Pete’s Brewing Company

Pete’s Brewing Company

514 High Street
Palo Alto, California 94301
U.S.A.
(415) 328-7383
Fax: (415) 327-3675
Web site: http://www.peteswicked.com

Public Company
Incorporated: 1986 as Pete’s Brewing Company
Employees: 85
Sales: $71 million (1996)
Stock Exchanges: NASDAQ
SICs: 5181 Beer & Ale

The second largest microbrewer in the United States, Pete’s Brewing Company sells a line of full-bodied, specialty beers— all bearing the “Pete’s Wicked” name—throughout much of the United States and in the United Kingdom. During the mid-1990s, Pete’s Brewing sold its microbrews in 47 states. The company sold its beer to more than 300 independent beverage alcohol wholesalers, who, in turn, sold Pete’s Wicked beers to more than 200,000 licensed retail accounts.

Origins

Pete’s Brewing’s signature product, Pete’s Wicked Ale, was the result of experimentations that began in a kitchen in Bel-mont, California, in 1979. Inside the kitchen were a five gallon container, a big kettle, and a garbage can. It was the realization that the same equipment could be used to make beer and wine that prompted Peter Slosberg, in whose kitchen Pete’s Wicked Ale was born, to begin brewing beer. Originally, Slosberg had his heart set on creating his own wine, but the fermentation process was too slow for his liking, so he converted his homespun equipment to another cause and tried his hand at brewing beer. It was a fateful decision for the multibillion-dollar U.S. beer industry. Slosberg’s impatience proved to be the spark that created one of the largest, most-recognized, most-praised microbrewing companies in the country. Craft brewers, whose ranks grew exponentially during their assault on major brands such as Budweiser, Miller, and Coors, recorded explosive growth during the late 1980s and the 1990s, and Pete’s Brewing led the charge, holding sway as a pivotal force that helped change the face of the U.S. beer industry.

Slosberg’s aspirations in 1979 were far less ambitious. His hours spent in the kitchen with kettles and garbage cans were those of a hobbyist; time spent away from a professional career that provided for his full financial support. Slosberg started brewing beer to fulfill a passion, not to start a brewing company. He started his professional career with an academic background in engineering, then worked as a cab driver in New York City before making a name for himself as a marketer for high-technology companies.

Slosberg worked as marketing executive during the day and toiled in his Belmont kitchen at night, experimenting with various recipes for brewing beer that harkened back to an era when German purity standards were followed strictly. Although he had forsaken a hobby as a vintner because the fermentation process took too long, Slosberg demonstrated considerable patience with brewing beer. He tinkered with one recipe after another, giving samples to friends and soliciting their suggestions. For seven years Slosberg searched to find what he considered the perfect brew, and once he had, Pete’s Wicked Ale and Pete’s Brewing were born.

1986 Birth of Wicked Ale

When Slosberg settled on his recipe in 1986 that would become famous as Pete’s Wicked Ale, he was working as a marketing manager at Santa Clara-based Rolm Corporation. By this point, after seven years of laboring over various recipes, Slosberg was ready to turn brewing beer into more than a hobby. He took a sabbatical from Rolm and struck a deal with Palo Alto Brewing Co. in January 1986 to brew beer according to his specifications. Next, Slosberg completed the difficult task of raising the money to finance the production and distribution of his first batch of Pete’s Wicked Ale by convincing a group of corporate investors to shell out $50,000 and make Pete’s Brewing a going concern. By the fall of 1986, Slosberg was ready to put Pete’s Wicked Ale to the test and wriggle into the entrenched $40 billion-a-year beer market.

Slosberg convened a meeting in November 1986 at the Jew and Gentile Deli in Mountain View, California, to discuss strategy. In attendance were Slosberg, Mark Bronder, an executive at Institutional Venture Partners, two executives from Rolm, and six other businessmen. At the time, the objective was modest in scope; the individuals gathered around a table in a deli were not discussing how they were going to challenge Anheuser-Busch head on. Instead, they were hoping Pete’s Wicked Ale would become a local favorite, perhaps a regional fixture in liquor stores and grocery stores. Large, national brewing companies maintained an intractable hold on the U.S. beer market, and those gathered at the deli did not dream of trying to wrest appreciable market share away from the industry stalwarts. Instead, their focus was on bringing a quality product to market and turning back the pages of history.

Beer, in pre-Prohibition America, contained four ingredients: malted barley, hops, yeast, and water; to add any other ingredients was to violate the tightly embraced German purity standards. The scores of small, regional breweries that composed the industry before Prohibition observed such standards, but following Prohibition, when large, mass-market brewers took control of the industry, rising barley malt prices forced brewers to use cheaper alternatives, such as rice and corn. Further transgressions of German purity standards followed, as behemoth brewing companies added head-stabilizers and preservatives to ensure consistent quality. Microbrewers, who numbered less than three dozen when Slosberg and his cohorts were discussing strategy at the Jew and Gentile Deli, were attempting to woo customers by brewing beer the way it historically had been brewed, by earning sales and cultivating loyalty through a quality product that tasted superior to what they believed were adulterated versions of traditional brewing standards.

