Category Archives: alcohol

Mila Johns: End the Monopoly

By Adam Pagnucco.

District 18 House candidate Mila Johns has sent out a mailer calling for an end to MoCo’s liquor monopoly.  The mailer contains an endorsement from Comptroller Peter Franchot, a hero to monopoly opponents who has been calling for its end for years.  This is the first mailer we can recall seeing on this subject and we appreciate Johns’s courage in calling this question so publicly.

Share

Is the Liquor Monopoly Improving?

By Adam Pagnucco.

Once again, Montgomery County’s liquor monopoly is a hot issue in local politics.  As far as we know, MoCo is the only county in the nation in which the county government has a monopoly on the distribution of beer, wine and spirits and also a monopoly on retail sales of spirits.  Candidates for office disagree on whether it is needed.  In a response to David Lublin’s recent post on the subject, Department of Liquor Control (DLC) Director Bob Dorfman claims it has improved.

Has it?

We will give the monopoly credit for one thing: it did not see system-wide distribution failures in the critical week between Christmas and New Year’s last year as it did in 2015 and 2016.  That has not stopped two anti-monopoly groups from forming in the last few months, one representing licensees and another representing consumers.  But what’s really going on?  Let’s look at the data.

According to Gallup and the U.S. Department of Health and Human Services, alcohol consumption tends to be correlated with education and income.  That makes sense – people with college and graduate degrees tend to make more money, and people with more disposable income have more money available for alcohol purchases.  MoCo has lots of highly educated and wealthy people so we should be one of the leaders in alcohol spending in Maryland.

The Comptroller of Maryland, who collects alcohol taxes, posts annual reports of alcohol sales per capita for each of Maryland’s twenty-four jurisdictions on his website.  We collected the last ten fiscal years of that data and present it below.  Let’s remember when recent changes at the DLC occurred.  After many revelations of bad performance in 2014, DLC launched an “Action Plan” to improve performance in June 2015.  George Griffin, the former DLC Director who was blamed for the first New Year’s Eve meltdown, left in January 2016, about halfway through Fiscal Year 2016 (which ended on June 30).  Bob Dorfman, the new DLC Director, started in December 2016, about halfway through Fiscal Year 2017.  If these events were associated with genuine operational improvements, we would expect to see significant increases in both per capita sales and rank among jurisdictions over the last three years.

That has not happened.

Below is data on per capita sales of spirits, wine and beer in Montgomery County over the last ten fiscal years.

Spirits sales per capita have increased over the last decade, although they have barely changed since 2013.  Wine is stagnant.  Both wine and spirits fell in FY17, the first year of the new Director.  Beer sales per capita are down over the last decade and rose slightly in FY17.  But here’s the thing: MoCo’s new craft breweries are exempted from the liquor monopoly and, as a result, are doing really well.  The tiny gain in beer could be due to FREEDOM from the monopoly, not better operations at the monopoly.

Now let’s compare MoCo’s rank in per capita sales to the 23 other local jurisdictions in Maryland.

Because of its education and wealth, MoCo should be one of the leading counties in per capita alcohol sales.  It’s not.  In terms of spirits, the only county that’s worse is Somerset, which perhaps not coincidentally has its own monopoly on spirits sales.  In terms of beer, MoCo is dead last.  In terms of wine, MoCo has slid from ninth in the state to fourteenth, moving down a spot in FY17.  Jurisdictions in which residents bought more wine per capita than MoCo in FY17 included Anne Arundel, Baltimore City, Baltimore County, Calvert, Carroll, Cecil, Frederick, Garrett, Harford, Howard, Kent, Talbot and Worcester.  Does anyone believe that residents of counties with two-thirds of MoCo’s household income (or less) drink more wine than we do?

