How to Lose a Fortune: The Stroh Family Tale

I posted the article below to highlight a typical evolution within family wealth. It’s part cautionary tale and part voyeuristic experience for those of us that will never be billionaires. It’s a tale of rise and greed and fall. The important lesson here is that the tale of this once prominent family doesn’t end just because the money did. Lives are changed and rebuilt. 

The once proud and lucrative Stroh brewery in Detriot.

The once proud and lucrative Stroh brewery in Detriot.

The original version of this article is from 7/8/2014 on www.forbes.com and was written by Kerry A. Dolan who specializes in writing about the world’s wealthiest people and philanthropy. 

AS WITH MANY OF AMERICA’S GREAT FORTUNES, the Stroh family’s story starts with an immigrant: Bernhard Stroh, who arrived in Detroit from Germany in 1850 with $150 and a coveted family recipe for beer. He sold his brews door-to-door in a wheelbarrow. By 1890 his sons, Julius and Bernhard Jr., were shipping beer around the Great Lakes. Julius got the family through Prohibition by switching the brewery to ice cream and malt syrup production. And in the 1980s Stroh’s surged, emerging as one of America’s fastest-growing companies and the country’s third-largest brewing empire, behind only public behemoths Anheuser-Busch and Miller. The Stroh family owned it all, a fortune that FORBES then calculated was worth at least $700 million. Just by matching the S&P 500, the family would currently be worth about $9 billion.

Yet today the Strohs, as a family business or even a collective financial entity, have ceased to exist. The company has been sold for parts. The trust funds have doled out their last pennies to shareholders. While there was enough cash flowing for enough years that the fifth generation Strohs still seem pretty comfortable, the family looks destined to go shirtsleeves-to-shirtsleeves in six.

“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.” His analysis comes tinged with inevitability. It wasn’t. A handful of family-owned regional brewers such as Yuengling and Schell’s continue to thrive, while others, like Olympia and Hamm’s, sold out. And the Strohs’ largest rivals during the 1980s and 1990s, the Coors, who also aspired to turn their no-frills, regional suds into a national powerhouse, remain in the top 100 on the FORBES America’s Richest Families list.

The Strohs chose a different path, a saga that serves as a powerful reminder: Hard as it is to build a family business designed to last in perpetuity, it’s shockingly easy for any successor to tank it.

FOR ITS FIRST CENTURY the Stroh beer business, based in Detroit, grew by following the basics: respect your customers; respect your employees. The former meant catering to Midwest working-class tastes at working-class prices (the family watered down Bernhard Stroh’s precious recipe, after hops and wheat shortages in World War II left Americans accustomed to weaker brews). The latter by treating every employee like an honorary member of the clan. John Stroh, who oversaw a dramatic sales surge in the Eisenhower years, “was known for walking the brewery and knew everyone’s first name,” his grandnephew Greg remembers. “Employees would run through walls for the family.” As if to connect the customers and the business, the Stroh signature was emblazoned on every bottle, topped by a family crest with a lion. Sales surged in lockstep with postwar Detroit, from 500,000 barrels in 1950 to 2.7 million barrels in 1956.

The Stroh Family Management - Not as clever or frugal as they needed to be.

The Stroh Family Management – Not as clever or frugal as they needed to be.

The mammoth changes came in the early 1980s. John Stroh had moved into the chairman’s role in 1967 and handed control of the brewery to his nephew, Peter, who became CEO in 1980. Like John, he had a plan to grow, but not incrementally: He would do it by acquisition. In 1981 Stroh bought New York-based brewer F&M Schaefer, which, like Stroh, was founded by a German immigrant in the mid-1800s and also offered low-priced suds to its regional fans (famous marketing line: “The one beer to have when you’re having more than one”). The next year, in what family members describe as “the minnow swallowing the whale,” Peter Stroh bet the family business, borrowing $500 million (the book value of the Stroh business was $100 million at the time) to buy Joseph Schlitz Brewing of Milwaukee.

Suddenly Stroh was the third-largest brewer in the U.S., with seven plants and a national footprint. On paper there was synergy. FORBES valued the company at $700 million in 1988, listing the Strohs with one of the largest family fortunes in the U.S. at the time, shared by 30 relatives.

