Hospitality Strategy Design & Execution Seminar

HOSP4060 Hospitality Strategy Design & Execution Seminar

Individual Assignment 3

Point Value = 10

Schlitz Beer: Fall of the Former Industry Leader

Joseph Schlitz Brewing Company was an American success story, a firm that survived Prohibition and maintained a position of prominence alongside its rival, Anheuser-Busch Inc. 1 Although Schlitz dropped to the third spot as the Miller Brewing Company achieved high revenues in the 1970s, sales continued to grow, and the Milwaukee, Wisconsin-based brewery expanded nationwide. However, a series of unfortunate events began to unfold in 1976 that quickly unraveled Schlitz’s position as a leading brand. The struggling brewery was acquired by Detroit, Michigan-based Stroh Brewing Company in 1982, which eventually discontinued the Schlitz brand. In 1999, Pabst Brewing Company acquired the rights to the Schlitz brand and worked with brewmasters to recreate the original formula. The brand was relaunched on a regional basis in 2008.

The Leading Brewer for 50 Years

Schlitz formed out of the tavern and brewery business founded by a German immigrant, August Krug, in 1849. Upon Krug’s death in 1856, his bookkeeper, another German immigrant by the name of Joseph Schlitz, took over the business. After Schlitz married Krug’s widow two years later, the business was renamed the Joseph Schlitz Brewing Company. Sales increased rapidly during the 1870s after the Great Chicago Fire wiped out the local breweries, and Schlitz began shipping its product to the devastated city. The company’s success led to the adoption of the slogan, “The Beer That Made Milwaukee Famous.” In 1902, Schlitz sold more than a million barrels of beer and surpassed Milwaukee-based Pabst Brewing Company to become the leading brewery in the United States.

Following the end of Prohibition in 1933, Schlitz resumed its position as the top U.S. brewery. In 1952, Schlitz’s sales exceeded six million barrels of beer. Meanwhile, Anheuser-Busch, based in St. Louis, Missouri, began building breweries to create a nationwide distribution network. In 1957, Anheuser-Busch became the leading brewery in the United States. Schlitz would retain its second-place position for another 20 years. (As of 2011, Anheuser-Busch remained the leading brewery in the United States, with 48.3 percent market share of U.S. beer sales to retailers, as stated in the company’s June 6, 2011, press release titled “Anheuser-Busch Takes Gold, Silver and Bronze at North American Beer Awards.”)

Competition Intensifies

In 1967, Schlitz introduced a new method of fermentation, called accurate balanced fermentation (ABF), which shortened the process by 10 days. ABF allowed the brewery to increase production by 25 percent and reduce margins. The process did not significantly affect taste, but according to Michael R. Reilly in “Joseph Schlitz Brewing Co.: A Chronological History 1933–1969,” some consumers perceived the brewery to be sacrificing quality for profits. As the decade ended, Schlitz had 12 percent market share with sales of 15 million barrels, whereas Anheuser-Busch commanded 18 percent of the market. However, the winds of change would begin to blow when Philip Morris International Inc., the leading U.S. tobacco company, acquired the Miller Brewing Company, ranked as the seventh-largest brewery in 1970.

Philip Morris lacked beer making know-how, but the company had the capital to make Miller into another marketing-driven success. It began to address Miller’s lagging sales by pouring half a billion dollars into promotion of the brand. The highly effective “Miller Time” commercials showed men finishing the day at their rugged, outdoor jobs and turning to Miller for refreshment. By the following year, Miller had moved up to become the nation’s sixth-largest brewery with sales of 5.2 million barrels. According to the Milwaukee Journal article “Busch, Schlitz Still on Top,” the leaders were Anheuser-Busch with 24.3 million barrels, Schlitz with 16.7 million barrels, and Pabst with 11.8 million barrels. With sales of 8.5 million barrels, Adolph Coors Company had taken the fourth-place spot from F.&M. Schaefer Brewing Company.

After Philip Morris purchased the rights to the “Lite” brand name, the low-calorie beer was rolled out nationally in 1975. Miller overtook Pabst in 1976 and ousted Schlitz from the number two spot the following year. Schlitz had introduced Schlitz Light in 1975, but Miller Lite had a 70-percent share of the low-calorie beer market in the United States. With its sights on the number one spot, Philip Morris had the goal of increasing capacity from 24.2 million barrels to 40 million barrels by 1980.

Schlitz seemed oblivious to the signs that Miller and Coors were slowly encroaching on its market share; instead, the firm embarked on its own plans for expansion to 35 million barrels by 1976. Despite having just completed its largest brewery in Winston-Salem, North Carolina, in 1970 and another in Memphis, Tennessee, in 1971, the company announced plans to spend US$300 million on building a new plant near Syracuse, New York, and dramatically expand the capacity of its Memphis plant from 4.4 million to 8.1 million barrels. Schlitz’s sales exceeded US$1 billion for the first time in 1974, an increase of 13.8 percent, and the company’s plan for growth seemed justified. However, an increase in the cost of materials and a strike at five plants would cause Schlitz’s profits to be cut in half the following year.

