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STRATEGY

Wine Sellers

How Don Zacharia turned a mom-and-pop liquor store into a wine-retailing juggernaut -- and a family business that works.
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"So, what's on your mind? What are you pissed off about?" asks Don Zacharia.

Twice a year, the 73-year-old patriarch of Zachys, the retail wine giant based in Scarsdale, N.Y., holes up in his 200-year-old weekend home on Long Island with his chief lieutenants -- son Jeff, 44, and son-in-law Andrew McMurray, 37 -- and asks a bunch of questions. The questions get personal. Sometimes they get very personal.

The purpose of these gripe sessions: to hash out the future of the family company. Jeff is the president of Zachys and Andrew the executive vice president, but Dad is still CEO -- and don't you forget it.

Virtually the whole of Don Zacharia's adult life -- "a half century of working my butt off" -- has been devoted to changing the way Americans think about wine. What they drink, whether French or Italian, American or Australian, red or white, dry or sweet. What they're willing to pay for a glass of Bacchus' gold. And, most fundamentally, how they buy their wine, whether off the shelf or at auction, over the phone or over the Internet -- a retailing revolution that Zachys has helped ignite, even at the cost of being charged with a felony by out-of-state liquor-control agents.

In the process, Don Zacharia has transformed what was a sleepy liquor store in the suburbs north of New York City into a $50 million-a-year monster. Not Costco, the No. 1 wine retailer in the U.S., mind you, but a damn big business. Zachys is today the largest wine retailer east of the Mississippi and one of the largest in the U.S. Zacharia is now focused on making sure that the business he created remains a family business. The gripe sessions are part of that effort. He doesn't want his son or his son-in-law, who is married to his daughter Jennifer, to take their complaints home. "You can't have bad feelings trapped inside. You've got to get them out in the open," he says.

After the personal issues are dealt with, Don and the boys, as he calls them, review the business. They compare numbers from the current quarter against those of the previous two quarters and then the preceding two years. Revenue up, revenue down. What were our margins? The numbers speak. And each man critiques his own management performance. "I don't see the big picture," was one of McMurray's recent self-criticisms. "I get caught up in the minutiae," Jeff Zacharia admitted. Don's contribution: "I have a very hard time adjusting to the corporate structure."

"We never thought we were big enough to have to worry about unions," says Don. "Well, surprise, we were."

And that, the Zacharias all recognize, is the new challenge. Last summer, some of the warehouse staff successfully petitioned the National Labor Relations Board to hold a unionization vote. "We never thought we were big enough to have to worry about unions," says Don Zacharia. "Well, surprise, we were." The unionization drive ultimately failed -- by a vote of 43 to 5 -- but it taught the family an important lesson. As Don says, "We know we can't run Zachys like a mom-and-pop store anymore."

Don Zacharia had big dreams as a teenager, but they didn't involve running a liquor store. A bright, well-read boy, he was going to be a novelist like his hero Ernest Hemingway, or a screenwriter in Hollywood like F. Scott Fitzgerald.

A child of the Depression, he watched as his father struggled to make a living running a newsstand in Bronxville, another New York City suburb, and beginning in 1944, a liquor store in Scarsdale. The store made just enough money to support the family. "It wasn't even a mom-and-pop store," recalls Zacharia. "It wasn't a wine store, either. It was just a liquor store." And not a high-end one at that.

When Don graduated from college in 1953, he enlisted in the Army. "I had a Hemingway idea of war," he says. "What a stupid f -- -ing thing that was." Posted to the artillery, he was sent to Fort Sill, Okla., to study sound ranging. He'd listen with earphones as shells exploded in the distance. Then, slide rule in hand, he'd try to figure out where the shells had landed. In time, he recalls, "I became very proficient."