What’s happening is that consumers leave the county to buy alcohol.  That’s why numerous D.C. liquor stores are located within blocks of the MoCo border.  That’s why a fifth to a quarter of customers at Total Wine stores in McLean and Laurel come from MoCo.  The state’s Bureau of Revenue Estimates found that if MoCo customers were to return to the county to shop for alcohol in the absence of the liquor monopoly, the county would see a surge of almost $200 million in new economic activity, enabling a path forward for the county to replace every cent of lost revenue.

Dorfman is a better manager than his predecessor and we believe he is genuinely trying to improve DLC.  But Dorfman won’t be there forever and DLC has a long history of problems.  The monopoly also has a long history of promising improvement, mostly resulting in fleeting or ineffective fixes with quick relapses.  Even modest liberalization passed by the General Assembly to allow some private retail sales of spirits has been blocked.  What the above data on per capita alcohol sales shows is that, despite claims to the contrary, not much has changed.  And unless MoCo starts behaving like a normal county and allows private sector competition, true change may never come.

Share

On “Those Good Union Jobs” at the Department of Liquor Control

MCGEO has done quite a number on county residents. When discussing the hot issue of privatization of Montgomery County’s liquor monopoly, politicians automatically express concern about the potential loss of those “good union jobs.”

People would be a lot less sympathetic to the idea of protecting liquor store or distributor employees. Why on earth should we maintain an antiquated, inefficient monopoly to protect their jobs but not spend money to protect the grocery store cashier or bank teller threatened by automation?

What makes all the angst about losing “good union jobs” even more galling is that private liquor distributors are unionized by the Teamsters – a little fact that never seems to get mentioned in all the handwringing.

Privatization doesn’t threaten union jobs. It threatens union jobs that pay dues to MCGEO. So MCGEO President Gino Renne, who was paid $196,700 by his local union and an additional $20,000 by his international union last year, is naturally quite concerned. As Gino likes to say, “Just keeping it real.”

Sadly, no one seems concerned about all these Teamsters Union jobs lost due to the monopoly depriving them of a livelihood. Not to mention the restaurant jobs lost because of extra costs that make it harder to turn a profit and frustration with the Department of Liquor Control that stops businesses from opening or expanding in Montgomery.

The other unasked question is why does the DLC perform so poorly if these jobs are so great? Service at DLC stores is variable at best and most employees are unfamiliar with their product. Beyond the stories about the DLC failing to deliver product at key moments, such as right before New Year’s, I’ve also heard about the DLC dumping shipments in the middle of the bar during happy hour.

It’s almost as if Ernestine left the phone company once Ma Bell was broken up and sought refuge at the DLC. “We’re the DLC, we don’t have to care.”

It’s not as if the DLC is understaffed. Somehow, Montgomery County-based Total Wine manages to keep in stock and much better organized a far greater range of product. They do it with fewer employees who yet also seem to know about the product that they’re selling and are more likely in my experience to provide good customer service. Other stores do the same.

Similarly, I’d like to know the share of DLC workers who live in Montgomery County. While some might argue that this is irrelevant, why must Montgomery County citizens keep in place a costly system to subsidize workers who don’t even live here? Even this question has totally lost the plot as government should not be a make-work program but should provide services to residents.

Councilmembers defend the DLC because it brings in money to the county. It would be a miracle if a monopoly on booze in the DC area did not. The sad truth is that it brings in far less than it might. The amount of beer and spirits sold per capita in Montgomery is lower than almost all other jurisdictions in Maryland as well as the Virginia suburbs. Does anyone seriously believe that we drink phenomenally less than people in Fairfax? Greater efficiency would also increase profit. Couldn’t we just tax alcohol and try to grow the economic pie instead of clinging desperately on to a stagnant unloved system?

None of this means that we shouldn’t pay county employees decent wages or we should just chuck the DLC workers out of a job. But nor should taxpayers be obligated to maintain a system that doesn’t work and myopically hurts the economy in perpetuity.

It’s time to call the question and end this outdated monopoly.