By December 1986, the first 200 cases of Pete’s Wicked Ale had hit the market, retailing at between $5 and $6 per six-pack. They quickly disappeared from store shelves. The following month, 400 more cases of Pete’s Wicked Ale replenished store shelves, and they were quickly shuttled home by customers as well. Bottles of Pete’s Wicked Ale, with Slosberg’s English bull terrier, Millie, on the label, grabbed customers’ attention; the quality of the beer induced them to buy more. Slosberg was happy, but he remained cautious. “We are waiting to prove the concept, then we will build a brewery,” he remarked to a reporter from a local newspaper. “We think we have a hit.” As Slosberg and his investors bridled their confidence and suppressed the desire to celebrate the success of their fledgling enterprise, disaster struck, checking any grand plans Slosberg had imagined.

Pete’s Brewing’s brewery, Palo Alto Brewing, filed for bankruptcy in January 1987, squelching the opportunity for Pete’s Brewing to increase production totals to meet demand. Panic set in as all those gathered together at the deli in Mountain View were now forced to scurry about, enlist help, and do what they could before the sheriff came to lock the doors of Palo Alto Brewing. “We had to scrounge for people and work the weekend before the door was padlocked,” Slosberg remembered. “We had to scour the West Coast for our particular bottle, then we had to go in and bottle, filter, and pasteurize. It was fun for about two hours.”

So began a six-month transition period for Pete’s Brewing just as the company was sprinting from the starting block. They were difficult months, to be sure, but Slosberg used the time wisely and began rebuilding. Intent on avoiding the prospect of a contract brewer going belly up again, Slosberg selected a veteran in the brewing business when he contracted with the 130-year-old, New Ulm, Minnesota-based August Schell’s Brewing Co. to produce the next batch of Pete’s Wicked Ale. Slosberg also went after new financial help and raised $400,000 from new supporters. By May 1987, when 1,400 cases of Pete’s Wicked Ale were scheduled for delivery to Silicon Valley, Pete’s Brewing was back in business and its flagship product was making a name for itself among beer connoisseurs. Pete’s Wicked Ale was voted the top ale in the “1987 Great American Beer Festival” in Colorado and ranked as one of the top five beers in the United States. In 1988, Pete’s Wicked Ale repeated its achievements, quickly earning a reputation as a premium microbrew.

Vigorous Growth Begins in 1989

Award-winning prestige spurred expansion for Pete’s Brewing after the Palo Alto Brewing debacle. Production in New Ulm increased monthly as the demand for Pete’s Wicked ale grew. By mid-1989, Pete’s Wicked Ale was sold in eight states and distributed by 50 major-brand beer distributors, with its territory of availability expected to reach 12 states by the end of the year. Despite the burgeoning growth recorded by his company, Slosberg continued to work as a marketing executive, serving stints at IBM and Network Equipment Technology as the 1980s drew to a close. Soon, however, the financial prospects for a microbrewer would become much greater, as the microbrew industry embarked on the most prolific growth spurt in its history. Between 1989 and 1993, the number of microbreweries in the United States increased more than tenfold, exploding from fewer than 40 to more than 400. Annual revenues for these small craft breweries skyrocketed as well, leaping from $135 million generated in 1989 to the more than $1 billion racked up in 1993.

Company Perspectives:

The “Pete’s wicked” formula for brand building is a simple one based on six award-winning “Pete’s Wicked” brews, the Wicked trade name, and homebrewer and founder Pete. Wicked is an original trade name that attracts beer drinkers to the brand. The quality and uniqueness of the products keep them coming back. Pete’s franc his e-building objective is to hold in the highest regard every person who drinks “Pete’s Wicked” brews. A new generation of American beer drinkers is interested in identifying with brands that their parents didn ’t have —brands with flavor and variety that they can call their own. These people are the driving force behind the specialty beer market.

The early 1990s were years when microbreweries blossomed, forcing such industry heavyweights as Anheuser-Busch and Miller Brewing to take notice of the growing appetite for gourmet beers. Pete’s Brewing, during this definitive period for craft brewers, took full advantage of the halcyon times. Production of Pete’s Wicked Ale was switched to a larger brewery called the Minnesota Brewing Company in 1992, the same year five new beers were added to the company’s flagship ale: Pete’s Wicked Lager, Pete’s Wicked Red, Pete’s Wicked Honey Wheat, Pete’s Wicked Winter Brew, and Pete’s Summer Brew. New product introductions, increased production capacity, and the animated growth of the microbrew industry as a whole combined to push Pete’s Brewing’s sales upward. The company’s sales increased at an average annual growth rate of more than 150 percent during the early 1990s, making it the 33rd fastest-growing, private company in the United States. Of the more than 400 micro-brewers in the country by 1993, Pete’s Brewing ranked as the fifth largest, collecting $12.2 million in sales for the year. As the microbrew industry continued to expand exponentially into the mid-1990s, Pete’s Brewing not only kept pace with its competitors but gained ground, and it did so by doing something unprecedented in the craft brewing industry.

