CHAIN REACTION

With sales over $120 million and double-digit same-store sales gains over a year ago, this California chain has solidified operations and is moving forward to expand and increase profitability.

Let history record that 1999 was the year that Beveragaes & more!, the second-largest retailer of beverage alcohol products in the country, finally put it all together.

Not only did the nearly six-year-old chain reach profitability for the first time in its history, but it has mapped out and is assiduously following a course that its top management team — a blue-chip collection of savvy, seasoned executives culled from a variety of other industries — has carefully crafted.

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The Beverages & more! senior executive team includes (from left) Steven McLaren, senior vice president, operations; James Simpson, chief financial officer; David Richards, executive vice president, marketing and real estate; and (seated) Bannus Hudson, chairman , president and chief executive officer.

They are doing this by making the shopping experience fun and applying tried-and-true, time-tested elements that comprise its strategy: lowering expenses and increasing margins by streamlining the company and its product offerings, reconfiguring processes, solidifying core markets, managing inventories, raising the average purchase and improving associate training.

Beverages & more!, a privately held chain of 16 California superstores, calls itself a “beverage lifestyle superstore.” The stores carry more than 2,600 wines, 600 domestic and imported beers (including microbrews), over 1,250 spirits (including more than 100 single malt Scotches), and a wide selection of non-alcoholic beverages. It also features more than 200 premium cigars and accessories at a concierge-staffed counter. And customers can choose from more than 800 ready-to-consume specialty foods, including fresh caviar and cheeses, chocolates, salsas, sauces, condiments and premium snack foods, and a wide selection of specialty glassware and bar and wine accessories. Beverage alcohol products represent about 85% of sales, with wine accounting for just over half of that.

The stores’ sales associates offer what is described as “highly personal, individual service and advice” to shoppers. Stores are designed for “convenience and exploration,” with color-coded shelves and highly visible signage to help customers navigate.

The retail concept offers ongoing wine, beer and food tastings, menu preparation and pairing demonstrations, notable guest chefs and winemaker appearances. A customer-loyalty program, called “ClubBev!,” provides special monthly discounts on more than 400 selected items, as well as product information and special features.

The company was founded in January 1994. In October 1997, Bannus Hudson took the helm as chairman, president and chief executive officer. The firm’s stated philosophy has always been to satisfy its customers, but as Hudson noted, “probably every retailer would tell you that. We are striving to achieve a combination of happy customers and making money. As you know, retail is detail. You’re constantly making decisions every day to make your concept competitive and stimulating and still be efficient in terms of use of capital and returning money to the bottom line.”

Hudson pointed out that “the real story here has been the turnaround accomplished over the last couple of years. Beverages & more! had a really good concept, which customers obviously appreciated: the stores were exciting. But the company made some mistakes, which are not uncommon for entrepreneurial start-ups that expand too rapidly.”

Since Hudson’s arrival, management has been working to get things back in order, which he feels it has done. Not only are sales strong and the stores exciting, but the bottom line jumped into the black for the first time midway through 1999, considerably ahead of projections. The effect was more than symbolic.

“A retailer is a businessperson,” Hudson said, “and part of what you have to do is make enough money so that you can reinvest it in growth and preserve the enterprise.”

Profitability came “sooner than we thought it would,” James Simpson, Beverages & more!’s chief financial officer, confirmed. He attributed it to “a lot of things coming together, paying attention to detail, making sure we have the right inventory, making sure expenses were in line, and making sure everybody remains focused on the key issues that drive the business.”

Throughout the company, executives stress the importance of a “fun shopping experience” as crucial to Beverages & more! “We try to have fun with things,” Hudson said, “and try not to take ourselves too seriously.” Indeed, he believes that sometimes one’s knowledge of wine is taken a little too seriously in the U.S., with the result of needlessly intimidating a segment of potential wine consumers. Making the wine experience accessible to consumers is important, he said.

“We want customers to be comfortable when asking what kind of red wine they should have with fish. And we also want to respond to questions about some remote chateau in France. We try to make our concept fun for both of these customers, as well as everybody in between.”

Basically, he reasoned, it is the idea of “having fun” that brings consumers to his store. “If you need to drink something to survive, you can drink water. For protein, you can drink milk. Alcoholic beverages, however, are consumed primarily for enjoyment.”

The in-store fun starts, he explained, with the expectations set up ahead of time, through advertising or communication with the chain’s half-million ClubBev! members. A prime element in both is a touch of almost tongue-in-cheek humor that says, “we think of ourselves as a serious business, but we want to portray ourselves to the customer as a fun business.”

All of the decor touches, from merchandised product to signage, contribute to an experience the executives want to be judged as being “larger than life,” according to Hudson. “The average customer spends about 45 minutes in our stores,” he pointed out, “and it’s not because of long check-out lines. It’s how we assort and merchandise the store. It’s identification cards that talk about product. It’s our Fat Cat, 12-pack beer, or Three Stooges Beer (a short-term, novelty item bearing the faces of Larry, Curly and Moe), or something the consumer is going to walk in, look at, and say, ‘This is a fun place.'”