It wasn't until his next posting that he learned the real value of his new skill. The sergeant there shook his head sadly and told him: "Son, didn't anybody tell you? We discovered radar a few years back." Knowing that he was probably on the road to war in Korea, Zacharia gulped. But the sergeant noticed that the scrawny kid was a college grad. "Can you type?" the sergeant asked warily. So Zacharia became a clerk and avoided being sent overseas.

His time in the Army inspired the first short story he published. It was called, "Oh, Billie Holiday, Where Are You Now When I Need You So Badly?" It was, perhaps predictably, about somebody who joins the Army and finds out it wasn't a good decision. (Since then, he has published one novel and a wealth of short fiction, much of it in Partisan Review and The Kenyon Review.)

Discharged from the Army in 1956 and newly married (his first wife, Judy, died in 1970), Zacharia set out for Hollywood. When it was clear after only a few months that he couldn't make a living there, he returned home to a job at the dreaded family store. It was, he says, "a very unhappy time" -- especially since he couldn't get along with his father.

In 1961, Zacharia, then 30, decided he had to make a choice: "Either buy out or get out." Zachys was, he says, nothing but "a tiny store, a horrifically small business." But it was ideally located, sandwiched between two major roads and directly across from the train station in a suburb that was becoming more affluent by the year, and it looked like his best bet to support his growing family. So he bought his father out.

From that moment on, Zachys was his and he was Zachys.

From the beginning, Zacharia showed a grasp of the market, great salesmanship, and a willingness to fight.

The retail liquor trade in New York state in those days was burdened by antiquated laws and corrupt officialdom. Under the state's Prohibition-era fair-trade wine and liquor laws, prices were fixed. "You sold Four Roses two cents cheaper than the other guy," Zacharia recalls, "and you lost your license."

On the heels of a well-publicized corruption case, Gov. Nelson Rockefeller appointed a commission to consider changes in the state's liquor laws. The so-called Moreland Commission favored striking down the fair-trade laws. Zacharia, taking his cue from the commission, decided to test the laws and began marking down prices. Fellow retailers -- and big distributors -- went ballistic. Zacharia soon found himself in court, but he had lines of 30 and 40 customers waiting outside his store.

Eventually, the federal courts struck down the laws as unconstitutional restraints on trade. Sales at Zachys soared from $400,000 to over $1 million in 1964. "I knew how to sell, and the next guy didn't," is how Zacharia explains it.

Zachys soon became a regular advertiser in The New York Times, with full-page ads trumpeting "20%-Off Days," "Bordeaux Extravaganzas," and the wildly popular "Half-Bottle Madness." The ads were expensive -- and still are, anywhere from $10,000 for a full page in the local edition to $30,000 in the national editions -- and Zacharia spent prodigiously. "Take a Drive to Scarsdale," his ads recommended, and many a New York City customer did just that to buy wines and liquor that were now heavily discounted.

The Zachys store in Scarsdale, N.Y., is a destination for wine lovers. "Everything is perfect," says one aficionado.

Four decades later, folks are still taking the drive to Scarsdale. "It's a great place for aficionados," says Dr. Michael Apstein, who makes the trip from Boston several times a year. A Harvard Medical School professor, Apstein writes about wine as a freelancer for The Boston Globe. In an age when he can -- and does -- order much of his wine over the telephone or the Internet, Apstein enjoys walking into a store "where everything is perfect, from the smell of wooden Bordeaux cases to the sight of the labels on old bottles of fine Burgundy." That, he adds, "is the allure of Zachys."

"Dad," says Jeff Zacharia, "didn't invent the wave, but he knew how to ride the crest." What Don Zacharia perceived -- and what many a retail wine merchant did not -- was that in the late 1960s Americans' drinking habits were changing. "It seemed to me that people were drinking a lot more white wine rather than cocktails," Zacharia recalls. "I was part of that movement myself."

Since he didn't know much about fine wine -- when he bought the store, wine accounted for less than 10% of sales -- he approached Sam Aaron, the co-owner of Sherry-Lehmann, the famous Madison Avenue carriage shop, and asked if he could study what Aaron did. Somewhat to Zacharia's surprise, the answer was yes. After that, says Zacharia, "I hung out, watched what they did till they turned out the lights and kicked me out for the night."