As a general rule of thumb, microbrewers spent as little as possible on advertising. They generated awareness of their beers chiefly by word of mouth and by designing attractive, unconventional labels for their bottles. Although some of the larger brewers paid for print and radio advertisements, most did not, and no microbrewer had ever bought television advertising. That distinction ended in 1994, when Pete’s Brewing launched its first TV ad. The commercial, which poked fun at the anonymity of Slosberg, set a precedent that other craft brewers would follow and provided a tremendous boost to Pete’s Brewing’s financial totals and its stature within the microbrew industry. The company’s distribution territory expanded as recognition of the Pete’s Wicked name increased. After ringing up $12 million in sales in 1993, Pete’s Brewing generated $31 million in sales in 1994, making it the second largest microbrewer in the country, second only to Boston Beer Company, maker of Samuel Adams.

Mid-1990s: Brewery and Expansion

Flush with success, Pete’s Brewing executives mapped out big plans for 1995. In mid-1995, the company began shipping small quantities of its ale to Great Britain, while executives discussed plans of extending Pete’s Brewing’s geographic reach into Canada, Australia, and Europe. Production was switched to another, larger brewery, the Stroh Brewing Co. in St. Paul, Minnesota, in late 1995, guaranteeing a long-term supply of the company’s six award-winning beers. By far the biggest event in 1995, however, was the company’s initial public offering in November, when one-third of Pete’s Brewing was sold to public investors. With the proceeds gained from the sale of stock, Pete’s Brewing planned to retire some of its debt and build a new $30 million headquarters, retail, and production complex in Napa Valley. After nearly 10 years of relying on contract brewers to produce its beers, Pete’s Brewing was ready at last to build its own brewery.

Between 1991 and 1995, Pete’s Brewing’s sales mushroomed, soaring 2,270 percent. Its market share increased as well, even as the number of microbrewers increased exponentially. The market that was considered too crowded by some when there were 40 craft beer companies, was populated by an estimated 800 companies by the mid-1990s. During these years of staggering growth, Pete’s Brewing shouldered competitors aside to rank as the second largest microbrewer in the country.

Production at its new, 250,000-barrel brewery was slated to begin at the end of 1997, giving Pete’s Brewing officials one more reason to celebrate the conclusion of a remarkably successful first decade of business. During the company’s 10th anniversary year, sales leaped upward again to eclipse $70 million, piquing optimism for the future. As company officials charted Pete’s Brewing’s course for its second decade of business, plans called for a greater push into international markets and the extension of the Pete’s Wicked name to wherever discerning beer drinkers resided.

Further Reading

Atkinson, Bill, “Has Spuds Met His Match?,” Business Journal, San Jose, May 11, 1987, p. 2.

Burstiner, Marcy, “Beers Without Peers: Anchor, Pete’s Find International Thirst for Crafted Brews,” San Francisco Business Times, June 16, 1995, p. 3.

Dwyer, Steve, “Hail to the Ale,” Prepared Foods, October 1996, p. 28.

Goldman, James S., “Pete Loves Beer—It’s His Business to Love It,”Business Journal — San Jose, August 14, 1989, p. 1.

Kahn, Aron, “Maker of Pete’s Wicked Ale Moves Contract from Minnesota Brewing to Stroh,” Saint Paul Pioneer Press, August 6 1995, p. 8.

Khermouch, Gerry, “Pete’ Comes to Television: As Pete’s Brewing Hits TV Airwave, It’s a Milestone for Beer Microbrewers,”ADWEEK Eastern Edition, August 8, 1994, p. 9.

Levine, Daniel S., “New HQ on Tap at Pete’s Brewing Co.,” San Francisco Business Times, June 7, 1996, p. 1.

Liedtke, Michael, “Palo-Alto-Based Pete’s Brewing Hopes to Brew Success on Wall Street,” Knight-Ridder/Tribune Business News, September 24, 1995, p. 9.

Schmitz, Tom, “California Entrepreneur Leaves High-Tech Career to Start a Microbrewery,” Knight-Ridder/Tribune Business News, November 7, 1993, p. 1.

Thurm, Scott, “Investors Hop Aboard IPO for Pete’s Brewing of Palo Alto, Calif.,” Knight-Ridder/Tribune Business News, November 7, 1995, p. 11.

—Jeffrey L. Covell