This article was originally published on May 15, 2015.
If you struck up a conversation with Dan Kenary, co-founder and CEO of Harpoon Brewery, in his South Boston Beer Hall, you might just think he was a regular beer connoisseur. He is unpretentious, and even today, after nearly 30 years in the craft brewing business, still exudes excitement when he talks about beer. But, he’s far more than simply an enthusiast. Mr. Kenary, with his business partner of 28 years, Rich Doyle, built one of the largest brands in craft brewing in the United States.
The Harpoon Beer Hall, which opened in 2013 and is adjoined to the primary brewery and bottling facility, is lined with taps of both its top commercial sellers and short-term special brews. BBH recently sat down with Dan Kenary in the Beer Hall over a few beverages to discuss pioneering craft brewing, building an enduring beer brand, creating a strong company culture and recently selling a large minority stake in Harpoon to an employee stock ownership plan (ESOP).
Brown Brothers Harriman: Tell us about the early days.
Dan Kenary: The great thing about starting a business when you’re young is that you don’t know what you don’t know, which is helpful because otherwise you would talk yourself out of it. I was working in banking in Chicago, and Rich, who had been a friend from college, was in his second year at Harvard Business School. We had travelled in Europe and both were into very good beer, which you couldn’t find in many places in the U.S. at the time. The microbrewing industry was just getting started out in the Northwest, and Rich asked me if I wanted to join him in opening a brewery in Boston. So, we went out and raised $430,000 from 35 friends and family, and we opened the brewery in 1986.
We were the first commercial brewery to open in Boston since 1964, and our first beer was Harpoon Ale, which is a gently-hopped, English-style pale ale. Back then, microbrewed beer was an unknown, and our first ale, which is on the “lighter” side of the beer pendulum today, was somewhat extreme. We only brewed in draft initially and went door to door to 150 on-premise accounts in Boston and Cambridge with kegs to provide samples. The group we targeted had to have Guinness at the very least and at least six draft lines, which was a lot back then. After six months, we started bottling.
BBH: Did you encounter any challenges?
DK: Yes. We started bottling using this terrible used soda filler that almost killed us. It was a huge mistake. The things that are really bad for beer, assuming you have a clean process and don’t have any spoilers, are air and light, and this machine had brutal air pickup. You’d have a six pack and four of the bottles might have a six-month shelf life, one might have a month and one might have two weeks. In that day and age though, people didn’t really know what to expect, so the customers were a little more forgiving than they would be now. Finally in 1990, we got rid of that equipment and began producing our bottled beer at F.X. Matt Brewing Company. It turned out to be a great move. In 1997, we brought all production back in-house after we purchased a state-of-the-art bottling line from Germany that eliminated the problems we used to have.
BBH: Early on, you had a very differentiated product. Did that differentiation and “first mover” advantage help you create a successful brand, or was it an impediment in terms of adoption?
DK: The great thing about our business, which is still the case, is that it’s a relationship business. Our first two accounts were great Boston bars that just happened to have taps open, and the owners are still friends to this day. There was a lot of going door to door and giving samples. We also ran promotions to introduce the product to customers and took advantage of great PR opportunities.
Specifically on the East Coast, you had to have a strong sales and marketing effort. Jim Koch, founder of Sam Adams, raised $40 million and didn’t have a brewery. He poured it all into sales and marketing. Imports were also much stronger on the East Coast – Heineken was huge. Having strong competition going all the way back to the beginning made us a better company though. The Northwest is where craft brewing started, but early on, they had disdain for marketing companies, so the models developed much differently.
BBH: It sounds as if you appreciate the competition. Does that hold true even now with the proliferation of craft breweries?