A Passion For
The Business

Hudson’s arrival marked his entry into the beverage alcohol business (see sidebar). He has proven strengths as a manager in leadership and business development. The various high-powered positions he has held have generally involved company turnarounds or building a small business into a big business and making money for its owners, whether public or private.

That’s really the primary skill set I bring here,” he noted. “I don’t bring years of alcoholic beverage experience, though we have people who have that experience.” He is resolute in his belief that the principles of business, after all, transcend any specific industry.

Steve McLaren, senior vice president, operations, and one of the chain’s co-founders, said he is pleased with the “incredible variety of backgrounds” among the chain’s top management. “They are exceptional as a group. There is tremendous synergy among the four of us in the senior executive group.” McLaren, who spent 22 years at Safeway, pointed out that the company’s buyers and general merchandise managers have largely spent their entire careers in the beverage alcohol business. And he noted that store managers average more than 15 years experience in the beverage alcohol retailing industry. “Most of them have been with us since we started, which is very exciting.”

“I have a passion for the business,” said Hudson. “It’s a business that is very people-intense, and I like that aspect. A big part of our product is the experience that our associates provide people in our stores. It’s a very personal, tactile business that goes beyond just offering a good product at a fair price.”

Corporate Structure

Unquestionably, the most fundamental change Hudson has implemented has been the far-reaching restructuring of Beverages & more!’s management, which has been effectively streamlined. Consider this: the head count at the corporate office has shrunk from 82 in late 1997 to 34 today even as business has grown.

“Everybody is more hands-on,” Hudson explained. “Everybody was working hard before, but now they are working hard and smarter. We’ve really simplified the organization and streamlined the processes. We’re able to make decisions much more quickly. We’ve pushed responsibility down to the stores.”6801RETA3
For example: the chain had been involved in what Hudson describes as “some fairly complicated merchandising approaches. We had a lot of different buyers making decisions. Many of those decisions have now been moved to the store level.”

One area of great concentration now, Simpson noted, is making sure the company has enough cash on-hand. He called the industry “highly regulated,” and the payment terms “very tight. If your inventory levels get too high, you’re not going to be selling that inventory before you need to pay for it. Ideally, any retailer wants to sell his inventory before he pays for it. In the soft goods business you can have terms of up to 180 days. That doesn’t happen in this business. Here you have 30 days, so expense and inventory control become very important.”

The trick, if it can be called that, is finding the optimum level of inventory. There is, Simpson said, a “delicate balance between what you want your store to look like when the customer walks in and how fast you want to turn it. You can replenish fairly quickly in this business, so you want to keep a broad selection, yet at the same time not be too deep.”

Hudson is not shy about calling the changes revolutionary. The chain’s marketing arm, he noted, used to be highly complicated. “We’ve simplified that. We’ve experimented to find out what we need to do to drive traffic into the store. Once they’re in, they love the concept.”

The company now has a total staff of 320. Store staffs have not been cut. He said stores are “probably running more efficiently now than they were because as sales have increased, we haven’t increased staffing proportionately. Again, we’ve streamlined store operations. Some of the functions we either pulled into the Service Center (home office) or deleted.”

McLaren holds monthly meetings with all store managers and assistants. “We have a tremendous amount of communication going back and forth. They’re part of the budgeting process. They feel involved in the company…and are.”

McLaren said he views his primary mission during the next six to 12 months to be “finding the right people to let us grow. The office is set. We can expand our company very quickly with the people we have now.” The managerial and assistant managerial ranks are similarly strong and poised for growth. “Store managers and assistants have stock options in the company, so they’re part owners.”

Marketing:
Setting A Tone

David Richards, executive vice president, marketing and real estate, broadly outlined the chain’s marketing strategies. “What we’re trying to do is create the perception that we are a superior place to go to buy your wine, beer, spirits and more. And we base it, very simply, on the best selection, best value, best service.”

Customer surveys have proven an invaluable guide, said Richards, who drew a simple analogy. “Suppose that what you had was a red brick and everybody wanted green bricks. You’d be out of business. So we do surveys to find out what the ‘green bricks’ are and whether we’re achieving that. We do quite a lot of this work, just trying to understand what our consumers want.”

Focus groups are conducted in the Bay Area, as well as in San Diego. All store managers attend the focus groups “so they can hear the good, the bad and the ugly. We listen to what our consumers tell us.” About half of the chain’s clientele is female, according to Hudson.6801RETA2

Juggling cases is not a job requirement at Beverage & more!; however, these company associates seeem pretty good at it.

What a focus group provides a retailer with, he explained, “is a much bigger picture than specific pieces. For example, one of the things we got very clearly from our customers is that, ‘If you’re going to market a product you better make sure you’ve got it when I get to the store because I’m really tired of some people who market special deals and I get to the store and they’re not there.’ It’s a cardinal sin to be out of that product if you’re going to market it.”