Brand Loyalty Diminishes

Up to this time, brewers were not required to list ingredients on beer labels. Although the regulation of food and beverages was theoretically under the jurisdiction of the Food and Drug Administration (FDA), the Bureau of Alcohol, Firearms, and Tobacco (BATF) had regulated alcoholic beverages since Prohibition ended in 1933. A conflict arose in November 1975 when the BAFT rejected the FDA’s request to require labeling on alcoholic beverages. Consequently, the FDA announced that it would impose ingredient labeling requirements on all alcoholic beverages beginning January 1, 1977.

In anticipation of the FDA requirement of an ingredients list on beer, Schlitz mandated that plant managers replace silica gel that was used to stabilize the beer and give it a longer shelf life. It was to be replaced by a different stabilizer called Chill-Garde, which would be filtered out and therefore not required on the ingredients list. However, the new ingredient unexpectedly reacted with Kelcoloid, which was used as a foam stabilizer, creating tiny flakes in the beer. The flakes gave the beer a hazy appearance that worsened over time.

Management did not know the cause of the haze, and no remedy was forthcoming for the problem during the first half of 1976. The company’s research department believed that a higher level of protein in the current crop of barley might be the root cause of the haze. Chairman Robert Uihlein Jr. refused to hire an outside laboratory to look further into the matter. Meanwhile, wholesalers became upset that Schlitz expected them to just continue delivering hazy beer.

Once Chill-Garde was identified as the culprit, Schlitz executives ignored the plant managers’ recommendation to switch back to the silica gel stabilizer and opted, instead, to remove the Kelcoloid. As a result, once shipments reached the marketplace, consumers began complaining that the beer was flat. In April 1977, Schlitz finally hired an outside laboratory that rectified the production problems. Schlitz initiated a recall of the bad beer, which amounted to a US$1.4 million write-off, but by then the damage to the brand was done. Many loyal customers had decided that Schlitz no longer cared about quality and they abandoned the brand. (One irony is that the ruling of the district court in August 1976 was that the regulation of alcoholic beverages would remain with the BAFT, which did not impose ingredient labeling.)

Legal Troubles Begin

In 1973, the BAFT became aware that Schlitz was illegally making cash payments to retailers that agreed not to sell competitors’ products. A warning was issued by the BAFT, and Schlitz agreed to stop making these payments, which were tantamount to bribes. However, the issue surfaced again in April 1976, when Schlitz, Miller, and Pabst were charged to appear before a Senate Commerce Committee. Miller and Pabst denied claims that they were making illegal payments to induce retailers and hotels to only sell their brand of beer. Schlitz released a statement saying all questionable marketing practices had been terminated years prior. However, Schlitz suspended its four top sales and marketing executives in August pending the investigation.

In April 1977, the Securities and Exchange Commission (SEC) filed formal charges against Schlitz for engaging in unfair trade practices beginning in 1967. The SEC had obtained documents showing that the company had a budget of more than US$400,000 set aside for illegal payments in 1969. Over the course of nine years, the brewery had allegedly paid more than US$3 million in direct payments to restaurant and hotel chains, to secure concession contracts at airports and sports stadiums, and to reimburse wholesalers for payment of cash bribes to retailers, among other illegal marketing practices. The bribes were disguised on the books in a variety of ways, such as market research or payment of hotel rooms that were never actually used.

In March 1978, a federal grand jury indicted Schlitz on 745 misdemeanor charges relating to the illegal payments in the civil case with the SEC as well as three tax felonies. In July, Schlitz settled the civil lawsuit filed by the SEC by agreeing not to engage in unfair trade practices and to hire an outside consultant to review the legality of marketing practices. Four months later, Schlitz was found guilty of two misdemeanors in the criminal case and ordered to pay a US$750,000 fine. To Schlitz’s benefit, the other charges were dropped, which put an end to the chance that Schlitz might lose its license to sell in more than a dozen states.

Leadership Shifts Away from Family Members

As if things could not get any worse for Schlitz in 1976, chairman Uihlein unexpectedly died of leukemia in November. For more than 100 years, Schlitz had been a family-owned business. When Joseph Schlitz died without heirs in 1875, ownership transferred to his nephews, including August Uihlein. At the end of Prohibition, August’s son became president, and in 1961 his grandson, Robert Uihlein Jr., took over. Robert also became chairman when August retired six years later. The first shares of company stock were sold outside the Uihlein family in 1961, but the family still retained 82-percent ownership a decade later.

