Southern Wine and Spirits of America, Inc.

1600 NW 163rd Street
Miami, Florida 33169-5641
U.S.A.
Telephone: (305) 625-4171
Fax: (305) 625-2790
Web site: http://www.southernwine.com

Private Company
Founded: 1968
Employees: 10,000
Sales: $7 billion (2006 est.)
NAIC: 424820 Wine and Distilled Alcoholic Beverage Merchant Wholesalers; 424810 Beer and Ale Merchant Wholesalers

Southern Wine and Spirits of America, Inc., is the single largest distributor of wine, spirits, beer, and nonalcoholic beverages in the United States. Operating in 27 states, from Florida to Hawaii, Southern represents more than 1,500 wine, spirits, beer, and beverage suppliers and markets and distributes nearly 5,000 individual brands. In 2006, Southern commanded more than 19 percent of domestic wholesaler revenues for wine and spirits. Chairman and CEO Harvey Chaplin and his family own more than 50 percent of the private company.

FOUNDING

In 1968, a small group of investors, led by Walter Jahn, a New York liquor executive, took over a small Miami liquor distributor. The founding executives brought to the new company over 50 years of experience in the liquor industry. Jay Weiss was born in Brooklyn, earned an education degree at Tulane University, and moved to Miami at age 21. He spent the next 20 years working in and operating bars and lounges in Miami before coming to Southern. Harvey Chaplin, another Brooklyn boy, brought to Southern over 20 years experience in the industry, including marketing skills and work as a distributor in upstate New York. Mel Dick, the third executive from Brooklyn, added knowledge of the wine business to the mix, having worked as a sales executive for E. & J. Gallo Winery.

At the time Southern came into existence, more than 10,000 separate wholesalers were distributing liquor in local communities around the country. The system of local liquor distribution emerged as a result of the liquor industry's past and the federal and state laws and regulations developed, in part, to keep bootleggers and mobsters out of the business.

In the United States, alcoholic beverages were manufactured, distributed, and sold according to a highly regulated system that involved three tiers. The first tier consisted of the producers and suppliers: the distillers, the vintners, the brewers and the importers. This group sold their beverages to the second tier, the designated wholesalers and distributors at the state level. The distributors then sold the beverages to the third tier, the legally licensed local retailers, including restaurants, bars, individual stores or retail chains or (in some states) state liquor stores.

This system began developing in 1933. Between 1919 and 1933, under the 18th Amendment to the Constitution, the production, distribution and sale of all types of alcoholic drinks were prohibited (except for a few with religious or medicinal uses). President Franklin Roosevelt included the repeal of Prohibition among legislation introduced in his first 100 days in office. The result was the 21st Amendment to the Constitution, repealing the 18th Amendment. The passage of the 21st Amendment did more than just end Prohibition. First, the individual states regained all power over the distribution and sale of wine, spirits, and beer. Second, both the federal and state governments were given the authority to tax these beverages. Finally, it led to regulations that outlawed the anticompetitive practice of the "tied-house," where a manufacturer owned one or more retail outlets where only its own products were sold. Under this system, generally no interest could invest in more than one tier.

To control distribution and sales, state legislatures had the choice to put into practice one of two legal approaches: a competitive model or a control model. In the 32 states using the competitive model, private businesses distributed and sold alcoholic beverages. Under the control model, used in the remaining 18 states, the state generally managed the distribution and/or the sale of the beverages. Under both models, the state decided the requirements and regulations as to who could be a distributor and where and how they could operate within the state.

GROWTH: A TASTE OF THE GRAPE

In the late 1960s, suppliers drove distributor's growth. When a supplier wanted to move into a new location or be stocked by a new customer, the distributor would have its sales reps take the product to the potential customers and, it was hoped, establish a relationship, make the sale, and keep selling. With a small portfolio of liquor brands, Weiss, Chaplin, and Dick looked for ways to generate growth through their own efforts. An early successful endeavor was to increase orders for wine from the restaurants, bars and retail stores they served.