Share

Luedtke Proposes Alcohol Sales Reform

There are two major components to frustration with Montgomery County’s alcohol laws: (1) the distribution monopoly by the Department of Liquor Control (DLC), and (2) the limitations on where consumers can buy alcohol. Del. Eric Luedtke’s (D-14) bills would address the latter (see press release below).

In a nutshell, one bill would allow supermarkets to get around the current limits that make it impossible for them to sell all types of alcohol at multiple locations by allowing them to open stores within their stores operated by the DLC.

I suspect supermarkets will be chary of giving up sales space when they cannot control the sales experience and have to negotiate over which products are sold. My bet is that they would much prefer to be able to sell just beer and wine within their own stores. Hopefully, the bill can be amended towards that end.

However, MCGEO, the DLC union, will likely resist any effort to move away from the absolute DLC control model. Though supermarket employees are unionized, it is a different union, and MCGEO won’t want to lose the opportunity to expand its muscle–and ability to protect the hated distribution monopoly.

The second bill loosens certain restrictions on DLC stores and Sunday alcohol sales. My bet is that non-DLC stores that sell beer and wine will fight allowing DLC stores to sell soft drinks and cold beer and wine. They’ll be outraged that they still have to deal with DLC’s distribution monopoly yet see the DLC encroaching on a valuable share of their business.

Bottom Line: If some major kinks can be worked out, especially the need for a DLC-operated store within a store, consumers will regard this as a major step forward. But the bills do nothing to address the hated distribution monopoly that jacks up prices and drives restaurant business out of the county.

Here is Del. Luedtke’s press release:

Delegate Eric Luedtke Seeks to Make Montgomery Alcohol Laws More Consumer Friendly

Bills include provisions that will eliminate outdated blue laws, expand choices for retail alcohol consumers

Montgomery County, MD, October 30, 2017Delegate Eric Luedtke (D-Burtonsville) announced plans today to introduce two bills aimed at making Montgomery County alcohol laws more consumer friendly. One of the bills, MC 16-18, will allow for separate beer, wine, and liquor dispensaries to be located inside grocery stores. This store-within-a-store model has been used successfully in other states. Under this model, large grocery stores will be eligible to have a separate store located within them selling alcohol, similar to coffee shops or bank branches located in many grocery stores now.

The second bill, MC 4-18, titled “The Montgomery County Alcohol Modernization Act of 2018,” will overhaul a number of outdated laws that limit consumer options and place unnecessary limits on businesses. Among its many provisions, this bill will allow county liquor stores to sell cold beer and wine, soft drinks, and growlers. The bill also eliminates some of the last remaining blue laws in Montgomery County, such as laws that prevent some alcohol licensees from serving alcohol as early on Sundays as they do on other days of the week.

Delegate Luedtke stated about this effort, “Our debates about alcohol laws in Montgomery County have too often ignored consumers. The most common complaint I hear from residents about our alcohol laws is a lack of beer and wine in grocery stores. It’s time we focused more on consumer needs and fixed some of these outdated laws.”

Both pieces of legislation will be filed as local bills, and there will be public hearings held on them before the Montgomery County Delegation in December.

###

Delegate Eric Luedtke represents District 14 in Montgomery County, which includes Brookeville, Burtonsville, Damascus, Olney and parts of Silver Spring. Delegate Luedtke is chair of the Education Subcommittee on the House Ways and Means Committee.

 

Share

Barkley Blasts Annapolis

By Adam Pagnucco.

Delegate Charles Barkley (D-39) has just given the most astounding interview by a member of General Assembly leadership ever seen by your author.  In it, he broke the most important rule of Annapolis decorum there is: never throw your superiors under the bus.

Barkley is the Chair of the House Economic Matters Committee’s Alcoholic Beverages Subcommittee.   In theory, that makes him the proximate point person on alcohol bills in the House.  Some think of the alcohol industry as one industry, but in fact it is several, with the manufacturers, distributors, retailers, restaurants and several individual companies hiring their own lobbyists and making tons of political contributions.  That makes for complicated politics which, among many other things, has produced the much-criticized bill punishing craft breweries.  That bill has already caused one potential brewery owner to bail on the state.