Richards said the ClubBev! membership will continue to get bigger. “I don’t think you ever prune the lists because there are always opportunities. If you’ve got loyal users, and non-loyalists, what you want to find out is why you’ve got non-loyalists, and what would motivate them to return.”

A recent addition has been a proprietary data base management system that he claimed enables management to look at consumer purchasing behavior and target communications and promotions with a “rifle shot vs. the more typical shotgun approach.”

Building The
Average Transaction

While Hudson said the amount of the chain’s average transaction is a “moving target,” he nonetheless said he and his colleagues are hard at work figuring out ways to build it.

“I will say that we’re spending much energy on driving that number up, and it is increasing dramatically. The biggest part of our sales growth is coming through increasing the amount of money spent by current customers.”

To bring transaction amounts up, management is concentrating on “making sure we’re priced crisply on key products and that we’re in stock in serious quantities on these products, so people can buy in quantity. We’re making sure that when a person walks into our store, we have the stuff they want.”

Another way is by offering a host of related products and cross-merchandising them. For example, a variety of cheeses have been added during the last 12 months, expanding that product category, and allowing for greater synergy with wine sales.

Pricing throughout the chain is very competitive. “Good everyday fair price,” Hudson noted, “is one of the reasons consumers select us over competitors. What we want to do is take price out of the equation so that our merchandise and service can carry the day. We aren’t trying to get somebody to drive an extra five miles to save a quarter on Kendall-Jackson Chardonnay. But we don’t expect them to pay a premium.” On key products, the goal is to offer a price the consumer will find “very attractive.”

Merchandising To Serve

Questions about Beverages & more!’s merchandising philosophy are, Hudson maintained, “hard to answer without sounding trite.” The stores have basic objectives, such as being clean, well lit, attractively merchandised and safe. “We want a mother with her child to be comfortable going down the aisle and picking up a bottle of chardonnay.” Thus, product location, aisle width, lighting, cleanliness and the way associates are dressed all set the tone.

Mass displays of product are common, but vendor-supplied point-of-sale materials are not. As Hudson explained, “We rarely authorize that. We’re looking for our own store look, not a corporate store look.” The only exception comes around the holiday season, with some of the Christmas point-of-sale, “which contributes to the atmosphere we’re trying to create.”

Customers find the stores “logical and easy to shop. We want to serve people if they want to be served, and we want to let them browse if they want to browse. The store is laid out so that anybody can figure it out.”

Prices are prominently displayed, and most products carry descriptive cards. Background music is selected by each store. A service provides a variety of music types.

Advertising,
Promotional Vehicles

Hudson would not disclose the size of his chain’s ad budget, but hinted that the figure is “not major for a regional business. We’re committed to advertising, but we recognize that as a category it’s a fairly low-margin business.”

Which vehicles are most effective “varies from time to time,” he noted. Most of the chain’s efforts go into newspapers, direct mail and its ClubBev loyalty program, but it has also done radio and various public relations campaigns. “We’re continually trying new things to find out what it takes to drive new customers in the door.”

Print ads stress product and price. Hudson called it “awfully hard to communicate the atmosphere of the store.” Company research shows Beverages & more! is highly preferred versus the competition among people who shop both. “Once you get them in, they see a dynamic superstore that they prefer.”

The chain’s 500,000-member frequent buyer club (ClubBev!) has been around since the chain began, although it has “evolved” over the years. Customers join for free and receive a membership card bearing a UPC code. They can then take advantage of a number of specials targeted specifically at club members. They receive discounted pricing on items being tasted in the store if purchased the same day.

Beverages & more! schedules at least three chain-wide tastings every weekend. Additional special events are scheduled at store level. While the chain does several varied mailings per year, it does not publish a catalog. Said Hudson, “We just haven’t found that to be effective so far, although we are currently having great success with a new 20-page holiday mailer.”

Product Trends

When it comes to beer trends, Hudson said Beverages & more! is not significantly different from most other beverage alcohol retailers. “Everybody is doing a bang up business in imports right now. I don’t know if there is anything we’re doing that is dramatically better in sourcing new products, although we try to be first with new items and feature a number of exclusive products. Because of our larger assortment you’re more apt to find something different in our stores than someplace else.”

Craft brews are also continuing to be strong. “If you look at our beer mix and our best-sellers, you go down the list a bit before you get to major domestic brands, and that continues to be true.” He conceded that the “bloom is off the rose a little bit in craft beers, though they are still very popular in our stores.” Twelve-packs have also proven popular as merchandising tools.

The chain has seen ongoing interest in premium and superpremium spirits, especially recently with vodkas and tequilas. “Our business skews toward upper-end customers, and we like that business. It sets us apart from our competition.”

In wine, Beverages & more!’s bread-and-butter category, about two-thirds of its selection comes from its home state of California. The buzz among those varieties, said Hudson, centers on “allocated wines. Always is, always will be. People want what they can’t get.”

As the year’s end nears, Hudson emphasized that “all sparkling wines have been the story this year, not just champagne. Anything sparkling is higher on people’s shopping list than it was a year ago.”

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