year. At Maroons, a Pottsville bar named after the local National Football League franchise locals contend won the national title in 1925, Yuengling paraphernalia lines the walls along with sports memorabilia. Five Yuengling offerings are on tap.

As with other watering holes in the city of 14,000, a Yuengling draft costs US$2.50, based on a company policy to keep prices low for its beer in Pottsville. The practice, Yuengling said, was to thank local customers who have remained loyal to the brand and its unchanging flavour as Budweiser, Miller and other brands grew through ubiquitous marketing campaigns.

Yuengling says he has no plans to sell the company in a public offering or to a potential buyer. He hears out investment banker pitches and then sets them aside.

The dominant beer makers have stopped asking if he's interested in selling. Two of Yuengling's four daughters, Jennifer and Wendy, hold management positions at the company. He hopes a third, who clashed with him much like he butted heads with his father, will want to return to the business too.

"We put 'American-owned, family operated' right on the case. And you know what? It means something to some consumers," he said, a smile emerging as he pulled a drag from his cigarette.

"It doesn't mean something to everybody. But they are anti-corporate America, the younger people today, and maybe rightfully so."