The anti-brewery bill passed the House on a 139-0 vote.  One source tells us, “When a bad bill passes on a vote like that, someone f____d up.”  In an incredible interview with Maryland beer blog Naptown Pint, Barkley placed the blame on his superiors, specifically Economic Matters Committee Chair Dereck Davis and Speaker of the House Mike Busch.  The whole interview is a massive scoop and a must-read, but the key passages are this:

“We didn’t know what was in the bill until the day it came in front of our committee for the vote,” Barkley answered. But was that due to the rush of the process, or was it an intentional screen being put up around the bill’s contents?

“I don’t think they were trying to give out too many details,” he commented…

“I honestly thought we were moving in the right direction with Nick Manis [MCA], Steve Wise [MSLBA legal counsel] and [Jack] Milani [MSLBA, Monaghan’s Pub in Baltimore]. We thought we were making progress, and we had the guys talking to us.”

Barkley then paused for a moment.

“All of a sudden, they quit talking to us,” he continued. “And then the [Economic Matters Committee] Chairman [Dereck E. Davis] said, ‘This is what we’re doing.’”…

I asked him his thoughts on some of the statements by House members who voted in favor of HB 1283 that they now know it was a bad bill or that they were misled on the contents ahead of the committee vote that pushed HB 1283 over to the Senate.

“I would say absolutely they were misled. [The House] thought we worked out a compromise and this was it. We hadn’t,” he stated.

“Up until this point, I ran the subcommittee and I kept my chairman [Davis] informed. But this one left my hands. I’ve never had this kind of intervention before, until this year. I thought [Manis, Wise and Milani] were meeting with us. But I think we were getting too close to stuff they didn’t want. So I think they met with the Speaker and got things changed.”

Here is a sub-committee chair describing a major bill as a backroom, secret deal involving lobbyists, a powerful committee chair and the Speaker in cahoots to deceive the full House membership.  Your author has never seen a state legislator entrusted with leadership responsibility go on the record in this way before.  It is an almost certain firing offense.

Barkley has always been something of a maverick.  Once a Vice-President of the county teachers union, he has not always been their best friend in Annapolis.  In 2009, he was famously kicked off the Appropriations Committee and lost a subcommittee chair for defying leadership on the millionaire tax.  In 2012, Barkley was one of a handful of MoCo Delegates to vote against the immensely damaging teacher pension shift, a top priority of Governor Martin O’Malley and the presiding officers.  After losing the first vote, he introduced a floor amendment to the budget which would have cut the shift in half, which also failed.  Considering this record, it’s surprising that Barkley acquired the alcohol subcommittee chair at all.

Barkley’s candor is likely aided by his apparent decision to leave Annapolis and run for County Council.  We don’t know what the future holds, but we will say this: given Barkley’s iconoclastic ways, he would make an interesting County Council Member.

Share

Is Maryland Trying to Punish Craft Breweries?

By Adam Pagnucco.

Craft breweries have been growing rapidly in Maryland and elsewhere, forever changing the beer business.  Maryland scored a huge win a couple months ago when Diageo announced their intention to open a $50 million Guinness brewery in Baltimore County, creating a tourist attraction and dozens of jobs.  Best of all, unlike many employers, Diageo is not asking for one thin dime of public subsidy to come to the state.  But instead of welcoming the new facility with open arms, the House of Delegates reacted by making it harder for Diageo to do business here, as well as many other breweries in Maryland.

The debacle began when Diageo asked for a change in state law to allow them to sell 5,000 barrels of beer at a restaurant and tap room on the brewery site.  (Maryland’s current limit of 500 barrels is by far the lowest in the nation; the second-lowest state, North Carolina, has a limit of 25,000 barrels.)  Other brewers sought a limit of 4,000 barrels in on-site sales for their own operations and five different bills followed.  HB 1283 was the one that passed the House of Delegates and did three main things.

