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10Sep2009

Liquor Group Wholesale, Inc. (OTCBB: LIQR)

DateThursday, September 10, 2009 at 10:18AM

Liquor Group Wholesale, Inc. 

4600 Touchton Road

Building 100/ Suite 150

Jacksonville, FL 32246

904-285-5885                                                                            

LIQR PDF Report

 

Liquor Group Wholesale, Inc. (OTCBB: LIQR) is an emerging liquor and wine distribution company representing more than 1700 spirit and wine products with operations in 31 states. Liquor Group is based in Jacksonville, Florida, and the principals of LIQR also own 10 private distribution companies in a number of those states. Liquor Group is focused on providing a distribution channel for mid-market, nationally and internationally recognized alcohol beverage products. Liquor Group in trade publications and the press is often  referred  to  as  the  fastest  growing  full  service  liquor  distribution company in the nation.  In terms of spirits brands represented, Liquor Group is the fourth largest distributor in Florida and the fourth largest broker in Michigan. Thus far Liquor Group has had great success building on the sales  of  midsized  brands  and  creating  entirely  a  market  for new brands.

The Company was founded in 2002 and was   formed   as   a   sales organization to represent Happy Vodka® in the State of Florida and to the US Military.   In March of 2005 Liquor Group made the decision to offer Liquor Group representation to other spirit brands.  Four months later Liquor Group signed its’ first spirit brands for representation and grew from 4 SKU’s (Stock Keeping Units) to 660 SKU’s in less than one year.  A year later the firm represented over 1200 SKU's and today Liquor Group currently offers over 1700 SKU’s, including spirits, wines and other related products with over $1.08 million in annual sales.

United States Tax and Trade Bureau - Liquor Group Wholesale and the privately owned Liquor Group entities recently received confirmation from the Director of the United States Tax and Trade Bureau (TTB), the Federal Government organization regulating and enforcing Federal laws related to the alcohol beverage industry, that the patent-pending bailment distribution business model in use by Liquor Group in both License States and Control States within the US is in compliance With TTB regulations This decision has landmark repercussions for the entire liquor distribution industry. There are specific Federal and State laws prohibiting “consignment sales” of alcohol beverages, several industry members and distribution competitors of Liquor Group had levied complaints with the TTB and State Alcohol Control agencies claiming that the “Innovative Distribution” approach utilized by Liquor Group through its patent-pending bailment warehousing business model was in violation of regulations and constituted an “Unfair Business Advantage”. The advantage of the Liquor Group model is best illustrated by an excerpt from a complaint lodged with the government by a distribution competitor: “Liquor Group does not have any carrying costs for the inventory placed in their control by alcohol beverage manufacturers on a state by state basis, allowing them to continue to grow rapidly and unfettered by the costs of the alcohol beverages in their inventory; unaffected by the volume of alcohol beverages they place in each state wherein they operate; and with no need for additional capital to grow their operations; which makes them unmatched in the alcohol beverage industry, and as such they are utilizing an unfair business advantage.” As the New Economy grows, Liquor Group is the new distribution model for the industry, especially now that the TTB has confirmed that the model is fully compliant with regulations.

Recent Updates

Fred Rosen, a long-time major shareholder in LIQR and a career alcohol-beverage retailer best known for his ownership in Sam's of Chicago, the largest liquor volume retailer in the world, began consulting in the summer of 2009 assisting with distribution company acquisition strategies and brand portfolio development for Liquor Group Wholesale. Mr. Rosen was later unanimously approved to join Liquor Group Wholesale with a focus on assisting the development of a large scale retailer outreach strategy.

Liquor Group added "Fat Ass Tequila" which is now available in Florida and is in the approval process for other states, as part of a multi-state Liquor Group distribution program. Multi-Award winning Fat Ass is imported by Premium Beverage Imports. Additionally, Old St. Andrews Scotch Whisky (OSA) announced the renewal of an exclusive U.S. import and distribution commitment through Liquor Group.  

Financial Information

  • LIQR has a $20 million tax loss carry forward.

