Value Added: Potomac’s Total Wine

I have always been interested in the business — and consumption, mind you — of alcohol products during the holiday season.

So, no surprise that I was drawn to the origin and economics of a giant retailer right in Washington’s back yard: Potomac-based Total Wine & More.

What is really fascinating is how the Trone brothers — David, 56, and Robert, 51 — spotted opportunity in the discounting of alcohol products while still in their 20s.

Total Wine & More just finished one of its busiest weekends of the year. The 78-store discount retailer, founded by Robert and David Trone, will gross just over $1 billion in 2011. (Courtesy of Total Wine & More)

Then they went after it.

Total Wine includes 78 superstores in 11 states up and down the East Coast, together grossing more than $1 billion a year and creating a profitable vehicle for the brothers, who own the enterprise. The company employs 2,770, including 300 at the Potomac headquarters.

The Trones began their careers about as far from the wine business as you can get, growing up on a 200-acre farm in central Pennsylvania, with 55,000 chickens, corn, wheat and hogs.

But their parents were entrepreneurs. Father Thomas ran a retreat business on the site, hosting catered picnics for companies and activities such as volleyball and fishing. There were a bunch of cottages where visitors could stay and get a close-up view of life on the farm.

Thomas also owned a store that sold soda and beer. Aha!

When the Trone brothers’ parents split up, Dad kept the farm and Mom took the beverage store. The brothers worked for both, but their father overextended himself in the stagflation years of the late 1970s and early 1980s, when interest rates hit 17 percent. He filed for bankruptcy in 1983.

That was the brothers’ first lesson in business.

“He may have been involved in too many businesses,” Robert said. “Running all of them together might have proved to be too big a challenge.”

The Trones decided that when they entered business, they would focus on doing it very well — and better than their competitors.

“It stayed with us,” Robert said.

Their education in retail sales came as they grew their mom’s beverage store from $300,000 a year in sales to more than $2 million by setting prices below what competitors were charging.

“We were living the [beverage] business throughout our lives,” said David, who attended graduate business school at the Wharton School of the University of Pennsylvania. “So we understood a lot about business.”

David learned more about beverage retailing at Wharton, studying the pricing of beer and how Pennsylvania’s various beverage markets worked. The brothers decided they could take the model at their mom’s beverage store and replicate it across the state.

So they went to work, using savings to start a second store outside of Harrisburg in April 1984. They paid the owner of a beer license $100,000, giving him $20,000 down and signing a note for the rest.

They immediately began underselling their competitors, taking slimmer margins on beer sales while pushing volume. A 24-pack of Budweiser from a wholesaler might cost the Trones $9.75, which they would turn around and sell for $9.99. Competitors would sell the same 24-pack for $13.

It was Retail 101. Sell it cheap and sell a lot, just as they had done at their mother’s store. As long as they could live with slim margins — keeping an intense focus on the day-to-day operations to ensure they stayed cash positive — they could survive. The store became a destination for shoppers willing to drive a few extra miles to save money.

Sales at the Harrisburg store rose to $11 million a year, among the highest in Pennsylvania.

“The business made money right away,” Robert said.

But it was difficult to expand. State laws governing the sale of alcohol made large-scale retail discounting tough. The business wasn’t the same as a Home Depot or some other large discounter.

So, Robert went to the University of Pennsylvania Law School to learn more.

“After we realized that we needed to expand outside of Pennsylvania, I decided that getting a law degree would be helpful,” Robert said. “You could really understand the different laws, court interpretations and how businesses can navigate with the legal framework.”

At the same time, the Trones got to know the regulators in each state and began working the political ends of the system.

For example, Delaware and Maryland had laws prohibiting wholesalers from offering discounts to retailers in return for buying in large volume. The Trones got the law changed, allowing them to pass along the lower price to their customers.

Delaware prohibited store sales on Sunday, which eliminated one of the busiest shopping days of the week. After seven years, the Trones got that law changed.

North and South Carolina prohibited sales of beer exceeding 6 percent alcohol content, which prevented sales of craft and imported beer. The Trones got the laws changed, allowing Total Wine to increase its beer selection, adding more than 800 brands. That gave Total Wine a leg up on grocery stores, which had limited shelf space.

“It opened up the playing field,” Robert said.

And they ran with it.

On average, Total Wine stores are growing sales at each store by 7 percent a year. If you include new stores opening every year, the company is growing revenue by 18 percent annually.

The typical Total Wine store carries about 8,000 wines, which is maybe 10 times the selection of a grocery store and three or four times that of a neighborhood liquor store. The store might add and delete 1,000 wines a year, offering fresh selections to keep up with consumer tastes.

The wide selection and low prices do not sit very well with many mom-and-pops, but customers keep coming.

Each store has a classroom where employees and customers can hear the latest from visiting winemakers. Many include an aisle for wine accessories such as corkscrews and gift holders, as well as humidors containing a big cigar selection.

On a recent trip to the company’s McLean store, which employs about 50, staffers roamed the aisles, equipped with headsets for quick consultations with each other on customers’ questions.

Wine sales are two-thirds of Total Wine’s revenue, while spirits and beer split the rest evenly. Cabernet is the most popular wine, and Florida produces the most revenue.

The biggest store in the chain is in Delaware, grossing $70 million a year. Next year, Total Wine will be in Texas, New Mexico and Washington state with 10 new stores.

Total Wine’s profit margins are low, but the scale is so high that even if margins are, let’s say, 3 percent on $1 billion, well, you do the math.

“We want to get to $2 billion the next five years,” said David. “We are on track to do that.”

I’m on track to tipple a few Manhattans over the next two weeks.