But Peter Stroh’s grand vision of a thriving U.S.-wide brewer failed to materialize. It largely missed the boat on the biggest industry trend in a generation: light beer. And Stroh’s core product–cheap, watery, full-calorie beer–was a commodity. But saddled with debt, Stroh couldn’t afford to match the ad spending of its bigger rivals, Anheuser-Busch and Miller. Unable to spur demand through marketing, Stroh turned to price, introducing a 15-pack for the price of 12 cans and a 30-pack for the price of a case of 24. While the latter had legs, it wasn’t enough to outrun the shrinking margins.

Meanwhile, an ambitious family from Colorado began moving into the Stroh markets. “It became a competition between Stroh and Coors,” says Scott Rozek, a former director-level employee who spent 12 years at Stroh. “At that time there were four big breweries in a three-brewery industry–there was really only room for three.” By the end of the 1980s Coors overtook Stroh as the country’s third-largest brewer.

In August 1989 the Stroh Brewery Co. was in retreat. The company that had treated employees like family laid off 300 people, one-fifth of its white-collar workforce. “I had to let go four of the five people in the marketing research department. It was heartbreaking,” remembers Ed Benfield, former director of market research at Stroh.

The next month Peter Stroh, who died in 2002, agreed to sell the family business to Coors for $425 million. But Coors got cold feet and pulled out of the deal a few months later. “It had something to do with due diligence, and Bill Coors,” says Benjamin Steinman, longtime editor of newsletter Beer Marketer’s Insights. “There were lots of stories.”

Desperate, Peter Stroh brought in renowned adman Hal Riney to give the Stroh’s brand a more upscale look and position. The cherished Stroh signature gave way to block print, prices were raised, and the 15- and 30-packs were nixed. It could not have been a worse decision. But since the product hadn’t changed, customers could do the math: Sales of Stroh’s-brand beer fell more than 40% in one year, “the biggest drop in sales in the history of beer,” says Benfield.

Market share for Stroh’s, as well as for its acquired brands like Schaefer, Schlitz and Old Milwaukee, fell from 13% in 1983 to 7.6% in 1991. Even CEO Peter Stroh admitted the troubles. “We’ve been through a very difficult period,” he told FORBES in 1992. “We tried to do too much.”

And yet it tried to do more. In 1996 Stroh repeated his mistake, borrowing yet more money for the $300 million acquisition of struggling brewer G. Heileman. The purchase fell flat. Heileman had breweries in cities like Seattle and Portland, where Stroh didn’t, but it lacked a big stable of strong brands. One industry analyst remembers the deal described as “two sick chickens–they were both declining.”

It got worse. Peter Stroh had tried to diversify the business, with investments in biotech and Detroit real estate. Both were far from the family’s core competencies and lost them millions more. By 1998 cousin John Stroh III had taken charge at Stroh Cos., the brewery parent. And while the company had turned to contract brewing for others, including Sam Adams, as a way to make up for plummeting sales, Stroh took a mortal hit in 1998 when it lost a contract with Pabst.

By 1999 there was internal concern about whether they could even make their interest payments on the debt incurred, says one former executive. And so Bernhard Stroh’s legacy was sold for scraps: Miller Brewing, owned at the time by Philip Morris, bought Stroh’s Henry Weinhard’s and Mickeys brands, while Pabst bought the rest of the brands owned by Stroh’s as well as its brewery near Allentown, Pa., for a price several sources peg at around $350 million–about $250 million of which was used to pay down debt incurred with the Heileman purchase. Some of the remaining $100 million or so was transferred to a fund to pay employee pension liabilities, which Stroh had retained in the sale. The rest went into a fund for the family that dribbled out checks until 2008, when it was completely tapped.

FOR GENERATIONS, GROWING UP STROH meant a life of comfort. “My life with my father felt like being inside a gilded bubble,” says Frances Stroh, whose father, Eric, quit the company after a fight with his brother Peter in 1985. An artist at heart, Eric spent millions buying hundreds of antiques–guns, cameras, guitars–to fill the big house that Frances grew up in. Saving, Frances says, was not a priority.