DK: Overall it’s great. We are incredibly proud of that fact that over 30 years, we have played a role in developing an industry – a significant market – in the U.S. that has completely transformed. In the 1980’s, we would go to Europe, and the U.S. was the laughingstock of the world in terms of beer. They’d ask, “What kind of Bud do you make?” Going coast to coast, the majority of the beer was interchangeable. People today think you’re kidding. “Having a brewery on every corner in the U.S.” is challenging from a competitive perspective, but spectacular for the industry. The frosting on the cake is that in Europe, they are trying to figure out what we’re doing to create so much fervor around beer, so they can import it back.
BBH: When did you reach the tipping point in terms of expansion?
DK: A lot of it was due to the demand for craft beer in the 1990’s. Craft went from 1% of the market to around 3%, which was significant. Now it’s around 11% including Yuengling. In the early- to mid-1990’s, the industry was growing 50-75% per year, and there was a broader acceptance of craft beer. I would go to bars and wouldn’t be surprised to see it on tap. American consumers got to a point where they were willing to pay more for quality, diversity and style.
BBH: You founded the company in 1986 with Rich Doyle, and you were business partners for nearly 30 years. Talk about your partnership and how you made it successful.
DK: We were in business together for over 28 years, and it was a great partnership. He ran sales and marketing, and I ran operations and finance. We left each other alone to run our separate sides of the business, and then we’d come together to talk about all the really important strategic things.
BBH: Talk about the culture of Harpoon. How do you maintain it through growth?
DK: Maintaining your culture through growth is always challenging. It is one thing when you have 15 people, but when you have 200, and 100 are part time, it’s a different animal. There are people who have been here for a very long time, and we say that they bleed Harpoon red. They are the culture. It can’t be exclusive though. Those people are at the center of what we call the “rolling circle,” and the goal is to keep hiring people to make that circle larger and larger.
With culture, hiring is key. You also have to focus more and more on communication. We talk about our values frequently. We talk about what kind of a company we want to be. And, you have to be realistic: it’s not going to be for everybody. I speak with our management team about setting up a company that is going to be here in 100 years. In order to achieve that, externally, we need to have a brand that has enduring value in the marketplace, which is a great challenge. Internally, the objective is to create a company that employees love – a place that they want to spend their entire careers. That’s as exciting as the brand side because you spend an awful lot of your life at work. Then, if you can allow employees and their families to share the financial rewards, that’s just great.
BBH: Talk about how you financed the business.
DK: We went through our first ten years continuously raising money. Mostly it was through equity in some follow on rounds. We stupidly turned away some money in the initial round. We were supposed to raise $330,000, and we raised $430,000 and thought that would be enough. But one of the things that cost us dearly, though it turned out to be one of our best decisions, was waiting for the facility we are in today. We had identified this space by September of 1986, but we were delayed by six months because of city bureaucracy. As a result, we were eating into our equity by paying ourselves and our brewer. It was an expensive wait time, but it was great for the long term. The other option was an industrial park that people never would have been able to find, and we always wanted our breweries to be the center point of our marketing.
So, we had equity, and we raised some subordinated debt in the 1990’s; then we brought in our last external equity round in 1996. From 1997 through 2004, we just bought back stock. We maxed out at 82 shareholders; by 2004, we were down to 15. Of the 15, eight were insiders – two outside directors and six employees – and seven were investors who didn’t want to sell. They loved what we were doing and loved owning a brewery. The insiders owned just over 90% of the company, so in 2004, we did a Delaware reverse form merger where you can simply obtain an outside valuation on the business and mail the other investors a check. After that, we had eight investors for 10 years until we decided to create the ESOP.
It’s a big mistake that a lot of business owners don’t pay attention to their balance sheet – specifically the equity portion. Many of them think that they just need to raise money, and everything will work itself out. But when issues arise, you can be forced into decisions that are bad for the long-term strategy and performance of the business. We paid attention. We were generating decent cash flow, and we didn’t have a lot of debt, so we were able to buy back equity.
BBH: What made you decide to do the ESOP?