Perhaps the single most important thing he picked up from Aaron was the notion of selling futures. At the time, Aaron was one of the few American wine merchants in the futures business. He bought Bordeaux wine while it was still in cask, years away from being ready to drink, and sold it to his retail customers for delivery after it had been bottled and shipped, one or two years down the line. The idea was that the wine's price would go up, saving the customer money later while putting cash into the retailer's hands now.

The futures game is a gamble, a crapshoot really, for both retailer and customer. For one thing, only a few vintages are likely to gain markedly in price. If the retailer is wrong about a vintage -- if he pumps one that is a bust or proves merely average -- the client is sure to feel that he's been taken. But if the vintage turns out to be really fine, and the buyer makes a killing, then the retailer is a hero.

For the customer, futures present another risk: What if your retail wine merchant goes belly-up? Many an order for futures has been lost just that way. "It was a problem in the 1980s," says Ray Isle, the former managing editor of Wine & Spirits, "and it's still a problem today. One supplier went bankrupt just last year." Unlike retailers that buy only after the customer has given them a check, Zachys buys futures on its own, in advance of the consumer order. That, says Apstein, is "why I don't mind paying a slight premium to buy futures through Zachys. You know you'll get what you ordered."

Having gotten into the futures business with the 1970 Bordeaux, Zachys scored big-time with the 1982 vintage. While a number of prominent European wine writers lauded the vintage, conventional wisdom in the U.S. ran against the '82s. The naysayers, however, did not reckon with Don Zacharia -- or with Robert M. Parker Jr.

Zacharia ignored the naysayers and relied on people in the business whom he trusted. Ab Simon, the longtime head of importer Chateaux & Estates, and wine writer and importer Frank Schoonmaker said buy -- and Zacharia bought.

As for Parker, well, he was the new kid on the block. A former Maryland banking lawyer, Parker had his own newsletter, The Wine Advocate. His advice on the '82s was brash and emphatic: Buy all you can; they're going to be gold.

With the Reagan dollar having turned the exchange rate upside down ($1 brought an unheard of 10 French francs), the '82 futures were dirt cheap in 1983-84. And in the end, Parker and Zacharia were proved right. The famous Chateau Gruaud-Larose, for example, that cost $110 a case in 1984 today sells for $250 -- a bottle.

Zacharia sold 1,500 to 2,000 cases of '82 futures, but what was important, he says, was that the vintage "brought Bordeaux into the middle-class American marketplace." For $49.99, Americans could buy a case of well-made, more or less ready-to-drink Bordeaux. "Those wines," adds Zacharia, "were delicious -- and they made friends, lots and lots of friends."

By the early 1990s, Zachys had become one of the two leading American players in the Bordeaux futures market, along with Sherry-Lehmann. Today, Bordeaux futures can account for as much as 20% of Zachys' business. When Bob Parker, by then the most powerful man in the wine world, decided that 2000 was the greatest vintage in the whole long history of Bordeaux, the roof shot off. Sales at Zachys topped 16,000 cases. The unprecedented demand led, in turn, to immense logistical problems. When the bottles began to arrive, crews had to be brought in nights and weekends to store case after wooden case in Zachys' White Plains warehouse. It got so bad, says Jeff, "that we had to call up customers, begging them, 'Come pick up your cases of wine. Please."

Sometime around 1995, the Zacharias began to take a serious look at the Internet. Don claims the only issue was when the company would go online and how much it would cost. Jeff and Andrew tell the story a bit differently. His father, Jeff says, "didn't understand the Internet. We had to convince him this was the way of the future."

"Don is a real technophobe," says Andrew. "He went for years without even having a computer on his desk."