And why would it have been when the checks rolled in? In the 1980s the seven members of the fourth generation got $800,000 a year. (There were another 20 or so shareholders from the third and fifth generations as well, who received differing amounts.) That enabled several Stroh families to live in stately homes on gated Provencal Road in the tony Detroit suburb of Grosse Point Farms, with maids, cooks, country club memberships, boarding school tuition and no need for 9-to-5 jobs. “A lot of people were living off the family business,” says Greg Stroh, who’s now 47.

As with too many families with more money than direction, drugs and alcohol followed. Frances Stroh was kicked out of boarding school at Taft after she was caught drinking. Her three brothers also got kicked out of different prep schools. In an excerpt from a memoir about the family that Frances is writing, she describes one incident during her college years when she was snorting cocaine with her brothers while the rest of the family was downstairs having Christmas dinner at their Grosse Point Farms home.

One of her brothers, Charlie, narrowly avoided going to prison for dealing cocaine in college in the early 1980s. His parents forced him to join the Marines, and good behavior in the service was the key to evading a prison sentence. Yet the demon of addiction reappeared two decades later, in 2003, when he fell to his death from a tenth-floor hotel balcony in Texas, as the sheets he tied together to form a rope failed to hold. He was 43. One report quoted police saying he called the front desk at the hotel “to report a bank robbery and other nonsensical things.”

There have been other tragedies throughout the years. Nick Stroh, a fourth-generation member of the family and a freelance journalist in Africa, was bludgeoned to death by Ugandan troops in 1971 after he investigated reports of an army massacre. Peter’s brother Gari Stroh Jr., who ran the Stroh Ice Cream division, became a quadriplegic after a fall from a horse on his farm in 1982. And so on.

All of which served to make 1989–the year of the failed sale to Coors–something of a shock to the family. For the first time the company couldn’t come up with dividend payments. “My generation probably grew up with the illusion that things were going to be pretty good,” says Greg Stroh. “We had to make adjustments.”

Eric Stroh was hit particularly hard. His first wife had to briefly loan him money to help him make ends meet. In 2009, a few months after the checks stopped for good, the overweight and diabetic Eric collapsed, alone, after letting a leg wound go untreated–most of his estate went into trusts to pay liabilities to his two former wives (the second one had gone to high school with Frances).

Frances and her two surviving brothers each inherited $400,000 from a trust. She also inherited her dad’s collections of antique cameras, guns and guitars–some of which turned out to be fakes, and others, fittingly, worth pennies on the dollar of what her father had paid for them.

To learn more about how to insulate your family from the unintended consequences of wealth, contact Fonthill Counseling for a fee consultation. 

Philadelphia Prep School Drug Ring: Affluence and Substance Abuse (and really good business planning)

Two young men, 25-year-old Neil Scott and 18-year-old Timothy Brooks, developed what they allegedly called the “Main Line Take-Over Project” (the Main Line referring to a group of affluent towns and cities outside Philadelphia). Their business plan: Take over the drug trade at some of Pennsylvania’s best schools. The team also had at least eight employees with a sophisticated business infrastructure. Scott and Brooks would allegedly push their dealers to each move at least one lbs of pot per week, and offer incentives like lower drug prices and the ability to buy drugs on credit if they successfully hooked new customers.

Montgomery County authorities announced April 20th that they were able to destroy this ambitious effort. They confiscated marijuana, hash oil, cocaine, ecstasy as well as cash and weapons and arrested the pair allegedly at the center of it.

“They were in business to make money, and they were going to do whatever they needed to do to make sure that no one threatened their business,” Montgomery County District Attorney Risa Vetri Ferman said.

Officials claim Scott ran the operation by shipping pot from California to Pennsylvania, while Brooks supervised sub-dealers at area high schools.

And these weren’t just any schools. They include the prestigious Haverford School ($35,000/yr tuition), from which both Scott and Brooks graduated. Also included were Conestoga, Radnor, Harriton and Lower Merion – each of which have some of the highest SAT scores in Pennsylvania.  According to the district attorney’s office, all had students tied to the drug ring. College students involved hailed from Gettysburg, Haverford and Lafayette Colleges.

Authorities seized stacks of cash and some semi-automatic weapons
Authorities seized stacks of cash and some semi-automatic weapons

In brief comments Tuesday, Scott’s lawyer Tom Egan said his client’s “main concern … is how the mandatory minimums are going to operate if he’s indeed guilty of the offenses.”

