National Wine & Spirits, Inc. Business Information, Profile, and History

Company Perspectives:

National Wine & Spirits is the largest distributor of wine and spirits in the Midwest and one of the largest in the country. Our market leadership is a result of nearly 30 years of superior service to our supplier and retail partners.

History of National Wine & Spirits, Inc.

With corporate headquarters in Indianapolis, National Wine & Spirits, Inc. (NWS) is a privately owned distributor of wine and spirits, one of the largest in the United States. Serving the Midwest, it is the largest distributor of spirits in Indiana, with a 54 percent market share, and in Michigan, with a 52 percent market share. The company's 30 percent market share in Illinois makes it one of the largest distributors in that state as well. NWS also owns a 25 percent stake in Commonwealth Wine & Spirits, a Kentucky distributor with a 36 percent market share for wine and spirits. NWS is a holding company, its operations conducted through several wholly owned subsidiaries, including National Wine & Spirits Corp. in Indiana; Union Beverage Company, Hamburg Distributing Company and Chicago Wine Merchants in Illinois; and NWS Michigan, Inc. in Michigan. NWS also owns United States Beverage, a national broker of malt-based products. To service its markets, NWS maintains seven distribution centers, five cross-docking facilities, and a fleet of more than 300 delivery trucks. Customers are categorized as either off-premise or on-premise, according to where the products are consumed. Off-premise customers are package liquor stores, grocery stores, mass merchandisers, and drugstores, while on-premise customers include bars, restaurants, and hotels. NWS features many well known brands of spirits, such as Absolut, Chivas Regal, Jim Beam, and Smirnoff. Depending on the market state, the company is the exclusive distributor of spirits for suppliers such as Diageo (Guinness/UDV), Fortune Brands (in all four states), Allied Domecq, and Pernod Ricard. In Indiana and Illinois NWS is the exclusive distributor of such top wineries as Kendall Jackson and Banfi Vintners, as well as many offerings from Canandaigua Wine Company (Constellation Brands), the country's second largest wine supplier. In certain markets NWS also distributes premium cigars to augment its fine wines and spirits business.

Repeal of Prohibition: 1933

The great experiment of banning alcoholic beverages in the United States, Prohibition, began in 1919 but lasted little more than a decade. Americans drank just as much, if not more in some cases, and outlawing alcohol resulted in well-funded organized crime rather than greater sobriety. In 1933 President Franklin Roosevelt repealed Prohibition, and a year later the National Liquor Company, predecessor to NWS, was issued Permit #7 from the Indiana Alcoholic Beverage Commission to distribute spirits in the central Indiana area. Designed to keep organized crime out of the industry, as well as to facilitate the collection of taxes, a new three-tier regulatory framework was erected at both the federal and state levels. Spirit, wine, and beer manufacturers were effectively banned from selling directly to retailers or consumers, making distributors like National Liquor a necessary part of the new system. A number of states, however, kept out private industry entirely, the government acting as the exclusive distributor and/or retailer of alcoholic beverages.

Original stock certificates for National Liquor Company were issued on April 9, 1935, to George Galm, Laura Galm, and Jules Fansler. The Galms relinquished their shares on December 12 of that year, when John J. Ohleyer was issued shares. For the remainder of the decade, Fansler served as president with Mr. Galm as secretary. Although Fansler continued his involvement with the company until 1948, he began selling his shares on March 1, 1940, when Frank M. McHale, lead partner of McHale and Douglass law firm (now McHale Cook & Welch), acquired a 20 percent interest in the company, registered shares in his wife's name, Mabel E. McHale, and held them until September 1955.

On August 15, 1941, Ohleyer sold his shares to businessman and politician Frank E. McKinney. The shares were registered in the name of his wife, Margaret W. McKinney, and their children. McKinney, by this time president of American Fletcher National Bank (AFNB), and McHale, were the two most prominent leaders of the state Democratic Party. From 1941 until the McKinneys and McHales redeemed their shares in 1955, the majority of the shares were female-owned, at one point 78 percent. The McKinney children later stated they never knew of their ownership; in reality, Frank E. McKinney and Frank M. McHale controlled the company.

McKinney was born and raised in Indianapolis, the son of a fireman who rose to the rank of chief of the department. A high school dropout, he went to work in 1919 at an Indianapolis bank as a messenger. He moved to another bank three years later to work as a bookkeeper, eventually becoming a cashier in 1933. In the meantime McKinney became acquainted with the man who proved pivotal in his future endeavors, Donie Bush, a local sports hero who had played 16 years in Major League Baseball before coming home to manage the Indianapolis Indians minor league team. Bush turned over his finances to McKinney and was not only influential in helping McKinney to one day become a baseball owner, he provided entrée into the Indiana Democratic Party. In 1934 McKinney was elected as Marion County treasurer, a post that helped make his fortune. During the Depression the treasurer was given a percentage of the back taxes he collected, an incentive that provided enough earnings to secure a $100,000 loan to purchase the Fidelity Trust Company, thus making him at the age of 30 the youngest president of a financial institution in the United States. With Fidelity Trust as a foundation, McKinney was able to acquire other banks and branch into other businesses, such as National Liquor.