Of course, Jeff Zacharia concedes, there were valid reasons to wait: "We wanted other people to make the initial mistakes -- and we'd learn from them." In 1996, the Zacharias registered zachys.com, but it wasn't until 1998 that they finally hired an outside firm to build a site. The project didn't go well. In the days before many people had high-speed Internet access, the site was too slow and cumbersome. Within three or four months, the whole thing had to be redone by Zachys' first full-time IT chief, Rich Anstett.

Zachys has seen remarkable growth in its Web-based business -- "25% to 35% a year early on and 10% to15% even now," says Jeff. He reckons that sales are now 25% show room, 25% Internet, and 50% phone calls. Customers, he adds, "still like talking to a person. They'll call and say, 'I was at your Internet site and saw something, and now I'd like to talk to you about it."

In a small cluttered room with some 20 telephone lines, a dozen or so employees handle an average of 2,000 calls, plus 200 e-mails, a day. Everywhere in the room there are reminders: "Do not leave the phone bank unattended" reads one. Another advises: "Always answer the oldest e-mails first."

Much of the business that arrives by phone and e-mail is, inevitably, interstate. And that is the great not-so-secret secret of the retail wine world today: It is illegal to ship wines across state lines in 24 of the 50 states. But, as McMurray says, "every big retailer in America does it." On the one hand, the advent of interstate Internet sales has become the wine world's California Gold Rush. You cut out the middleman -- the distributor -- and his profits become your profits. On the other hand, the liquor laws of some states are draconian. In Florida, for example, it can be a felony to transport wine across state lines.

The Zacharias can tell you all about those Florida laws. In 1995, the state ran a sting operation against Zachys. The store sent a shipment of wine to Florida and found itself accused of a felony. Eventually the federal courts threw out the charges on jurisdictional grounds, but not before Zachys had spent plenty -- "more than one dollar but less than a hundred thousand," is all Don Zacharia will say -- defending itself. It was, says McMurray, a reminder to every wine merchant in America that the long arm of some state could easily find them.

No wonder then that the Zachys case and others like it helped set off the Great American Wine Wars. Countless challenges to the Prohibition-era wine laws have been filed in federal courts from Texas to New York. The issue is complicated, but it boils down to this: Does the commerce clause of the U.S. Constitution trump the many discriminatory state laws that followed the repeal of Prohibition in 1933?

While the plaintiffs in these cases are typically angry consumers aggrieved by the inflated prices of wine sold legally in their states -- Pennsylvania, with its state-wine-store monopoly, being a frequent target -- the financial backers of the challenges are often large retail wine merchants (among them, Zachys and Sherry-Lehmann). They, after all, have the most to gain from a change in the laws.

The stakes are high -- in the billions of dollars -- and the lower courts divided. Judges on the U.S. Second Circuit Court of Appeals voted to uphold New York's restrictive laws, while judges on the Sixth Circuit struck down similar laws in Michigan. On December 7, 2004, the U.S. Supreme Court heard arguments in these two cases, one filed by a small Virginia winery against the New York State Liquor Authority, and the other by consumers in Michigan. The justices, led by wine-lover Antonin Scalia -- he's a frequent judge at the annual International Wines for Oysters Competition held at the Old Ebbitt Grill in Washington, D.C. -- seemed inclined to favor the plaintiffs. A decision is expected before the end of the session in June.

Zacharia has his fingers crossed. December 7, he hopes, will lead to something really big. "It's Pearl Harbor Day, you know," he says, grinning.

Ownership in Zachys is divided into 200 shares. Today, Don Zacharia owns but one. "It's hard for me to get used to not having control," he admits. But he knows that he's ensured the transition from one generation of Zacharias to the next. Zachys, he says, "is a family business that works -- which is a rarity in itself. I have friends in business with their children, and it's a disaster." The problems, he thinks, "typically begin with the second generation, when they start fighting among themselves and get the lawyers involved."