About four years ago, Rich and I started to ask ourselves, what should we do with the business? We were both over fifty years old and both owned about 45% of the business. That was when we first investigated an ESOP by hiring an advisor who determined that one was feasible because of our strong, stable cash flows and low levels of debt. We decided to put the idea “on the shelf,” and then just under two years ago, Rich wanted to look into selling the business. I really didn’t want to do anything and was happy with the structure and setup we had, but I had to respect his desires, which certainly were not irrational. We decided to each pursue our own preference: Rich looked into selling to a strategic or a financial buyer, and I investigated the ESOP more. When we came back together though, we realized that we had reached an impasse and couldn’t make a decision. I didn’t want to sell the company, and I wanted it to remain independent, and Rich wanted to sell to a strategic acquirer.
We decided to present the options to our six other investors and let them vote on it a little like a jury. We had that meeting in March of last year, and the group voted 6-0 to pursue the ESOP route. It’s a pretty amazing group of people. We brought in an advisor and started putting books together for the bankers, and we were off to the races. Between March 7 and July 2 we closed the ESOP.
BBH: That was a short window of time.
DK: It was a distraction from running the business, so once we made that decision, I pushed as hard as I could to get it to closed. ESOPs are incredibly complicated. We had ESOP advisors, ESOP lawyers, an ESOP valuation firm, an ESOP trustee, and these groups had their own lawyers, and there were the five banks with their lawyers. It was a lot, and letting it drag on would have served no one’s purpose.
BBH: How did you tell your employees about the ESOP?
DK: Last year, we had a special mid-year gathering with all employees in July. Leading up to that, some people had noted the presence of strangers in suits around the brewery and that I had been distracted. Something was clearly going on.
We had everyone in the Beer Hall, and normally at these Harpoon gatherings it is difficult to get people to stop talking and to stop from getting another beer. This time, people were sitting down quietly, and some weren’t even drinking. I said, “We have some big news. Rich and I have a lot of grey hair, and I’m sure you’re wondering about the future of the business.” You could hear a pin drop. And I said, “We’re here to introduce you to the owners of a large minority stake in the company.” I looked around, then said , “Please turn to the person next to you and shake their hand because you’re the new owners of a 48% stake in the company.” The room just erupted. People were crying. It was great.
BBH: Do you think that creating the ESOP was the right thing to do?
DK: It’s still very early going. In fact, employees will not receive their first ESOP statement until July, which means that we will have operated for a full year with “nothing in people’s hands.” It just takes time. ESOPs are very complicated as our CFO is learning.
But at this stage, I would absolutely recommend it. Some of the best advice I’ve received from other CEOs who’ve created ESOPs is that, while they give employees a pretty incredible benefit, it takes two to three years of people seeing enough of a balance in their account to really understand. If you think about employees, it’s not natural for many or most employees to think like owners. An awful lot of people just like to do their job and go home, which is okay. Being an owner doesn’t mean that they have to be up in the middle of the night worrying about paying our bankers back like I do. But it does mean that when they’re here, they have to be engaged at a different level than just punching the clock.
BBH: How do you help spur that thinking along?
DK: You have to drill it into the culture. It takes work and a lot of communication. We created an ESOP communication committee comprised of twelve individuals across the firm. In our monthly meeting, we lead off with ESOP information. We put signs up about ownership and what that means. And we have an idea wall, where people suggest ways to improve the business – to save money or make money. If you’re on the bottling line, which operates five days per week, and an employee figures something out that saves us $100 per day, that’s $500 per week times 50, which is $25,000 per year. And with a healthy multiple, especially in our industry, that is hundreds of thousands of dollars per year that someone just added onto the valuation that will be reflected in the stock price. So, it’s a pretty powerful thing if you get people thinking that way. All it is for them is an opportunity. We’ve given our people a very unusual opportunity to participate in the financial success of the business.
BBH: Thank you for your time and insights, Dan.
This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ("BBH") to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ("EEA"), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries.
© Brown Brothers Harriman & Co. 2015. All rights reserved. 2015.