by Mike Vogel
Updated 3 yearss ago
Last year, in a move little noted outside the beverage industry press, Coral Gables-based liquor maker Bacardi shifted most of its national distribution, $1-billion worth of business, to a longstanding Miami wholesaler known as Southern Wine & Spirits.
“Suddenly that whole business moved over. It was a big blow to the competition,” says Harry Kohlmann, CEO of Park Street, a Miami-based advisory and services firm to the spirits industry.
The Bacardi announcement went over public relations newswires just an hour and a half after familyowned Southern announced it was merging with a rival wholesaler, family-owned, Texas-based Glazer’s. The deal added seven states to Southern’s portfolio and gave Southern, already the industry’s leading player, even more heft.
Bacardi’s acknowledgement of the dominance of the new Southern Glazer’s Wine & Spirits was confirmed further in January. Campari America, the U.S. subsidiary that controls Wild Turkey, Skyy Spirits, Grand Marnier and other brands, handed Southern 14 markets on top of the ones Southern already managed for it.
Southern serves as middleman between the wineries and distilleries that produce alcoholic beverages and the retailers, bars and restaurants where consumers buy them. If you imbibe wine or spirits in Florida or 43 other states, you’re likely drinking a product that Southern has handled. Depending on who is measuring, Southern’s market share in the $90-billion wine and spirits wholesale industry is more than that of its next two to three competitors combined. It’s the nation’s 17th-largest private company and Florida’s third.
Southern’s profile in Florida extends beyond the liquor business. It’s the largest financial supporter of Step Up For Students, the Florida program that lets corporations steer tax dollars to scholarships for K-12 students to attend private schools. Roughly one in four dollars in the program — funding 21,000 of the 98,000 Step Up students — comes from Southern. This year, it pledged a record $150 million for the upcoming school year, bringing its total since 2010 to $465 million.
Closer to its core business, it hosts two of the nation’s highestprofile food and wine festivals, one in New York and, in Florida, the South Beach Wine & Food Festival, a five-day celebrity-packed fundraiser for FIU’s Chaplin School of Hospitality and Tourism Management. Its title sponsors are the Food Network and Cooking Channel.
Southern isn’t chatty with the media. Its “priority owners,” the Chaplin family, generally speak only for the occasional trade press article. (For this article, festival founder Lee Brian Schrager, senior vice president for communications and social responsibility, was available to talk about its festivals and community work, though he also answered some questions about the company itself.) The headquarters is in a warehouse building in an industrial area of Miami, devoid of signage except for a few circular “SG” logos easy to miss driving by.
Creating wine demand
Southern got its start in 1968 when an investor group led by Jay Weiss acquired a small Miami distributor. “Jay Weiss was the engine. He’s the one that started them all on course,” says Patrick “Chip” Cassidy, a veteran of the liquor industry and longtime instructor at Florida International University’s hospitality school.
Harvey Chaplin, now the company’s chairman, joined so soon after that purchase that the company counts him as a founding investor. Chaplin, who ran the company’s day-to-day operations, is a Brooklyn native who never went to college and got his start in the mailroom of a New York distiller called Schenley Industries, at the time one of the nation’s largest liquor companies.
Chaplin rose to become a Schenley marketing executive.
The state and nation were different beverage markets then. Drinks with dinner meant martinis and other spirits, not wine. Around the time Chaplin joined Southern, so did Mel Dick, a salesman for E.&J. Gallo, as wine sales manager. Dick got Southern involved in staging tastings at restaurants to educate bar and restaurant owners and the public on wines. Southern donated wine to high-profile charity events to increase wine drinking among taste-shaping elites. At Dick’s invitation, R. Michael Mondavi came to south Florida from his family winery to train Southern’s salespeople.
Wine consumption in the United States, and the number of wineries, soared in the ensuing decades; within the industry, Dick and Southern get substantial credit for the shift in American beverage tastes. “Everyone was slow to pull the trigger on wine except Southern,” Cassidy says.
Dick became a part-owner of Southern and president of its wine division. Today, wine makes up half of Southern’s sales, and the company has more than 1,500 trained sommeliers; 15 of the 147 holders of Master Sommelier diplomas in the United States work for Southern.
Southern’s spirits salespeople copied the success of its wine sellers. Southern, Chaplin once said, was built on wine. Dick’s method became one of Chaplin’s “seven commandments”: Build brands at restaurants and bars first, then aggressively grow sales off-premises. (The other commandments stress the importance of retaining people, growing relationships, innovation, training, and investing in the business.)
The Chaplin fortune — he bought out Weiss in the 1990s, according to the Miami Herald — rose with those sales. Harvey Chaplin and family had a net worth of $1.2 billion in 2006, according to Forbes.
Weiss, meanwhile, served long as a civic leader and had become such a philanthropist that when he died in 2004, the Miami Herald wrote, “Jackson Memorial Hospital and the University of Miami have lost their guardian angel.” Weiss “lavished millions of dollars” on charities, the Herald reported.
Southern, under the Chaplins, has maintained the company’s generous charitable giving.
Southern expanded quickly from its Miami base, acquiring a California distributor in 1969, three years before it achieved statewide distribution back home in Florida. Over time, it became the most aggressive consolidator in the industry, and distillers and wineries that wanted an avenue for national distribution had to consider Southern.
By 2015, Southern operated in 38 states and was the largest distributor in the nation. Then came what industry intelligence firm IBISWorld calls the “landmark merger” — terms weren’t disclosed — with Glazer’s, a distributor in 14 states, Canada and the Caribbean. Harvey Chaplin remained chairman. Glazer’s Bennett Glazer became executive vice chairman. Harvey’s son Wayne, a University of Miami law school grad, became CEO.