At the time, wine was a minuscule portion of most distributors' business. To make wine a more popular alternative to liquor, the folks at Southern took a two-prong approach to developing sales of premium wine brands, a process known as brand building. First, they worked hard to educate their customers. The company held wine tastings and conducted seminars for restaurant and bar staff, often bringing in experts, such as R. Michael Mondavi, head of his family's California winery, to give presentations. Second, Southern courted elite taste-makers by donating wine to local charity events.

Before too long, customers were relying on Southern for advice and help with their wine lists. As the customer base expanded, sales of higher-quality jug wine increased in Southern's territory, followed by premium wines. This building of wine brands did not go unnoticed by spirits suppliers. Many ended up giving Southern their spirits business as well.

The force behind this effort was Mel Dick. Hired as general sales manager–wine in 1969, four months after the founding of the company, Dick was charged with developing Southern's wine operations. The approach Dick took—stressing customer service, focusing on premium brands, and working with restaurants, bars and nightclubs (what the industry terms "the on-premise business") as well as retail stores (off-premise business)—served as the model for the company as it grew. Dick became vice-president-wine in 1972, president of the wine division in 1976, and an owner of the company in 1984. He added the title of senior vice-president in 1991.

COMPANY PERSPECTIVES

Our Mission: To be the best managed, most competitive and most knowledgeable distilled spirits, wine, beer and nonalcoholic beverage distribution Company in the United States. To deliver exceptional customer satisfaction by distinguishing ourselves as an innovative organization; who, by constant reassessment, seeks to continually exceed the expectations of our customers and supplier partners while positioning ourselves for the future. Our Beliefs and Values: Our people are our most fundamental resource. Diversity in thought and actions are welcome. Individual differences are respected. We recognize that employee contributions through teamwork and empowerment are critical to the success of the Company. Our goal is to provide a positive environment for our employees that encourages creativity, recognizes innovation and rewards results.

GROWTH AND STATEWIDE DISTRIBUTION

Developing a strong wine and spirits portfolio locally was not the only way in which Southern grew. The company also took responsibility for growing its territory, beginning in Florida. From its home base in Miami, the company first expanded into Palm Beach and Jacksonville. By 1972, it had established the capacity to distribute its beverages throughout Florida, becoming one of the first companies to do so.

From Florida, the company headed west to California, which had the largest per capita wine sales in the country. In 1969, Southern acquired a small, struggling distributorship in Southern California, called the Landfield Company. Replicating the practices it had honed in Florida, Southern Wine and Spirits of California mended fences with suppliers, trained, and fielded a knowledgeable sales team, built brands, and developed operations and distribution infrastructures. In 1984, Southern bought a small distributor in Northern California and offered a statewide sales, marketing, and distribution system, the first distributor in the state to gain such capacity. Meanwhile, in 1972, Southern began operating in Nevada, which had the highest alcohol consumption per capita.

The year Southern moved into Northern California, Wayne Chaplin joined the company. Son of founder and senior executive Harvey Chaplin, Wayne held various positions at Southern over the next ten years and was appointed president and chief operating officer in 1994. At that time, his father became chairman and CEO.

REGIONAL GROWTH

In the early 1990s, Southern began an aggressive growth plan. The company followed its typical pattern of buying local distributors in a state, providing extensive service and well-trained sales representatives (usually from within the state) and developing a statewide distribution capacity. That model soon became the standard for the industry.

Southern moved into Arizona in 1992, South Carolina in 1993, Pennsylvania in 1995, Hawaii in 1996, and Kentucky in 1998. That year, the company's sales reached $2.8 billion. In 2000, operations began in New Mexico, followed by Colorado in 2001, and Illinois in 2002. By that time, Southern was selling one of every ten bottles of wine in the country according to Business Week. In 2003, the company was operating in ten states and had revenues of $5.4 billion, a 22.7 percent increase over the previous year. Early in January 2004, founder Jay Weiss died at age 76.