To fill the void left by Robert Uihlein’s death, Eugene Peters took on the role of CEO, and Daniel McKeithan Jr. was elected chairman of the board. Peters had been promoted to the position of president just two months prior. With legal troubles mounting, the firm’s legal counsel moved into the third most powerful position in the company. The company was in the hands of three nonfamily members for the first time in its history. A Schlitz marketing staffer at the time was quoted by Jacques Neher in his June 9, 1981, Milwaukee Journal article as saying, “Here were three guys running the second largest beer company in the world, and not one of them had ever sold a case of beer in their lives. It was amateur night at the zoo.”

Aimless Advertising

The trio decided to fire the marketing executives who had been suspended during the investigation into illegal bribes, leaving the company adrift without experienced marketing leadership. As Schlitz struggled with its own troubles, Anheuser-Busch was contending with a 96-day workers’ strike. This caused Schlitz sales to reach a record of 24.2 million barrels in 1976. It was an opportune time to try to overtake its chief rival, but Schlitz’s marketing staff was ill-equipped to effectively promote the reformulated brand that consumer surveys were rating as terrible.

Peters and McKeithan rejected the image advertising campaign presented by the Leo Burnett advertising agency, which had spent US$200,000 on market research. Peters wanted to challenge loyal consumers who might be considering switching to another brand in what, according to Martyn Cornell in Beer Connoisseur Online, were dubbed the “Drink Schlitz or I’ll Kill You” commercials. Protest letters began to pour in, and the commercials were pulled after just two months on air. With third-quarter sales numbers in and the company US$75 million behind the previous year, the industry expected Miller to overtake Schlitz by year-end. Peters resigned in October 1977, and Frank Sellinger, a former executive at Anheuser-Busch, was named the new president.

Slumping Sales

Despite the many woes at Schlitz, 1978 ended with sales of 19.6 million barrels, and the firm managed to turn a profit of US$12 million. However, things changed drastically the following year. Schlitz lost US$50.6 million after selling only 16.8 million barrels. This was a setback to sales volumes of seven years prior. Facing severe overcapacity, Schlitz was forced to close its plant in Hawaii on May 12, 1979, after failing to find an interested buyer. The following year, Schlitz sold its Syracuse brewery, which had been constructed just four years prior, to Anheuser-Busch.

The drop in sales allowed Pabst to surpass Schlitz, which fell in brewery rankings to the fourth-largest, with 8.5 percent market share (a drop from 12 percent a decade prior). Rumors began to surface of plans to close the landmark brewery in Milwaukee. After a workers’ strike in June 1981, the Milwaukee plant did shut its doors. With five plants continuing to operate (in Tampa, Florida; Winston-Salem, North Carolina; Longview, Texas; Memphis, Tennessee; and Van Nuys, California), Schlitz still had significant overcapacity of about 10 million barrels.

Schlitz was receptive to a merger with G. Heileman Brewing Company, which had achieved success buying approximately 30 regional brands and avoiding the costly expense of national advertising. In August 1981, Schlitz accepted Heileman’s offer, but the Justice Department rejected it on antitrust grounds. Six months later, Schlitz accepted an offer of approximately US$500 million from Stroh Brewery Company. Surprisingly, the Justice Department approved the merger with a stipulation that Stroh sell either the Schlitz plant in Memphis or Winston-Salem to a brewer other than Anheuser-Busch or Miller. The deal was finalized in June and ownership of Schlitz passed to Stroh.

Industry Consolidation Continues

Some years later, Stroh ran into financial difficulty and was forced to sell various assets. In 1999, ownership of the Schlitz brand was transferred to Pabst, along with Old Milwaukee (Schlitz low-cost beer introduced in 1960) and several other brands. (In the same deal, Miller agreed to buy the Mickey’s and Henry Weinhard’s brands from Stroh.) Industry consolidation continued with Pabst’s acquisition of G. Heileman and others. In June 2008, SABMiller PLC and Molson Coors Brewing Company merged their U.S. operations into MillerCoors LLC, with headquarters in Chicago. The companies’ combined sales for fiscal year ending in March were just over 70 million barrels. Shortly thereafter, Pabst announced it was relaunching Schlitz beer, which would be brewed on the East Coast under a contract with MillerCoors. In June 2010, the Metropoulos & Co. investment company purchased Pabst.

It is not clear whether Schlitz could have survived the competitive forces in the brewing industry had it not made some of the bad decisions that led to its downfall. What is clear, however, is that a drop in beer quality and poor management hastened the brewery’s demise. When the company did not address consumer complaints about the new formula, and legal troubles further damaged the Schlitz image, consumers abandoned “The Beer That Made Milwaukee Famous” and never looked back.

Last Updated on March 27, 2019