Rather than get the lawyers involved late in the game, Zacharia turned to lawyers in the early to mid-1990s. One of the first was Andrew Crisses, a Manhattan attorney who has worked with wine distributors and merchants for over 30 years and is used to dealing with family ownership issues. Crisses serves as a go-between -- "more consigliere than lawyer," says Don -- for all three principals. Crisses sits in on the semiannual gripe sessions, sometimes acting as moderator, and is listed in the partnership agreement as Don's eventual successor as "intermediary," a role he already helps fill.

At the same time, Don Zacharia began meeting with trust and estate attorneys. He had already decided, he says, that his wife, Christina, and his two daughters who play no role in the business would be compensated "very well," but not with company stock. Zachys would pass equally to his daughter Jennifer and son Jeff via grantor retained annuity trusts, or GRATs.

Like charitable remainder trusts, GRATs allow the giver to avoid inheritance taxes. In effect, the donor gives away his stock over time -- six years, in the Zacharias' case -- while retaining fixed annual annuity payments. At the end of the given period, the business ends up in the hands of the grantees and the annuity payments cease. The gift is irrevocable. The process is now complete at Zachys. Don, says McMurray, "owns bupkis!"

"Giving up control is hard for Don," says McMurray. "He's been so hands-on all his life." Driving through a neighborhood of million-dollar houses in Westchester County, McMurray recalls that when he and Jen needed money for a down payment on their house, "Don said yes, just so long as we lived only a few blocks away." Jeff and his wife got the same deal.

One secret to the family's continued success -- and peace -- has been a parceling out of responsibilities. Jeff is the main Bordeaux buyer and the operations guy. McMurray is the Italian wine buyer and the rainmaker. The same willingness of all parties to set boundaries has translated into a series of separate but related businesses. When Jeff and Andrew wanted to buy or rent additional warehouse space -- for years Zachys had stored its hoard of wine in a warren of cramped cellars underneath its show room -- Don refused. "He told us that if we want to do it, fine," recalls Andrew, "but we'd have to use our own money. So we did."

Jeff and Andrew formed their own company, New York Fine Wine Storage, and rented space in a former bakery in White Plains. They opened the doors at Thanksgiving 1997. The warehouse staff is made up of Zachys employees, and most of the inventory belongs to Zachys as well. But when there's room for more -- as there was once the 2000 Bordeaux futures were cleared out -- New York Fine Wine Storage charges private customers for using its state-of-the-art climate-controlled space.

That is no small thing. When a blackout hit New York in August 2003, says McMurray, the backup generator at the warehouse "came on without missing a tick." Expensive wines that could have been damaged by overheating stayed cold.

In the warehouse, a half-dozen or so rooms are stacked floor to ceiling with some of the world's finest wines. Attached to the wooden cases are the names of famous actors, money managers, and some of the richest men in New York who bought their wines from Zachys and are awaiting delivery or are paying to have their wines kept in pristine, air-conditioned storage.

Now "the warehouse is one of D.Z.'s favorite things," says McMurray. "Don loves it because it's visceral. He likes to see the wine, to touch it, to talk with the guys who stack it."

That's not to say Don approves of all the things Jeff and Andrew have done. In the wake of the unionization threat, for example, Jeff brought in a management consultant. At the very mention of the word consultant, Don Zacharia's forehead creases. "I would never have dreamed of doing that," he says. Drumming his fingers on his desk, his face screwed up in a cockeyed grin, his shrewd eyes gleaming, he booms: "I'd have said, 'Get off your f -- -ing asses or get out the f -- -ing door!"

The wine-auction business belongs to Don. "I own it 100%," he says. "It's my baby."

The younger generation may have the workaday warehouse operation, but Don has the glamorous new leg of Zachys -- the wine-auction business."I own it 100%," he explains. "It's my baby."

The sales have already attracted new customers to Zachys' website and the show room, and Don says he expects the auction business to turn a profit this year. All three agree that the growth potential -- going online is in the plans -- is tremendous.