The expansion continued. In 2004, Southern acquired Premier Wine & Spirits, one of New York's larger distributors. In each of its new markets, the company was willing to invest significantly in people, facilities, and technology. A senior vice-president described Southern's commitment in a BeverageWorld article, using upstate New York as an example, stating "We told our suppliers in January that we would be in operation by April 1. That gave us only 90 days to create a business where there was none before. We had to open a warehouse, hire 205 people, get 22 trucks on the road and get all of the software and administrative support operational. We did it in 47 days."

The year 2005 saw a major push by Southern to open offices in the so-called control states, where states had monopolies on the sale of alcoholic beverages, through state liquor stores, for example. Southern purchased a minority stake of distributor The United Group, acquiring United's control state operations in New England (Maine, New Hampshire, and Vermont) and the Mid-Atlantic (Virginia and North Carolina). Later in the year, the company moved into West Virginia and Mississippi. In September, Southern created a national team to focus exclusively on the control states, the first of its kind by any distributor.

Also in 2005, Southern acquired Lauber Imports, Ltd., creating an independent, fine-wine division in New Jersey to serve that state, New York, and Pennsylvania. Southern already owned Shaw Ross International Importers, based in Florida.

KEY DATES

1968:: Southern Wine and Spirits of America founded in Miami, Florida.
1969:: Company expands into California and builds wine business.
1972:: Company becomes one of first distributors to provide statewide distribution, merchandising and promotional support in Florida.
1986:: Southern is the first company to gain statewide distribution in California.
1994:: Wayne Chaplin, son of founder Harvey Chaplin, is appointed president and chief operating officer.
2005:: Southern creates the first national entity to work with the country's "control states," U.S. states wherein the government controls the sale of alcohol.

The following year, the company moved into Alabama, another control state. It also entered into partnership with Alaska Distributors Company, which created Southern Wine/Spirits West and gave Southern entry into the control states of Washington, Oregon, Idaho, Montana, Utah, and Wyoming. With Pennsylvania, where it had operations, the company was doing business in 14 of the 18 control states.

In addition to the Control States Division, Southern realigned its sales force into teams specially trained to handle a specific sales channel. These included major supermarket chains, national hotel chains, independent restaurants, and national discount stores. Again, Southern was one of first beverage distribution companies to do this.

INTERSTATE WINE SALES

The consolidation wave among distributors also effected suppliers, particularly within the wine industry. In 1950, there were about 200 wineries across the United States and some 5,000 distributors. By the late 1990s, that ratio had been reversed, with about 2,000 wineries nationwide but only about 300 distributors, according to the Wall Street Journal. And the top five distribution companies accounted for one-third of the market.

Distributors were mainly interested in wineries that could produce lots of wine, generally more than 150,000 cases annually, because that was where the money was. This effectively shut many smaller suppliers out of that market. The distributors claimed that part of the problem was the increase in labels being produced by wineries, in California an average of five labels per winery. Moreover, the vintners were overproducing, causing a glut on the market.

One venue small vintners turned to was mail-order sales, through catalogs and web sites. While that method was successful for selling wines within their home states, it was limited in that in many states regulations resulting from the three-tier distribution system restricted direct sales from out-of-state suppliers.

In 1997, the Florida legislature passed a law that made it a felony for out-of-state companies to ship beer and wine directly to customers in the state. The penalty was up to five years in prison. The mail-order legislation, which was strongly lobbied for by Southern and other distributors in the state, was generally deemed unenforceable, and a state court ruled that Florida had no authority to collect state taxes from out-of-state suppliers. However, five other states followed Florida's lead.

Over the next few years, local wine collectors in Florida and several other "restricted" states filed a total of 11 lawsuits. The debate addressed a variety of factors, ranging from individual liberty to minors' access to alcohol to collection of sales taxes to states rights to regulation of e-commerce. In 2005, the U.S. Supreme Court struck down laws in Michigan and New York that allowed in-state wineries to ship directly to in-state consumers but banned interstate wine shipments.

As a result, a federal judge in Florida tossed out the state's ban on out-of-state purchases. Southern and other distributors as well as sellers and winemakers lobbied for legislation regulating such purchases, but were not successful. Early in 2006, the state announced regulations permitting Florida consumers to receive shipments from wineries outside the state. Although there was no cap on the size of the winery allowed to ship into Florida, it was generally thought that most shipments would be from small and boutique operations, that is, those not carried by the state's distributors.