Greg Pagano, Brooks’ attorney, spoke more extensively regarding his client, who went to the University of Richmond in 2013 on a lacrosse scholarship then left after one semester. He said Brooks had gotten injured, after which he was at home, “idle and suffering from some depression” when he got involved with Scott “at a very susceptible, low point in his life.”

“He’s willing to accept responsibility for what he did,” Pagano said of Brooks, whom he said “was involved in this conspiracy for a very, very short period of time.”

In a news conference and release, authorities laid out what they described as an elaborate operation to build up business. This effort included things like offering incentives to sub-dealers, such as lower drug prices and being able to buy them on credit.

Including Scott and Brooks, eight people have been arrested in the case, an arrest warrant is out on another, and there are petitions for two juveniles. All but two of those arrested attended local schools such as Lafayette College, the Haverford School and local public high schools. They face a host of drug, criminal conspiracy and other charges.

Reflecting on the areas where this alleged drug scheme operated, Seth Williams — the district attorney for Philadelphia, which is near the schools in question — said in a press release, “The days of, ‘It can’t happen here’ are long gone.”

The arrests follow an investigation that began in January. Authorities say seized text messages showed the suspects’ plans to expand the business, with Scott giving Brooks business advice on how to expand marijuana sales in local high schools and Brooks encouraging sub-dealers to “efficiently distribute drugs at their schools,” Ferman’s office said.

Authorities assert the discovery of a loaded .223 caliber AR-15 assault rifle, in addition to a semi-automatic pistol and another rifle, suggest the drug ring’s leaders had the capability to use force.

Ferman admitted she’s bothered by the fact Scott — who left Connecticut College after three semesters of study after being sanctioned for using marijuana and creating fake IDs — and Brooks both attended Haverford, then allegedly did what they did.

“You’re dealing with kids from one of the finest institutions probably in the country,” she said. “To take those skills and turn it into this kind of illegal enterprise is very distressing.”

California Fight Over Affluenza Defense

California lawmaker, Mike Gatto, is proposing a new law that would ban the use of “affluenza” as a defense in criminal trials. In December, a Texas teenager was spared jail time in a fatal drunk-driving crash. The teen’s defense team’s supporting evidence was that he was incapable of understanding consequences for his choices due to affluenza

The Los Angeles-area state Assemblyman introduced a bill this week that would prohibit considering a person’s privilege when sentencing – basically, environmental conditions impacting a defendant’s behavior should be ignored. 

“The fact that a defendant did not understand the consequences of his or her actions because he or she was raised in an affluent or overly permissive household shall not be considered a circumstance in mitigation of the crime in determining the punishment to be imposed,” the bill states.

The bill is a response to a controversial Texas case. In December 2013, State District Judge Jean Boyd sentenced a 16 y/o Ethan Couch to 10 years probation for drunk driving and killing four pedestrians and injuring 11 after his attorneys successfully argued that the teen suffered from affluenza and needed rehabilitation, and not prison. The defendant was caught on surveillance video stealing beer from a store, driving with seven passengers in his father’s Ford F-350 pick-up, speeding (70 MPH in a 40 MPH zone), and had a blood alcohol content of .24‰, three times the legal limit for an adult in Texas, when he was tested 3 hrs after the accident. Traces of Valium were also in his system. Dr. G. Dick Miller, a psychologist hired as an expert witness by the defense, testified in court that the teen was a product of affluenza and was unable to connect his behavior with consequences due to his parents teaching him that wealth buys privilege and insulates him from repercussions. The rehabilitation facility near Newport Beach, California (Newport Academy) that the teen will be attending will cost his family an estimated $450,000 annually.

Back to Gatto – He said he is trying to prepare for the next time someone attempts to hide behind the affluenza defense. 

“People often think of the Legislature as too reactive,” Gatto told the L.A. Times. “Up until last year, for instance, it was not illegal to commit rape if the victim thought the rapist was her husband or boyfriend, and people said how did you let this stay on the books so long? We’re trying to be proactive.”

The bill, introduced Tuesday, January 14, may be debated in committee as early as February.