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Charles Sonnenberg Of Frugal MacDoogal On The Changing Retail and Distribution Landscape

August 5, 2011

Nashville-based Frugal MacDoogal Wine & Liquor Warehouse is the largest beverage alcohol retailer in Tennessee. Owner Charles Sonnenberg started the business in 1983 and branched out to South Carolina in 1990, when he opened a second store in Fort Mill, and again in 2004 with a third store in Columbia. Reliable industry sources estimate that his annual revenues are $45 million. Sonnenberg believes the entrance of Berkshire Hathaway’s McLane Company into the beverage alcohol distribution business last year (with its purchase of Empire Distributors in North Carolina and Georgia and Horizon Wine & Spirits in Tennessee) could signal a paradigm shift in the way beverage alcohol goes to market. He recently spoke to Shanken News Daily about the changing wholesale and retail environment.

SND: How has the entrance of Berkshire Hathaway’s McLane subsidiary changed the wholesaler situation in Tennessee?

Sonnenberg: We haven’t seen any changes thus far, but I think McLane’s strategy is long-term. Tennessee and Georgia have very stringent franchise laws, and so McLane can be certain of maintaining all the brands at Horizon and Empire. They can thus put their foot in the water and see if their presumed distribution model would work in beverage alcohol, confident that suppliers can’t remove or transfer brands. For obvious reasons, they’ve paid very high multiples for these businesses. But we’ve seen no changes in Tennessee, even though the transaction occurred at the end of last year and was consummated in February. McLane and other large national grocery distributors function at a very high level, and there’s no reason why they shouldn’t be able to do that in beverage alcohol. For the most part, beverage alcohol isn’t perishable, has high per-case values, the number of SKUs pales in comparison to what they’re presently distributing, and their model probably shows that they can make a gross profit far higher than what’s presently being accomplished. So it appears that they’ve entered small markets to test this strategy. We don’t yet know what their strategy is, or whether they intend to purchase any major beverage alcohol distributors. But I do believe we’ll see a paradigm shift, the likes of which we haven’t seen since Prohibition.

SND: Has there been any impact on your business, in terms of delivery efficiency in your markets?

Sonnenberg: No. All they’ve done is take ownership. They haven’t implemented any significant changes, and I doubt very much that they will. They’ve maintained staff and structures. If and when they choose to implement changes, I think they’ll strike very aggressively on a massive scale, way beyond these markets.

SND: Are today’s distributors vulnerable?

Sonnenberg: The economic numbers for profitability have changed significantly, and distribution costs have increased dramatically. For the first time, as a general rule, wholesalers need to make more percentage in their business than retailers. The question is, what services are they providing for this elevated cost of product? The extra share they’re taking out is coming from the retailer, not the supplier. So we get back to the fact that the wholesaler is getting tremendous pressure from the supplier, and that’s translated into economic costs, some of which they’re able to pass through. But we return to the fundamental issue: What services are wholesalers providing to the marketplace? At the large retail level, what services do they provide? Their role has been diminished dramatically over the years, and good retailers are now very sophisticated in every aspect of their businesses. Large chains like Costco, grocery chains like Safeway and big box operators are getting into private labels, where they can get enhanced margins. Frequently, they’re putting national brands at very aggressive prices to attract customers and then converting them to their own high-margin private label products. They’re abusing the national brands, getting the consumer in and very successfully moving them to their own brands.

SND: Are you in the private label business?

Sonnenberg: Yes. Private label represents an alternative channel that’s financially productive. That’s especially true in wine, where traditional brand loyalty has diminished dramatically. Private labels at retail have really proliferated in the past few years, and that will continue for the foreseeable future.

SND: How successful is your control label business?

Sonnenberg: We’re seeing very favorable results, particularly in wine. The retort frequently heard from suppliers is that low pricing will dry up and sourcing will become very difficult. But wine is available from so many emerging new regions that there’s no shortage of quality juice globally.

SND: Where are you sourcing most of your control label wines?

Sonnenberg: It vacillates pretty rapidly due to pricing. At present, we have very good sources in Argentina and Chile. Lately, inexpensive, quality juice from Australia has become more scarce. California and other U.S. vineyards up until recently have been awash in quality value wine. If the dollar turns and strengthens there will be a lot of control label activity from Europe. Right now it’s purely the dollar that’s inhibiting further sourcing there.

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