MORE CHANGES IN THE INDUSTRY

Southern's growth, while aggressive, was not unique in the industry. Consolidation had been occurring among the primarily family-owned distribution companies just as it had among department stores, drug stores, newspapers and radio stations. Acquisitions were almost the only way for distributors to move into a new territory, as it was hard for new distributors to form because of various state laws, which often included residency, or six-figure inventories.

In Massachusetts, for example, it was expected that in 2007 there would be only two major liquor distributors in the state, after Martignetti acquired United Liquors. In May 2006, Atlanta-based National Distributing Company announced it was merging with Republic Beverage Company of Houston. The resulting company would be the second largest wine and spirits distributor in the United States, behind Southern.

A key factor pushing the distributor consolidation was the large suppliers, which were also consolidating. In the wine industry, by 2005, the roughly 50 big name wineries, such as Gallo, Mondavi, and Beringer, made nearly 90 percent of the wine sold in the United States.

On the liquor side of the business, for example, Paris-based Pernod Ricard acquired Seagram in 2001, then bought two-thirds of Britain's Allied Domecq in 2005 for $17.1 billion. (Fortune Brands took over the rest.) That purchase made Pernod Ricard the second largest producer of spirits and the fourth largest wine company in the world. Diageo, the leader in the industry, was itself the result of the merger of Guinness and GrandMet in 1997.

Huge suppliers wanted distribution systems within the United States that could serve their national markets in order to meet or beat their projected sales goals for their various brands. Diageo brands included Johnnie Walker, Smirnoff, Guinness, Tanqueray, and Sterling Vineyards wines. Pernod Ricard's portfolio contained such well-known brands as Chivas Regal, Mumm, Jameson, Beefeater, and Jacob's Creek wines. There was a great deal of competition among U.S. distribution companies to wholesale these brands.

Late in 2005, Pernod Ricard announced that Southern would be its exclusive distributor of its full line in Florida, Illinois, metropolitan and upstate New York, Kentucky, and South Carolina; be the broker for its spirits and wines in North Carolina, Virginia, and West Virginia; and continue to represent certain of its brands in Nevada and New Mexico.

In 2006, a legal investigation in New York State into the payment of illegal inducements to favored retailers led to Southern and three other large wholesalers and their affiliates in the state agreeing to pay $1.6 million and adopt a series of reforms. However, with its size and clout in the U.S. spirits and wine businesses, Southern looked forward to maintaining its leadership position.

Ellen D. Wernick

PRINCIPAL SUBSIDIARIES

Shaw-Ross International Importers; Premier Wine & Spirits of New York; Southern Wine & Spirits of Upstate New York; Southern Wine & Spirits/Romano Brothers Beverage Company; Southern Wine & Spirits of California; Southern Wine & Spirits of Florida; Southern Wine/Spirits West.

PRINCIPAL COMPETITORS

The Charmer-Sunbelt Group; National Distributing Company; Young's Market Company; Republic Beverage Company.

Southern Wine and Spirits of America, Inc.

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Southern Wine and Spirits of America, Inc.

1600 NW 163rd Street
Miami, Florida 33169-5641
U.S.A.
Telephone: (305) 625-4171
Fax: (305) 625-2790
Web site: http://www.southernwine.com

FOUNDING

GROWTH: A TASTE OF THE GRAPE

COMPANY PERSPECTIVES

GROWTH AND STATEWIDE DISTRIBUTION

REGIONAL GROWTH

KEY DATES

1968:: Southern Wine and Spirits of America founded in Miami, Florida.
1969:: Company expands into California and builds wine business.
1972:: Company becomes one of first distributors to provide statewide distribution, merchandising and promotional support in Florida.
1986:: Southern is the first company to gain statewide distribution in California.
1994:: Wayne Chaplin, son of founder Harvey Chaplin, is appointed president and chief operating officer.
2005:: Southern creates the first national entity to work with the country's "control states," U.S. states wherein the government controls the sale of alcohol.