Liquor Group announced its unaudited results for fiscal fourth quarter of 2009, prior to the annual shareholder conference. Fiscal year net income was $729,828 or $0.0682 basic weighted earnings per share before non-cash expenses. Key Financials:

  • Gross margin of 38.8%
  • Net income of 40.2%
  • Current liquid ratio of +1.85

Public companies in the alcohol beverage industry include:

  • ABV - Companhia de Bebidas das Americas
  • BF.A - Brown-Forman Corporation
  • CEDC - Central European Distribution
  • DEO - Diageo plc (ADR)
  • FO - Fortune Brands, Inc.
  • LQU - Quilmes Industrial (QUINSA) S.A.
  • ROX - Castle Brands Inc.
  • STZ - Constellation Brands, Inc.
  • VCO - Vina Concha y Toro S.A. (ADR)

Innovative Distribution

The Liquor Group takes a fresh approach to bringing spirits products to the market. This unique strategy can be outlined as a business of networking with a partnership mentality. Liquor Group Wholesale never takes possession of products as they merely facilitate the transfer directly from alcoholic beverage manufacturers or importers to the State Level Clients (SLC). Liquor Group's SLC operations utilize a series of master warehouses strategically located throughout the US and Control State warehouses to store and ship its products pending sale to customers.

Cooperation with the spirits brands, distributors and state administrators is the key, as the adversarial approach wastes time, is often counterproductive and is ultimately more expensive than the team or partnership approach. The suppliers to Liquor Group are on a Bailment System, giving these brands more control over their inventory, shipping costs and supply lines. These suppliers choose how much product to ship to Liquor Group in a given territory and at what price the Liquor Group will be charged for the goods (FOD to destination). Liquor Group bailment suppliers often utilize these low cost storage bailment warehouses as way-stations for supplying adjacent non-Liquor Group territories. The term "Bailment" means delivery of personal property by a “bailor” (supplier) to a “bailee” (Liquor Group Holding, LLC.) for specific purposes under an express or implied agreement of both parties. When those purposes are accomplished, the property can be delivered to a purchaser, returned to the “bailor”, kept until the “bailor” reclaims it, or disposed of according to the agreement. Liquor Group transactions are digital from concept to completion.   The entirety of the organization’s transactions  utilize  proprietary  software  coupled  with  off  the  shelf  technology  to  sell,  invoice,  pick, pack, ship, confirm delivery of and collect funds for the sale of products.  Sales representative utilize web enabled PDA cellular phones to scan and immediately place orders for their clients with live inventory tracking and complete product data at their disposal. Much of the industry is technology challenged, but, from its inception, Liquor Group has made the investment in technology

Patent Pending Bailment Warehousing - Liquor Group does not purchase products from any brand owner or distillery for inventory and resale. Rather Liquor Group accepts brands for representation, arranges for and supervises warehousing, inventories the product at one or more of its facilities then markets the products in territories chosen by the brand owners throughout the United States and Canada. Product in inventory remains under the ownership and control of the brand or distillery until it is sold to the Liquor Group client.

Once the product is sold and shipped to the Liquor Group client, delivery is confirmed and funds are collected, and the net sale proceeds are remitted to the brand owner or distillery. The exact structure will vary from state to state depending upon local regulations. This method does not tie up capital investment by Liquor Group in product inventory, which allows Liquor Group to charge far less of a mark-up on the goods than other importers and brand representatives. The result is increased net profit for the local wholesale distributor thus retailers and premise accounts are able to take advantage of the price spread and can mark up the product at greater levels of profit, thus driving sales. 

Depending on the requirements of the various states, under the patent pending bailment warehousing structure Liquor Group is either directly responsible for State Excise Tax payments or for supervising its Associated Distributors to ensure that State Excise Tax payments are made.  It should be noted that the cost of all State Excise taxes are completely recovered from the retail or premise account customers as part of the wholesale price paid for products so that these excise taxes do not require additional capital investment by Liquor Group.

Liquor  Group’s  main  warehouse  is  a  State  Bonded  facility  leased  in  Jacksonville,  Florida  and encompasses  approximately  20,000  square  feet  of  temperature-controlled  storage,  as  well  as  up to 300,000  square  feet  of  expandable  standard  warehouse  space. 