  1. It increased the on-site sales limit to 2,000 barrels. Breweries could apply to the Comptroller for permission to sell another 1,000 barrels on-site, but they would have to go through a distributor to do so.  That means the brewery would have to brew its own beer, then turn it over to a distributor, then receive it back from that distributor and of course pay the distributor a fee for its service.  Guess who ultimately pays that fee?  That’s right, you the customer!
  1. It established closing times for tap rooms of 9 PM during the week and 10 PM on weekends, down from local closing times ranging from midnight to 2 AM.
  1. It limited tap room sales to beer brewed on-site only. This repeals a long-standing practice in which brewery tap rooms supplement their own products with contract beer brewed for them by other breweries.  Such contract beer sales are major sources of revenue for some craft brewers and make tap rooms more attractive to customers.

Brewers characterized the combination of changes as “one step forward and two steps back” and predicted layoffs and business losses.  Why would the House pass such a bill?

One of the biggest opponents of liberalizing rules on craft breweries is the Maryland State Licensed Beverage Association, which represents restaurants and small alcohol retailers.  The group is particularly influential in Annapolis as its PAC has contributed over $180,000 to state politicians since 2005.  The association sees craft brewers as competition for its members.  From a zero-sum perspective, every pint purchased in a brewery tap room is a pint not purchased in a restaurant or package store.  But that view doesn’t recognize the synergies between these types of establishments as well as their differences.  Diageo’s brewery has the potential to be a major tourist facility, bolstering the entire local economy.  And if a consumer purchases a new product at the Diageo site and likes it, he or she will be motivated to buy that same product at restaurants and stores.  That means more business for everyone.

Some brewers would prefer that HB 1283 simply die in the Senate because of the problems it would cause, but it’s not so simple.  If the bill dies, the state’s current on-site sales limit of 500 barrels would stay in place.  That could cause Diageo to cancel its project, costing Baltimore County a $50 million tourist attraction that other states would kill to get.  Think of the impact that would have on the industry’s perception of Maryland.  If we lose Diageo, what other major brewer would ever relocate here?

Maryland has a number of anti-competitive laws on alcohol, including the much-loathed prohibitions on sales in most grocery stores and Montgomery County’s dysfunctional liquor monopoly.  The last thing we need is even more of these laws, especially if it causes us to lose a major employer and gives us a national black eye.  HB 1283 must be fixed.  Cheers to the State Senate if they can get it done.

Share

MoCo’s Stunted Restaurant Industry

The following is a guest post by Adam Pagnucco:

One of the dimensions to the current debate about Montgomery County’s Department of Liquor Control (DLC) that has not been empirically explored is its impact on the county’s restaurant industry.  Restaurant owners have many complaints about DLC and some have said that entrepreneurs will not open new establishments here because of it.  However, several urban districts in the county have lots of restaurants that seem to be doing just fine.  So what’s going on?

Let’s investigate.

One of the many programs run by the U.S. Census Bureau is the Economic Census, a very detailed look at industries by geography that is updated every five years.  Among the statistics collected by the Economic Census are the number of establishments, the sales of those establishments, and the number of employees.  Below are the combined totals of two industry segments – drinking places (industry code 7224) and full-service restaurants (industry code 722511) – for 22 jurisdictions in the Washington-Baltimore region in 2012.  This data does not include limited service restaurants (like fast food places) that often do not sell alcohol.  Data on drinking places for Fauquier and Stafford Counties and the Cities of Fairfax, Falls Church and Fredericksburg is not available because it does not meet the reporting thresholds established by Census.

Restaurant Stats
MoCo is a significant player in the region’s restaurant industry.  It has 11% of the region’s bars and restaurants, 10% of sales and 10% of employees.  But it also has 13% of the region’s population.  MoCo matters because of its sheer size.  What happens when the restaurant industry’s statistics are presented on a per capita basis?  Using Census population data for the five-year period of 2009-2013, here’s what that looks like.