“They’re the gold standard in a way,” with a scope and economies of scale tough to beat, says Park Street’s Kohlmann, a former McKinsey strategy consultant. “They are one of a kind now.”
Shanken’s Impact Newsletter, a respected industry source in New York, projects $17.5 billion in revenue for Southern this year, up 6.2% from 2016. Southern, the middleman, is actually larger than some of the best known drink makers it represents, powerhouses such as Pernod Ricard, Bacardi, Moet Hennessy and Gallo. Florida, the nation’s second-largest alcohol market, is Southern’s second-biggest market by revenue after California, with a projected $2.75 billion in revenue this year.
In Florida, Southern has made its presence felt in Tallahassee, where it’s known for its political contributions ($336,000 combined in 2015 and 2016) and fierce protection of its place in the government-mandated market structure. Florida, like many states after Prohibition, mandated a three-tier distribution system for alcohol to keep any one sector — and organized crime — from dominating the industry. In three-tier states, the law requires producers to sell to wholesalers, who sell to retailers, restaurants and bars. There can be no crossownership among the tiers.
Challenges to the three-tier system continue to crop up nationally. The system has “propped up” distributors, according to an IBISWorld report, by preventing manufacturers and retailers from bypassing the middleman as has happened in other industries — meaning consumers pay more.
Markups in the industry vary widely by brand, with wholesalers adding 18% to 45% to the price they pay manufacturers. But overall, the wholesale industry’s profit margin is just 3.5% (higher for larger operators such as Southern) after costs. The industry is notably labor-intensive, according to IBISWorld.
Amazon, meanwhile, has made inroads in online ordering of wine. And states, including Florida, have chipped away at the three-tier system by allowing home-grown craft distillers, brewers and small wineries to sell direct to consumers in some circumstances.
In Florida, in the 1990s, Southern fought direct-to-consumer wine sales. Abandonment of the three-tier system would be of “considerable concern” for distributors, IBISWorld says. But in Florida, the three-tier system appears safe. Its defenders say the system helps government collect taxes, keeps alcohol away from minors, eliminates the need for manufacturers to have their own sales forces and provides good customer service for retailers. Says Schrager, “The three-tier system has worked to a lot of people’s advantage.”
Navigating differing state regulations and markets has brought dust-ups in some areas. For example, in 2006, Southern and other big New York wholesalers agreed to a $1.6-million fine to settle an investigation brought by then New York Attorney General Elliott Spitzer over alleged violations of state alcohol laws involving payto- play practices — gifts to customers, discounts to top retailers and in some cases, setting up sham ad companies to pay for retail advertising since distributors are prohibited from that practice. Many of the practices were legal for products other than alcohol, Spitzer noted.
In the marketplace, distributors have to contend with rapidly changing consumer tastes. The craft industry and the national trend toward purchases of premium lines and buying local have eaten into the share of big brands. That trend — evident throughout consumer goods — has had pluses for distributors. “The market is continuing to premiumize in both wine and spirits, and that’s very positive. For 2017, we’ll continue to see value grow faster than volume,” Wayne Chaplin said at a Shanken conference in March.
Booming numbers of new products and differing preferences among millennials, women and multicultural consumers have had an impact as well. Once upon a time, says Schrager, “you drank what your father drank. It certainly has changed.”
Growth in the industry has averaged 3% to 4% annually for wine and spirits, Kohlmann says. But IBISWorld projects just 0.3% going forward. Given the industry’s margins, inventory control and logistics skill are at a premium, and the trade press reports that Southern has an advanced operation. It also looks beyond alcohol and distributes coffee and glassware wholesale.
Today, the third generation of Chaplins works at the company. More industry consolidation is expected. Schrager says he has no doubt Southern will one day operate in every state. Wayne Chaplin at the March conference said Southern is running a “flatter, tighter” operation. Schrager explains the corporate outlook: “Big is the new small. As big as we are, we’re focused on making our company smaller.”
The university has been a major beneficiary of Southern Glazer’s largesse.
The list of benefi ts Florida International University has reaped from its proximity to industry-dominant Southern Glazer’s Wine & Spirits is long. There’s the Southern Wine & Spirits Beverage Management Center, a beverage facility at the university that supports product evaluation, research and teaching. There’s the Jay W. Weiss Wine & Spirits Laboratory, named for a late Southern founder. Both are in the Chaplin School of Hospitality and Tourism Management, named for the family that owns Southern. There’s a Harvey R. Chaplin Eminent Scholar Chair, the first endowed chair in the nation for beverage management. Wines from Southern stock the wine cellar at the university’s teaching restaurant.
But the biggest benefit is a beneficiary of the annual South Beach Wine & Food Festival extravaganza that’s raised $26 million over its 16 annual runs. It drew more than 65,000 people this year, and 400 chefs, winemakers, and distillers. FIU students — along with students from other institutions and Miami-Dade schools — work the event, with tasks ranging from assisting chefs to dealing with sponsors. Festival founder Lee Brian Schrager, now Southern’s senior vice president for communications and corporate responsibility, says the festival originated as a fundraiser for FIU and a chance to educate the public on brands Southern represents. The festival’s sibling, the Food Network & Cooking Channel New York City Wine & Food Festival, benefi ts a New York food bank and hunger relief program. Schrager says a third festival, perhaps in Texas, is possible.