When the national retailer Total Wine & More opened a store in Burnsville last September, Brenda Visnovec expected the three city-owned liquor stores she oversees in nearby Lakeville to feel some competitive pressure.
She didn't expect them to get called out in ads in the suburban newspaper.
"Hey Lakeville! Save at the Burnsville Total Wine & More!" beckoned a headline in a December ad that showed how the prices of 18 products were lower at Total Wine than Lakeville Liquor. "In the past, ads didn't intentionally target someone," Visnovec said.
In the 15 months since Total Wine arrived in the Twin Cities, consumers have flocked to its stores and unleashed competitive forces that the state's clubby industry of liquor dealers had long ago locked up.
Prices for beer, wine and spirits have plunged around the metro area, and product selection has grown at a number of stores. A few sellers have closed, including, just last week, craft beer specialist the Four Firkins. Others have fiercely fought back, taking advantage of Minnesota's quirky liquor laws that exposed Total Wine's playbook in a way unseen in any of 15 other states where it operates.
Consumers are the beneficiaries. Ian Madison, of Eden Prairie, still shops his city's municipal store for convenience, but he said local consumers have overpaid for alcohol for too long. "I pay $55 for a bottle of Veuve Clicquot [champagne] at most stores, but Total has it for $37," he said of the Bloomington store.
Executives of Potomac, Md.-based Total Wine say early results in Minnesota are particularly strong. Sales at each of the four Minnesota locations that Total Wine has opened so far rank in the top 20 of the company's 117 outlets.
But the state also presents some competitive difficulties that don't exist elsewhere. Minnesota's existing liquor sellers have been able to gain unusual insight into Total Wine's business because of a state law prohibiting liquor retailers from making deals to exclusively sell any alcoholic product. Instead, liquor must be sold through a distributor that every retailer can access.
That means all of Total Wine's products, including its private-label Winery Direct and Spirit Direct items, can be ordered and sold by any Minnesota liquor store. Any Minnesota liquor dealer can also see Total Wine's wholesale prices.
The law is part of a broader regulatory structure that was built over decades to ensure that smaller sellers of alcohol products won't fall prey to larger competitors and to carve out room for both municipal and private dealers.
Minnesota's laws and competitive practices are "very unusual," Total Wine chief executive David Trone said, adding they allow competitors to access the pricing model and exclusive deals that he calls the company's intellectual property. "I don't buy Haskell's, Surdyk's or Costco's brands. We respect those relationships."
Because of those laws, Minnesota liquor stores have learned that Total Wine engages in a tactic common to national retailers of other products: pushing exclusive private-label products at a higher markup.
According to a wholesale price list from Johnson Brothers distributing in St. Paul, profit margins on many of Total Wine's private label wines run about 60 percent, compared to the 50 percent retailers typically make on wine. "We have superior margins on private labels," Trone said.
Lakeville Liquors' Visnovec, who is also president of the Minnesota Municipal Beverage Association, said she and other competitors believe Total Wine's strategy is to drive customers to its higher-yielding products.
"They give the appearance of looking like they're a savior to consumers with low prices on national brands," she said. "But it's more complicated than that."
Minnesota's liquor retailers were vulnerable to Total Wine's business model in part because of the state's odd blend of private and publicly owned stores. With some towns and suburbs dependent on revenue from municipal liquor stores, state regulators over the years fashioned regulations that let them coexist with private ones.
Those rules ensured that product selection, pricing and profits were relatively uniform in both private and city-owned stores. The state's liquor retailers made comfortable profits as a result, but they had little incentive to innovate and distinguish their stores.
When Total Wine announced it was entering the Twin Cities, Trone said that Minnesota liquor stores' profit margin was around 50 percent, well above the 25 to 35 percent range in other states.
In addition to Burnsville, Total Wine has opened stores in Roseville, Woodbury and Bloomington and hopes to open a fifth location in Maple Grove this year, essentially forming a ring around the metro area.
As Total Wine built out its stores, existing liquor retailers scrambled to hang on to their customers, learn Total Wine's strategy and counter it. Lakeville Liquors' Visnovec became a key figure in the fight.
Last November, she wrote a letter to members of the state municipal beverage dealers group about what she had done to compete with Total Wine. At Lakeville's three stores, Visnovec brought in 17 of Total Wine's proprietary wines and five spirits and then posted signs on shelves listing Lakeville's and Total Wine's prices side by side.
She also ran an ad in the Lakeville newspaper to counter the one that Total Wine placed in December. It described "Totally awesome everyday pricing" on 12 of Total Wine's proprietary wines. The ad ran just once. "We don't have the budget," Visnovec said.
Reserved and soft-spoken, Visnovec, 53, said her resolve stems from a strong belief in the benefits her town receives from liquor sales. "I'm not in business to be the cheapest. This is a service to the community," she said.
"Brenda is extremely dedicated to Lakeville," said Allyn Kuennen, assistant city administrator and Visnovec's boss. "She's worked here for 32 years, spends 60 to 70 hours on the job in a typical week, and goes above and beyond any expectations anyone has in the liquor business."
Sales and charitable fund drives from the city's liquor stores contributed more than $1.3 million to Lakeville's 2013 budget, enough to reduce every resident's property taxes by about 4 percent, according to the city website. In recent months, however, revenue at Lakeville Liquor has dropped by about 14 percent.
This spring, Total Wine sent nine Twin Cities municipal stores, including Lakeville Liquors, a cease and desist letter because it thought the municipal stores were colluding on price and selection. No further action has been taken, but it is still being monitored, said Mark Jacobson, an attorney representing Total Wine at Lindquist & Vennum.
One of Total Wine's most popular private labels is Hi Jinx Red Blend Paso Robles, which sells for $11.99 and has a wholesale price of $4.63. After the Lakeville and St. Anthony municipal stores started selling Hi Jinx for $7.99, Total Wine matched that price in Twin Cities stores.
Mike Larson, operations manager at St. Anthony municipal stores, brought in 15 proprietary wines and spirits by Total Wine. "I bought five cases of D'Autrefois pinot noir, and it was gone in two weeks," he said. "Now I buy 15 cases at a time." Larson sells the pinot for $6.99 on promotions. Total Wine offered it for $7.99 this week and has it priced $11.99 in other markets.
One way Total Wine steers customers to its private labels is by displaying them in categories such as "wines of the week" and "staff favorites." No national brands were included in such displays last week.
When Danae Bruning, of Woodbury, asked a salesman at Total Wine's Woodbury store for recommendations for a party last week, she said he gave her 16 choices, but none were national brands. "He said I would enjoy Winery Direct more because they were built just for Total Wine," she said.
Jim Johnson, of Roseville, likes Fetzer Valley Oaks cabernet and found Total Wine's price at $5.47 to be about $4 less than other stores. But when he went back to stock up at Total Wine's Roseville store, the wine was gone. Cardiff cabernet, a private label selling for $7.99, had taken its place.
"The sales clerk said the distributor had run out," he said.
John Ewoldt • 612-673-7633