The Stroh Brewery Story - Stale Beer & Leadership


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The origins of every company stem from an idea and the energy of its founder.

The founder’s behaviors influence the organization’s culture. Most successful, long lasting companies have been able to consistently maintain the founder’s credo as they grow. However, these companies are the exception.

Chances are a founder’s vision becomes diluted over time. Whether it’s fueled by the introduction of outside managers who are divorced from ownership, or brought about by owners with the wrong motives, maintaining the founder’s credo, reputation and operating philosophy is hard as a company grows.

Stroh Brewery is a shining example of this common corporate phenomenon. The reputation established by the founder had been spoiled by corporate successors who fell prey to quick money.

Stroh_Brewery_Company

Stroh’s Start - Lion Brewery

The Stroh Brewery Company traces its lineage to Kirn, Germany. The Stroh family began brewing beer in a family-owned inn in 1775.

The whole Stroh family took a part in the brewing operations. Bernard Stroh, born in 1822, learned the family business but wasn’t satisfied as a small town German brewer. Like other fanatics he sought to stand on the shoulders of the giants. He traveled to the best breweries in Germany and Brazil taking note how they ran operations.

Upon arrival back to Germany, Bernard spent four years in the army. To escape the revolutions in Germany, in 1848, 26 year old Bernard Stroh left the family business to emigrate to America. He originally settled in Harrisburg, PA, but on route to Chicago, he stopped in Detroit, Michigan and decided to stay.

There, in 1850, armed with $150 ($4,500 inflation adjusted), a family recipe for beer, and knowledge from the great brewers in Germany and Brazil, Bernard set up his own brewery and named the operation the Lion Brewery.

Bernard’s Bohemian-style, light pilsner was of high quality and with limited competition. Heavy ales were commonly consumed in the United States during that time. Persuasively and persistently Bernard sold individuals on his light ale, and sales grew. By the time of Bernard’s death in 1882, the Lion Brewing Company was valued at roughly $250,000 ($7.5 million inflation adjusted).

Regional Brewer - B. Stroh Brewery

Bernard’s sons Bernard Stroh Jr. & Julius Stroh took over operations after their father’s passing. Alleging the company in poor shape and the possibility of lawsuits, they would buy shares owned by other family members at bargain prices. The two brothers would reorganize the Lion Brewing Company under a new business named B. Stroh Brewing Company.

Bernard & Julius expanded regionally throughout the Great Lakes, and even as far as Florida, by applying pasteurization to their beer and utilizing refrigerated rail cars for transport.

The Stroh brothers built upon their father’s basic principles: respect your customers and respect your employees. They focused on providing a top quality beer at a low price to the working-class of the Midwest. And they innovated by being the only brewery in the U.S. to borrow the fire-brewing process popular in Europe before World War I.

During this time Stroh began to increase marketing efforts. Example from the Detroit Free Press - July 16, 1895:

Prime Materials.

Pure water.

Professional skill and

Proper age

Place Stroh’s Bohemian Beer

Pre-eminently the

Perfect Beer.

When you are tired of acrid, immature beer that burns and distresses, you will find in the refreshing, well-ripened brews of the Stroh Brewing Co. all that a beer should be. There is no quality higher than Stroh’s Bohemian Beer. Bottled or on draught. Connoisseurs will have no other.

Julius Stroh became the sole operator of the now called Stroh Brewery Company (Stroh’s) in the early 20th century. Unlike other brewers, he smartly adapted the business during the prohibition. Gone was the Bohemian beer, and in was the Mattay-Cola, Temperance Beer, Ginger Ale, and Alaska Ice Cream. The business continued to thrive with the change. Then in 1933 when the Prohibition was repealed, Stroh’s was the first brewer in Michigan to sell beer.

Gari Stroh, Julius’s son, would assume presidency in 1939 until his death in 1950. Stroh’s continued to dominate the local Detroit brewing market. By 1950, Stroh’s half a million barrel a year production made it the 42nd largest brewery in the United States.

John Stroh Growth

John W. Stroh would succeed his brother in 1950. He would make Stroh Brewing Co. the dominant brewer in Michigan, and maintained the corporate ethos his grandfather created while growing at a slightly quicker pace. Stroh began to market heavily on radio, print and television. They also began heavily sponsoring hockey and baseball, an innovation for the time.

John Stroh grew the company into the United State’s 12th largest brewer “by treating every employee like an honorary member of the clan.” Grandnephew Greg Stroh recalled, “Employees would run through walls for the family.” This is the type of “all in” mentality necessary to build a competitive moat outlined by Peter Kaufman.

The proof is in the pudding: Stroh’s was awarded first place in industrial safety numerous times. For example, the Michigan Mutual Liability company reported that Stroh’s had half the accident rate of the industry in the 1960s. Moreover, the United States Brewers-Association awarded Stroh’s first-place in an industry wide safety contest. Maintaining top industry safety, while growing 5x in production, is only achievable with a team that is “all in”.

John Stroh became chairman in 1967 and handed over day-to-day operations to his nephew Peter Stroh. From 1964 to 1980, Stroh Brewing maintained a conservative growth and acquisition strategy. For example, Stroh’s only acquisition during the time was Goebel Brewing Company in 1964. Later the brewery bid $6 million for Blatz beer property but lost to Heileman Brewing Co. who bid $10.75 million. John Stroh wanted to grow but only at the right price, and not too quickly. That would soon change in 1980 when Peter Stroh became CEO.