Restaurant Stats per Capita
In terms of establishments per thousand residents, MoCo (at 0.65) is not terribly different from the regional average (0.73).  MoCo’s figure is also close to the two jurisdictions which most resemble it in education and income levels, Fairfax (0.66) and Howard (0.61).  But on the next two measures, MoCo falls short.  MoCo’s restaurant sales per resident ($789) are 20% below the regional average ($989).  They are also below Fairfax ($900), Howard ($930) and Loudoun ($826).  MoCo’s restaurant employment is just as bad.  MoCo’s figure (14.2 restaurant employees per thousand residents) is 23% below the regional average (18.4) and lags most other places in the region, large and small.

Why could this be happening?  It’s not because of low income levels – MoCo does just fine on that measure as do many jurisdictions in the region.  It’s not because of comparative tax burden.  The District of Columbia’s Chief Financial Officer finds that MoCo’s tax burden is not out of line with its neighbors.  Do MoCo residents simply not like going out to eat?  Are we a county of shut-ins?

Frank Shull, the Chief Operating Officer of RW Restaurant Group, which owns several county restaurants, explained why the industry is lagging when he appeared before the County Council last spring.  According to Bethesda Magazine:

A partner in the Robert Wiedmaier Restaurant Group testified Friday that Montgomery County’s Department of Liquor Control (DLC) is “an evil empire to most people in the business.”

In testimony before the County Council’s Ad Hoc Committee on Liquor Control, Frank Shull said poor selection, bad service and high prices keep Washington, D.C., restaurateurs from opening restaurants in the county.

“A majority of good operators in D.C. will not come into the county,” Shull said. “We have this discussion all the time. Restaurants don’t want to because they don’t want to deal with the DLC.”

Jackie Greenbaum, owner of Jackie’s Restaurant and the Quarry House Tavern in Silver Spring, detailed the challenges of dealing with DLC when she signed our petition to End the Monopoly:

I own 2 restaurants in Montgomery County, both well known for the breadth of their beer, wine and liquor lists. The difficulty in creating and maintaining these lists because of the county controlled system is extraordinary. It adds hours of unnecessary labor to my payroll costs, diminishes the quality of my beverage programs through the inconsistency of stock, unavailability of products and errors in delivery, and drives up the cost of the products we sell–which must either be absorbed by us (therefore diminishing our profits) or passed on to the consumer resulting in higher menu prices. This system causes all but the most intrepid restaurant owners to dumb down their offerings because it’s far far easier and ensures Montgomery County will never compete with DC in terms of the quality and creativity of its restaurants.

What would happen if MoCo’s restaurant industry were average in size relative to its population?  In other words, how big would the industry be if it had 0.73 establishments per thousand residents, $989 in sales per resident and 18.4 employees per thousand residents, which are the averages for the Washington-Baltimore region?  Extrapolating from the data above, the county would have 82 more restaurants, $198 million more in sales and 4,184 more employees.  All of this would create more tax revenue for both the county and the state.

How do we get there?  Let’s be honest and acknowledge that there could be many factors governing the size of the county’s restaurant industry and DLC is just one of them.  But in the opinion of the folks who actually run restaurants, DLC is an important impediment to their doing business.  The County Council has proposed reform, but in the opinion of the two largest alcohol distributors in the state, it won’t work and they won’t participate.

Restaurants are not just businesses.  They are critical cultural assets.  People decide where to live in part because of the abundance and quality of food options.  This industry is a large part of our quality of life.  By unleashing its spirit of entrepreneurship, we enrich all of society.  So how do we do that?

Here’s one way.  End the Monopoly.

Share

Why the Council’s Liquor Reform Won’t Work

Today, I am pleased to present a guest post from Adam Pagnucco:

Rising to the defense of the county’s liquor monopoly, the County Council has put forward a proposal for reform.  They claim it will cure most of the problems at the Department of Liquor Control (DLC) while causing none of the budgetary consequences of allowing full private sector competition with the department.  Are they right?