By 1944, he had acquired a controlling interest in National Liquor, but shares were held by family members because of his increasing involvement in politics. In 1940 he was named vice-chairman of the Democratic National Committee, and in 1951 was appointed its chairman. During the time of the McHale-McKinney ownership, politicians in many states played an active role in the beverage alcohol business. Many of the state laws regulating the industry today were crafted during this period.

National Liquor acquired Capitol Hill Distributing in 1952 and issued shares to owner Marven M. Lasky and family members in 1952, 1953, and 1954, eventually giving them a 30 percent interest. This acquisition was the first of many that enabled National to become a key distributor in the Midwest. Up until this point, National had primarily represented the Schenley product line of spirits in central Indiana. The Capitol Hill acquisition brought Seagram and Hiram Walker spirits into the portfolio. Along with Capitol Hill, Lasky owned Melody Hill, a line of products made from wine brought in and bottled for sale to retailers. This line, later sold to Gallo, was also added to the National portfolio. At this time, distributors were not pursuing the wine side of the alcoholic beverage business. By entering the wine market, National took its first step toward becoming a dominant wine distributor, especially in the expanding grocery market. The Capitol Hill and Melody Hill deals set the stage for company growth that would continue the rest of the century.

The Lasky ownership was short-lived, as virtually all shares of the McHale, McKinney, and Lasky families were redeemed on September 26, 1955, when National Liquor's sales manager, Charles E. Johnson, Jr., acquired the company. The change of ownership at this time was motivated by Frank McKinney's desire to become Secretary of Treasury under Adlai Stevenson, a presidential candidate during McKinney's tenure as chairman of the National Democratic Party. Although Johnson did not have the financing for the purchase, McKinney arranged credits from Schenley, loans from Bankers Trust, and eventually a loan from AFNB.

Ownership Change in 1973

Ownership of National Liquor did not change again until 1973, when the current chairman and CEO of NWS, James LaCrosse, first became involved with the business. A Harvard M.B.A., LaCrosse and brothers William and Cameron Johnston bought National Liquor from Charles Johnson, Jr., intending to hold onto the business just long enough to turn it around and resell it. At the time National Liquor remained very much a local distributor, booking just over $14 million in 1973. Because business showed such dramatic improvement in just six months, the partners decided to hold onto the company. A year later William Johnston died and his interest passed to his widow, Norma Johnston, who in 2002 still controlled a 17 percent stake. In 1995 Cameron Johnston sold out to LaCrosse, who now owned 83 percent of National Liquor.

Under LaCrosse's leadership, National Liquor saw its revenues improve steadily through the 1980s. On December 30, 1982, the company changed its name to National Wine & Spirits Corporation. Also in that decade the company completed several significant acquisitions including those of Kiefer Stewart, Conard Liquors, Allen Products, Midwest Liquors, Stadium Liquor, Liquors Inc., General Liquors, Fort Wayne Liquor, and Standard Liquors. NWS also absorbed some product lines and personnel from competitors forced to close their doors, such as Lake Shore Liquors and Fred Beck. Additional distribution hubs were located in South Bend and Evansville, with sales offices in Fort Wayne and Merrillville, later moved to Crown Point. As a result of this external growth, NWS's annual revenues, well below $50 million in 1980, topped $150 million by 1990.

By the 1990s NWS was poised for diversification. In 1991 the company launched a bottled water business, Cameron Springs Co., to take advantage of Americans' increasing thirst for so-called designer water. The Cameron name had deep roots in Indiana, dating back to the 1800s when a man named William Cameron bought a property near Attica, Indiana, which featured a spring that had a reputation for restorative properties. According to lore, a farmer named Samuel Story, who suffered from rheumatism, engaged in a drainage project at the springs. After weeks of wading around in hip-deep mud and drinking liberally from the spring, he discovered that his rheumatism was cured. William Cameron opened a small hotel near the springs and sold products he dubbed Magno-Mud and Lithia Water. A businessman named Henry Kramer then purchased the property and in 1885 opened a posh health resort and spa, Mudlavia Hotel. In 1920 it was destroyed by fire, never rebuilt, and the miracle springs became neglected. In its search for a source of water many decades later, NWS learned of Cameron Springs and tests revealed it was a suitable product. In the summer of 1991 Cameron Springs Co. began marketing its water, which also included processed Indianapolis municipal water, to grocery stores and restaurants, as well as to home and office coolers. The label also offered distilled water. To support the venture, work was begun on a 31,000-square-foot bottling plant in Indianapolis.