Corporate Dilution

Stroh Brewing Company went from 10th largest brewer in 1972 to 6th largest in 1980. The initial departure from the company’s tradition of promoting from within to hiring outside managers from Proctor & Gamble and Pepsico looked to be working. At least from a market share standpoint as they moved into more markets and raised prices. Morale began to fall.

The downfall of many U.S. national brewers during the 1970-1980s was their grand acquisition strategies and debt loads. For example, G. Heileman Brewing Company acquired 13 brands during this time and eventually imploded after Alan Bond acquired the company via a leveraged buyout, financed by junk bonds.

Stroh’s was no different. The purchase of F. & M. Schaefer Brewing Company, in 1981, and Schlitz Brewing Company, in 1982, provided wider distribution, and made Stroh the 3rd ranked brewer in the U.S., but along with it came a massive debt load.

“We made the decision to go national without having the budget,” sighs Greg Stroh, a fifth generation family member and former Stroh Brewery employee. “It was like going to a gunfight with a knife. We didn’t have a chance.”

Too much debt put a stranglehold on Stroh preventing them from innovating and from spending similar amounts on advertising as other national brewers. Stroh’s initially resorted to price cutting, which hurt financially and allowed competitors such as Coors to steal market share. Margins compressed in the short term and over the long term diminished Stroh’s brand equity.

Stroh’s new overcapacity led to mass layoffs. The main Detroit manufacturing plant was closed in 1985. The profitable ice cream business was sold. Leadership was nowhere to be found, and the strong culture founded by Bernard Stroh was now fully diluted.

A last ditch attempt to “update” the Stroh brand and raise prices. Similar to the JCP fiasco that happened in 2011-2012, Stroh’s sales fell by 40% in one year, the most in the history of beer.

Stroh’s market share fell from 13% in 1983 to 7.6% in 1991.

“Fool me once, shame on you; fool me twice, shame on me”

Stroh’s pivoted by becoming a contract brewer, and expanding internationally, however, once again the company took to acquisitions to get out of their position in 1996. Stroh borrowed $300 million to acquire struggling G. Heileman Brewing Company. This proved to increase market share, and further hamper cash flow. It also didn’t help that the Stroh family started to invest in biotech and Detroit real estate.

Pabst Brewing Company and Miller Brewing Company eventually acquired parts of Stroh Brewing Company for $400 million in 1999. A majority of the price was to extinguish Stroh’s debt.

Conclusion

“Hard as it is to build a family business designed to last in perpetuity, it's shockingly easy for any successor to tank it.” – Forbes Article

This statement is true with any business looking to last in perpetuity. It’s easy for any successor to tank a business. Stroh’s is only one example of many.

One might conclude that since it’s shockingly easy for a successor to tank a business, then they should only focus on the “quality” of the business instead of the quality of the management and their culture. Buffett did say “you should invest in a business that even a fool can run, because someday a fool will,” right?

As Sanjay Bakshi pointed out, Buffett doesn’t mean it strictly. Sanjay mentioned numerous examples where Berkshire bet purely on management/culture quality, in difficult industries – insurance, re-insurance, trucking – effectively not following his own advice. I would even go as far as saying nearly all of Berkshire’s excess returns from operating businesses were due to outstanding managers and their corporate cultures. He even said it in his 1990 shareholder letter:

Equally important, our return was not earned from industries, such as cigarettes or network television stations, possessing spectacular economics for all participating in them. Instead it came from a group of businesses operating in such prosaic fields as furniture retailing, candy, vacuum cleaners, and even steel warehousing. The explanation is clear: Our extraordinary returns flow from outstanding operating managers, not fortuitous industry economics.

For example, See’s Candies is only a quality business because Charles See created an “all in”, long-term thinking culture. See’s built brand equity over numerous decades by demonstrating to all stake holders their values. As I wrote in The Full See’s Candies Story: People & Product:

Trying times, like a recession or war, challenge companies to live up to their values. Most won’t live up to their claims but the truly high quality companies will. Strong leadership is necessary. The trust created in all stakeholder’s minds pays off very well over the long-term.

See’s culture has persisted during Berkshire Hathaway’s ownership because of its quality leadership which has been built up from within. Nepotism was not a factor, nor has it with most Berkshire owned businesses. Nebraska Furniture Mart is an exception.

The Stroh family was fortunate enough to produce a few outstanding managers, but nepotism ended up limiting the family to a below average manager. Had the company developed talent to take over the operations and steadfastly maintained Bernard Stroh’s philosophy, the family’s business, and fortunes, might be in a different state today.

Stroh’s is another example of leverage magnifying the effect of management strength and weaknesses.

The only businesses that perpetually obviate the risk of being run by a fool, is one that makes it impossible for a fool to take over. In other words, design or invest in businesses that make it impossible for a fool to become the leader. The only way to do that is to constantly build future intelligent fanatic leaders from within.

Thanks to @FourFilters for the initial article on Stroh’s downfall.


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Resources
https://fundooprofessor.wordpress.com/2015/03/20/why-you-shouldnt-invest-in-a-business-that-even-a-fool-can-run/

https://www.forbes.com/sites/kerryadolan/2014/07/08/how-the-stroh-family-lost-the-largest-private-beer-fortune-in-the-u-s/#f6681793d13a

http://www.nytimes.com/1984/09/29/obituaries/john-w-stroh-91-ex-head-of-the-family-beer-company.html

https://en.wikipedia.org/wiki/G._Heileman_Brewing_Company

Detroit Free Press – July 16, 1895, Aug 3, 1886, Jun 25, 1882, Feb 9, 1964

Lansing State Journal – Oct. 9, 1957

Ironwood Daily Globe – Jul 15, 1969