Liquor Group also  utilizes  several warehouses throughout the country commonly taking advantage of free storage offered at state bonded warehouses  of  various  control  states  as  well  as  free  storage at  its  distillery  suppliers.   Capacity  of product  should  not  be  an  issue  as  the  company  cost effective to  utilize. This “cost cutting” technique utilizing virtual/public warehousing rather than conventional leasing is just another of the processes that have helped Liquor Group to grow at a blistering pace while expands  its  operations  throughout  the  US,  since leased commercial  pallet warehouse  space  is  plentiful  and  very  keeping overhead down.

Patent Pending Bailment Bonded Warehousing - The patent pending bailment bonded warehousing structure is similar to the patent pending bailment warehousing structure, differing only in that, in this instance, Liquor Group is acting as the importer of the product into the US or Canada, and thus it is responsible for the calculation and the payment of Federal excise taxes.

In the United States and Canada Liquor Group has established open, interactive and cooperative relationships with licensed distributors, licensed brokers, control state administrators and license state administrators. Liquor Group is a direct licensed wholesaler or associated wholesaler in a rapidly expanding number of states within the U.S. and Canada, which allows direct merchantability in a number of markets for brands accepted by Liquor Group, giving them “instant” distribution. 

Liquor Group also has direct relationships with the head purchasing office of both the US Navy & and the US Marine Corps (NEXCOM) and the Army & Air Force Exchange System (AAFES) for worldwide store placements. The requirements for participation with these entities are stringent but once again the candid approach leads to results. 

Standardized Mark-ups and Product Pricing - Liquor Group uses a standardized mark-up for spirits products per category for all brands under its purview. This eliminates the product pricing favoritism granted by other distributors and brand representatives. While everyone wants to ‘get a deal’ the long term benefit of a standardized and firm pricing structure sets a platform of certainty and confidence for successful operations that is preferred by all.

Brand Support

Liquor Group has been fortunate to be closely involved in the creation of several successful brands, from product concept to retail and premise shelf. As a result, members of the Liquor Group staff have specific knowledge relating to product creation including product design, label design marketing campaign strategy and design, sourcing of product, bottles, labels, capsules, corks, case boxes, point of sale items and all or the appurtenant aspects of product creation. This gives Liquor Group an unusual perspective on product development and distribution and is a valuable resource for the firm's suppliers as they build the lines of products that are offered through the Liquor Group network.  Liquor Group also represents distilleries and major importers such as Hood River Distillery (one in four bottles of spirits purchased in the North West US is a Hood River product), Charles Jacquin & Co. (the country’s oldest and largest cordial company) and a host of independent and emerging brands and product portfolios

Liquor Group intends to continue to aggressively add more brands to it’s portfolio in an effort to provide more variety to the existing customer base of the organization. Nearly every week several brands contact Liquor Group seeking   distribution   in one   or   more   of Liquor Group’s territories.  The continued expansion of the Liquor group product portfolio coupled with increased market penetration in states where operations currently exist and measured expansion into additional states will assure that the growth of Liquor Group continues for years to come.

Liquor  Group’s  import  division  holds  exclusive  import  rights  with  several  brands  as  well  that  are represented by Liquor Group.  Liquor Group also holds agreements for overriding distribution rights to expand  it's  operations  with  several  brand  suppliers  in  markets  wherein  the  brand  supplier currently utilizes other distribution methods.

Product Demonstrations - Liquor Group is a big believer in them. In the numerous states where Liquor Group conducts business and product demonstrations are allowed you will find that products that are properly supported by the brand owner with Product Demonstration support are more successful and will sell many times more product than those that do not.  For a brand attempting to establish new markets, Product Demonstration is an excellent way to insure that a product is noticed and given consideration in the sea of competing brands. Liquor Group believes so strongly in Product Demonstrations that it requires every brand in its entire portfolio to address and support Product Demonstrations as an integral part of brand marketing and promotional success.