Furthermore, in 1991 NWS acquired the Chicago distributor Union Liquor Company, another family-owned business that grew out of the repeal of Prohibition. Established by the Leavitt family it started out distributing beer, but when it branched into wine and spirits changed its name to Consolidated Distilled Products, Inc. (CDP). Expanding into the rectifying business (the blending and filtration of spirits already distilled), the company launched Consolidated Rectifying, Inc. (CRI). Union Liquor Company was also established to serve as a distributor in the Chicago area, becoming especially influential in the restaurant fine-wine market. The company moved into the super premium beer market in the 1980s. Shortly after NWS acquired Union Liquor (which changed its name to Union Beverage Company in 1996) it added CRI. To solidify its presence in Illinois, NWS subsequently acquired Hamburg Distributing Company and two other wholesalers downstate, then in 1993 purchased Chicago-based Federated Industries, Inc., along with three outstate and downstate distributors. Supporting these units were distribution hubs located in Chicago, Champaign, Peoria, and Springfield, and sales offices in Rockford and Belleville, later moved to Collinsville. The closing of Continental Distributing Company in Chicago in 1996 provided further opportunity for Union Beverage to add product lines and personnel.

In 1996, U.S. Beverage was founded as a national broker of increasingly popular microbrewed, craft beers, as well as imports and specialty malt products. In March 1997 it commenced operations as a division of NWS. In the ensuing years U.S. Beverage obtained the exclusive U.S. distribution rights to Hooper's Hooch, a flavored malt beverage produced by Bass PLC; the beers of Goose Island Brewing Company; the products of Grolsch International; and Seagram's Coolers and Rick's Lemonade.

NWS moved into new territories in the late 1990s. When Michigan elected to privatize the distribution of spirits in 1997, NWS began doing business in the state through its newly formed subsidiary, NWS Michigan, Inc., quickly lining up exclusive deals with Michigan's major spirits suppliers. To expand its operation, in 1999 NWS Michigan acquired broker R.M. Gilligan, Inc., making the company the largest distributor in the state. It gained a 52 percent market share, serving some 11,500 customers from its main warehouse in Brownstown and distribution hubs in Grand Rapids and Escanaba. NWS also moved into nearby Kentucky when in 1998 it acquired a 25 percent interest in Commonwealth Wine & Spirits, a joint venture with two other distributors, Vertner Smith Company and Kentucky Wine & Spirits.

Reorganization Creates Corporate Holding Company in 1998

In the late 1990s the industry underwent a period of consolidation. With annual revenues of more than $540 million NWS was one of the country's top ten distributors but in this new, highly competitive environment it was essentially forced to grow larger, to either be the acquirer or the acquired. In keeping with this reality, in December 1998 the company underwent a reorganization and the present NWS holding company was formed. LaCrosse (or a family trust) and Mrs. Johnston owned virtually all of the stock of the Indiana and Michigan subsidiaries, and along with Martin H. Bart owned the Illinois subsidiary. A longtime Seagram's executive, Bart joined the Illinois operation as vice-chairman in 1995. LaCrosse and Mrs. Johnston exchanged their shares for stock in the new holding company, while Bart exchanged his shares in the old Illinois entity for shares in the new Illinois entity. The reorganization complete, the stage was set for a major bond offering in January 1999 to fund future expansion. NWS raised $110 million through the sale of high yield or "junk" bonds, a first for wholesale distributors, which typically relied on their own funds or traditional bank lending. Much of the proceeds, in fact, were used to pay down bank debt, freeing up a large line of credit and allowing NWS access to the debt market if it needed to.

In 2000 NWS decided to sell Cameron Springs to Perrier Group for $10.4 million in cash. Focused on its core business--spirits and wines--NWS enjoyed steady growth following its reorganization in 1998. Revenues topped $600 million in fiscal 2000 and improved to $681.5 million for fiscal 2002, despite difficult economic conditions. There was every reason to believe that trend would continue in the foreseeable future, especially in light of the alcoholic beverage industry's traditional immunity to recessions. By mid-2002, the National Wine & Spirits family prepared itself for more changes and challenges as consolidation in the industry continued to unfold.

Principal Subsidiaries: NWS-Illinois, LLC; NWS, Inc.; NWS Michigan, Inc.; United States Beverage, LLC (50%); National Wine & Spirits Corp.; Union Beverage Company; Hamburg Distributing Company; Chicago Wine Merchants.

Principal Competitors: Glazer's Wholesale Drug; Johnson Brothers; Southern Wine & Spirits.

Chronology

• Key Dates:
• 1934: National Liquor Company is formed.
• 1944: The family of Frank E. McKinney gains majority ownership.
• 1973: James LaCrosse and partners become majority owners.
• 1982: Name is changed to National Wine & Spirits Corporation.
• 1997: Company enters the Michigan market.
• 1998: Reorganization results in holding company, National Wine & Spirits, Inc.