From 1995 to 2002, Zachys partnered with venerable auction house Christie's, but the relationship was strained. "We're a family business that can make a decision quickly," explains Jeff. "We analyze and go forward -- or don't. Christie's is a big company, where wine is just a small fraction of its business. It can sell a single painting and make more on that than we can do in a single year." The Zacharias decided they could do it better themselves.

When Zachys set out on its own, at the end of 2001, Don cherry-picked the best of the old Zachys-Christie's auction staff -- Kevin Swersey, who, among other things, checks potential sellers to make sure they have stored their wines correctly, and auctioneers Ursula Hermacinski and Fritz Hatton. "I wanted buzz in the room," says Don. "I wanted theater."

And Fritz is theater. At Zachys' fall sale, the dining room of the four-star restaurant Daniel in Manhattan is filled with well-dressed bidders, most of them male, most of them middle-aged, some waving paddles in the air, others bidding with a wink of the eye or a wave of the hand. Hatton seems to catch every nuance.

"Zowie!" he hollers when a bottle of wine fetches $18,000. "Keep the temptation going!" He does his best to stoke the fires: "I drank this beauty in Paris. Nice Petrus. Really nice. Might be the wine of the vintage. What am I bid for it?"

Wine of the vintage, maybe. But not a particularly good vintage. Nevertheless, the wine is the famous Chateau Petrus, and the winning bid is $2,000. Hatton bangs the gavel and moves on to the next "beauty." When a lot consisting of a mere three bottles of rare 1982 Bordeaux goes for $9,000, Don grins broadly. When Zachys sold that wine as a future back in 1984, it cost about $240 a case -- $20 a bottle. How on earth can anyone justify paying $3,000 for a bottle of wine that's not even 25 years old?

"I don't justify it," Don Zacharia says, chortling softly. "I don't have to. I just sell the stuff."

Sidebar: Zachys on the ($150) case

The store's wines range from $6.99 to $2,000 a bottle. Inc. asked Don Zacharia to put together two top-value cases from the Zachys inventory: a dozen red wines -- all his picks are Spanish -- and a dozen whites.

Spanish reds

  • Juan Gil Bodegas Hijos de Juan Gil 2002 $15.99
  • Mas Donis Capcanes 2002 $14.99
  • Panarroz 2003 $8.99
  • Gotim Bru Castell Del Remei 2001 $14.99
  • Las Rocas de San Alejandro Garnacha 2002 $11.99
  • Etim 2001 $7.99
  • Mas Igneus F.A. 206 2001 $18.99
  • Petalos Descendientes De Palacios Bierzo 2003 $17.99
  • Altos de la Hoya Olivares 2002 $8.99
  • Ochoa Graciano/Garnacha 2002 $9.99
  • Artazuri Garnacha 2002 $10.99
  • Borsao Tres Picos Garnacha 2003 $11.99
  • Total $153.88

Whites

  • Txacoli 2003 (Spain) $14.99
  • Burgans Albarino 2003 (Spain) $12.99
  • Muscadet Chateau de Chasseloir Chereau-Carre 2002 (France) $9.99
  • Domaine Castera 2000 (France) $17.99
  • Portal do Fidalgo Alvarinho 2003 (Portugal) $12.99
  • Raats Family Original Unwooded Chenin Blanc 2003 (South Africa) $10.99
  • #96 Falanghina Feudi di San Gregorio 2003 (Italy) $14.99
  • Kahurangi Estate Riesling Moutere 2002 (New Zealand) $17.99
  • Gruner Veltliner Veltliner #1 Hirsch 2003 (Austria) $9.99
  • Pinot Blanc Albert Mann 2002 (France) $14.99
  • Montes Reserve Sauvignon Blanc/Fume Blanc 2003 (Chile) $9.99
  • Domaine de Pouy White 2003 (France) $7.99
  • Total $155.88

John Anderson wrote about Ted Turner for Inc.'s February 2004 issue.

Last updated: Apr 1, 2005




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