Regulatory

The spirits industry is a labyrinth of complicated Federal and State laws and regulations, which can hinder the success of a brand, should they not know the proper means of navigating the system.  As a legacy of the end of the Prohibition era each state gained the right to regulate alcoholic beverages within its borders and each state has over the years developed its own peculiar laws and regulations, which are often daunting to the uninitiated. Liquor Group provides brands with vital information concerning these regulations along with the required regulatory support for the level of service chosen. Brands imported by Liquor Group are managed from manufacturer’s port, of entry through the patent pending bailment bonded warehouse system to the retail store. Brands with wholesale management are guided from the Liquor Group patent pending bailment warehouses to the wholesale purchaser. Regulations and compliance are a serious concern within the industry and should not be taken lightly as the resulting fines or reprimands can be serious. In one recent instance an alert Liquor Group staffer was able to narrowly avert the importation by an inexperienced supplier of a European product that was bottled in a container that could not be sold in the US market, an intervention that prevented the loss of tens of thousands of dollars on a single transaction

Liquor Group handles control state presentations directly unless the policy decision is made that the brand is better served by the product being presented in conjunction with a local Associated Distributor or Broker. This gives the brand the comfort of knowing that the best strategy for achieving a listing is being employed. Each state has listing periods and specific presentation criteria, and in some cases there are even listing fees and charges. Liquor Group charges each brand a flat fee for the preparation and implementation of a listing presentation in each state where the supplier chooses to pursue a listing, relieving brand owners and distilleries from the great expense and aggravation of travelling to each state for the listing meetings and presentations. 

Liquor Group can assist in all phases of product development. Product creation, sourcing supply, bottles, label design and production, imaginative corking, capsules, case box design, POS materials, web design, marketing and advertising, whatever it takes to bring a product idea from concept to the retail shelf.

Industry Recession Resistant

Distilled Spirits Council CEO Peter Cressy recently released industry data at an annual briefing for media and analysts showing slowing 2008 revenue growth of 2.8% totaling $18.7 billion and volume growth of 1.6% to 184 million cases.  He noted market share was holding steady but softened in the fourth quarter, although the consumer trend toward "premiumization" continued.

For 2009, he warned policymakers at all levels that distilled spirits, and indeed all beverage alcohol, are a key component in hospitality industry profitability and— particularly for the hard-hit on-premise segment of restaurants, bars and hotels—new hospitality taxes could have a devastating impact on employment and actual tax receipts. “Contrary to popular belief, the entire beverage alcohol sector is recession resistant not recession proof,” said Cressy. He emphasized that it is essential that policymakers and legislators understand three things in 2009:

  • The on-premise segment of the hospitality industry is reeling;
  • Spirits represents a key component of the profitability of restaurants, bars, hotels and tourism;
  • New hospitality taxes at any level would have a devastating impact on employment in a sector that has already lost over 150,000 jobs.

“Our message is simple: we are not seeking a bailout; just do no harm,” Cressy stated. Instead, he urged policymakers to continue the market access improvement trend highlighted in 2008 — the 75th anniversary of Prohibition Repeal.   “Legislators now understand increasing market access for distilled spirits will drive new revenue for the states without raising taxes,” Cressy said, noting that in 2008 Colorado became the 13th state since 2002 to repeal it’s ban on Sunday spirits sales in package store bringing the total number of Sunday sales states to 35. Key factors Cressy cited in the industry’s recession resiliency included: holding the line on new hospitality taxes; expanding market access; continuing fascination with cocktail culture and consumer premiumization; and spirits remain a good value compared with other beverages.

“Premiumization continues,” Cressy said, noting that many consumers appear to be “trading around, not trading down.  Consumers are being more discerning about their buying decisions when it comes to alcohol.”  He cited growth in premium Rums; and high-end premium and super premium American, Canadian and Irish whiskeys.  Super premium Tequila also continued its growth, and Vodka, the largest category representing approximately 24% of sales, also showed growth.  But, he said, it remains to be seen how the recession will affect the categories going forward.