Let’s examine their recommendation in detail.

The council’s proposal focuses on “special orders,” which are requests by customers for products not in DLC’s regular stock.  The DLC’s performance in delivering these products is a huge source of complaints for restaurants and retailers, who claim that DLC regularly shorts orders, misses orders, delivers the wrong products and charges mark-ups that are significantly higher than in the District of Columbia.  The following story is a typical description of DLC’s operations in this area.

Mike Hill, general manager of Adega Wine Cellars & Café in Silver Spring, said they have problems getting specialty wines and craft beer.

“If we like a beer or wine and we want to bring that into our store, the turnaround time can be eight days if we’re lucky or two to three months to not at all in some cases,” Hill said.

He said delivery times vary from 11 a.m. to 7:30 p.m. He explained that sometimes he receives orders that should have gone to other restaurants or stores. Other times his business receives sealed boxes that are labeled as one type of wine, but turn out to be another type when they open it.

“About 75 percent of my wall is bare because of items we’re unable to get,” Hill said.

The council is right to be concerned about this.  Their proposal would allow retailers and restaurants to purchase specialty wines and beer directly from private distributors.  That sounds great on the surface, but the devil is in the details.  Let’s have a look at the major features of what the council has in mind.

  1. DLC remains in control.

DLC has sole authority to determine what beverages are regular stock or special order, and the council’s proposed legislation does nothing to change that.  DLC would also have sole authority to levy and administer a fee on any transactions between private customers and private distributors, an issue explored further below.  Because DLC continues to preside over, control and impose charges on any purchases under the council’s proposal, that guarantees that its many inefficiencies will continue to plague the entire system.

  1. The economics don’t work.

The council would have private distributors make small deliveries of specialty products while retaining most of the volume for direct delivery by DLC.  That’s a problem.  Distribution is a capital-intensive industry.  Assets like warehouses and trucks are expensive to maintain.  To make money, distributors need to move lots of volume through their warehouses and send out lots of full trucks.  If they can’t do that, many won’t be able to profit under the council’s proposal and they could simply stay out.  Since distributors strike exclusive arrangements with manufacturers, this factor alone could exclude many beverages from the council’s proposed new system, thereby limiting its scope and defeating its purpose.

The two largest distributors in Maryland, Reliable Churchill and Republic National, made this argument in a July 2015 letter to the county council.  They wrote:

We suggest that some wholesalers, including us, will not be able to deliver special orders for economic reasons.  At present, private wholesalers deliver only to the Department of Liquor Control (the “Department”) warehouse so they have no regular delivery routes in the County.  To fulfill a special order, the private wholesaler would have to make a special trip to the licensee.  By their nature, special orders are for small quantities.  The profit on such a small transaction would not cover our delivery costs incurred by sending a truck for a special delivery.  In other words, there is no financial incentive to make the special delivery and, in fact, a disincentive.

We do not want the [council’s] resolution to raise expectations unnecessarily, so we are writing again.  As you know, private wholesalers are not required to fill all orders.  Also a winery and distillery can use only one private distributor in Maryland.  A distributor can refuse to fill an order if it is not economically feasible.  Common sense dictates that a private wholesaler would not fill orders costing them money because they are not in business to lose money.  It is almost certain that Republic National and Reliable cannot afford to make a special delivery to a licensee.

Wholesalers Letter to Council 1 Wholesalers Letter to Council 2

  1. The do-nothing fee.

The most controversial aspect of the council’s proposal is that DLC would be able to charge a fee on any special order transactions between private customers and private distributors even though it does nothing to facilitate them.  According to the council’s legislation, the fee would be “set at a level sufficient to replace the Department of Liquor Control for Montgomery County’s estimated revenue lost by allowing private licensed Maryland wholesalers to sell and distribute beer and light wine products…”  So DLC would be made whole.  It would be the sole determiner of exactly how high of a fee would be required to make it whole.  And since DLC is hugely inefficient in the special order segment – something even the council admits – the fee would reflect DLC’s bloated service costs rather than any cost savings obtained by going private.  And who would ultimately wind up paying this fee?  That’s right, the consumer.