Market Opportunity

The spirits industry is currently experiencing the greatest period of consolidation in its history. Some analysts  believe  that  a  small  number  of  major  spirit  brand  families  are attempting  to  control the industry through increased brand ownership.   Distribution channels are consolidating as well, leaving between two and four major distribution entities per state. The  major  brand  families  are  expanding through  contractual  obligation  and  “defacto”  control  of the major distribution channels, all to the detriment of the medium and small sized brands*. Distributors are generally given the exclusive rights of master distribution in a state are even known to contract the distribution of   a   brand,  purchase  the minimum requirement  necessary  to complete  the  obligation,  and then  hold  off  the  market  the product  to  keep  it  from competing with  the  distributors  other  products  of  like type  in  the  state, commonly  referred  to  as  “burying the brand”. Sizeable  brand  entities  that  generate  millions  of dollars annually  at  the  wholesale  level  with  proven  brands  are literally  being  pushed  to  the  side by  the  major  brand families due to  the  wholesale  distribution  control  the majors exert. In contrast, Liquor  Group  holds  itself  out  as  the  ‘level  playing  field’  distribution  company,  offering distribution  at  a  standardized  markup  to  all  brands  and  allowing  any  size  brand  to  compete in the market.

Management Team

C. J. (Christopher John) Eiras - C.E.O., President, and Director – CJ has been the managing member of Liquor Group Holding LLC since its inception in 2001 and has also been President and owner of Happy Vodka Corporation, the controlling company for all the Happy branded beverages worldwide since it's inception in August of 2001.  Mr. Eiras recently acquired Urban Brands & Spirits, LLC whose portfolio includes the Party A-Go-Go alcohol products, the Cadillac Margarita and the "Hype" trademark branded energy beverage, which Eiras has since sold.  Eiras is also the sole owner of Wild Orchid Vineyards, as well as the wine brands Orchidia and Wilde Orchid. 

Jason Bandy – CFO – Jason has been CFO since September 2007.  Mr. Bandy has managed his own accounting firm since 2002, primarily serving clients in the alcohol beverage industry. Between 1997 and 2002 Mr. Bandy was employed by Price Waterhouse Coopers, an international public accounting firm. Mr. Bandy is a certified public accountant.

Lowell Newman - Vice President – License States Operations and Director – Lowell has been with Liquor Group since May 2005.  His past professional activities include careers in archaeology, as a postal historian with the Smithsonian Institution, as head of an international auction firm and restaurant management which led to his entry into the alcoholic beverage industry.  He has also served as a wine consultant with the ABC Fine Wine & Spirits chain and as manager of the largest independent liquor retailer in Central Florida prior to joining Liquor Group.  Newman's duties with Liquor Group Holdings, LLC include nominal supervision of operations in all License States where the firm operates and the selection and contracting of new products and brands based upon taste profile, price point within their market sector and sales potential.  He also contributes to Liquor Group's sales representative training programs in the areas of product knowledge and sales techniques.

Steven Dodge - Vice President – Control State Operations and Director – Steven has been the state coordinator for Liquor Group Holding, LLC and state manager of Liquor Group Michigan, LLC since March of 2006.  Dodge is a 20 year liquor industry veteran who joined Liquor Group 3 years after his employer became a customer and advocate of Liquor Group products.  Dodge previously held the General Manager position at the multi-million annual case distribution operation of General Wine and Liquor for 12 years (1994 -2006), an organization that to this day continues to work closely with Liquor Group Michigan, LLC.  Dodges' responsibly include running the largest of Liquor Group's state level Control State operations while managing the overall Control State operations of the company.

Prospects for the Future

This Bailment System allows Liquor Group to control very large amounts of inventory without the capital required to purchase the product and without any product selection risk.    This is a major advantage over the competition and the patent pending status of this "Innovative Distribution" system provides protection from the system being adopted by competing distribution companies without licensing and compensation.

In  conclusion,  this  is  an  opportunity  for  Liquor  Group  Wholesale  to  create  a  solid foundation to achieve the firm's  goals  of  becoming  a  “major”  nationwide  alcohol beverage distribution company while providing shareholders with a viable operation with significant upside potential. The implementation of the structures herein can create shareholder value in a market that is rarely open to the public investor.  Liquor  Group’s management  team  has  proven  to  be  a diligent  force  of individuals whom have dedicated themselves to the ongoing success of the Liquor Group operation, and as such, LIQR brings a great opportunity to all its shareholders for future increased earnings and the expansion of the distributions areas.

 

 

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