Here’s what the state’s two largest distributors wrote about the do-nothing fee (which they characterize as a tax) in the letter shown above.

We also suggest that the local tax you intend to impose on special orders is counter-productive.  It makes a bad economic situation worse.  First, increasing the cost of products will encourage people to shop outside the County, thereby creating a hit for County business.  The County should lower prices to keep business in the county.  Already, tens of millions of dollars are spent outside the county on alcoholic beverages due to the comparatively higher costs.  Second, the tax makes delivery of a special order even more costly, discouraging wholesalers from delivering special orders.  Wholesalers cannot charge more in Montgomery County to recoup a local charge.  Third, state law precludes local taxation of alcoholic beverages, thereby suggesting that the local charge is illegal and cannot be implemented.  Fourth, we expect significant opposition to this proposal of a local charge based on its statewide implications.  Last, in some ways, the County should pay wholesalers to deliver special orders because they are solving a County problem at their expense.  We know that will never happen.

What if the do-nothing fee is removed?  Well, there’s a catch: the county issues bonds backed by liquor profits.  The council and the County Executive use this as a basis for opposing full private competition but it’s also relevant to the council’s proposal.  The County Executive believes that the do-nothing fee is required to protect those bonds in the case that any liquor distribution is done privately.  In the memo below, the Executive writes to the Council President:

I have been advised by the County’s Bond Counsel that edits were required to earlier drafts of the [liquor control] legislation to avoid a downgrade to the over $100 million in outstanding Department of Liquor Control (DLC) Revenue bonds as well as prevent litigation from existing bondholders due to a material deterioration in the security of the bonds.  According to Bond Counsel, at the time the bonds were sold bondholders had the security of a near monopoly created by State law.  If this legislation is approved that near monopoly will no longer exist under State law; so the security of the bonds will have changed.  Prior drafts of the legislation did not limit the reduction in DLC revenues pledged for the payment of the bonds and did not mandate the imposition of the surcharge [on private transactions].

The best option for reducing the possibility of a downgrade or a bondholder action is to require that the surcharge collected from the wholesalers is equal to lost revenues.  Therefore we have inserted provisions making the surcharge mandatory and “set at a level sufficient to replace… the estimated revenue lost.”  This provision should remain even after the bonds have been paid to protect County services supported by the DLC earnings transfer.

Leggett DLC 1 Leggett DLC 2

And so if the council’s recommendation is adopted with a do-nothing fee, it will – surprise! – do nothing because distributors won’t participate.  And if it is adopted without one, it would cause many of the same budgetary issues as an End the Monopoly approach with few of the offsetting benefits.

  1. A Get Out of Jail Free Card for DLC.

Remember the board game Monopoly?  One of its most famous playing cards allows a player to Get Out of Jail Free.  That’s exactly what the council’s proposal does for DLC.

Get out of jail free-1

The proposals by Comptroller Peter Franchot and Delegate Bill Frick would expose DLC to full private sector competition – the only force that will compel DLC to improve.  But the council’s system would keep DLC in the driver’s seat.  DLC would decide which beverages to sell, which ones to delegate to the private sector and exactly how much money it will charge to be “compensated.”  It will remain free to run its warehouse with sticky notes and to suffer shortages of as many as 154 cases a day.  Its broken ordering system will now include extra accounting and paperwork to administer the do-nothing fee.  And if anyone speaks up in the future in favor of real change, the DLC’s bureaucracy will say, “Wait a minute.  A new procedure has just been put in place.  We need time to implement it.  And once we do, we promise things will improve.”  And a year will pass.  And five years.  And then a decade.  And businesses will continue to struggle while consumers simply flee to the District of Columbia, which they do now.

The council’s proposal is designed to force citizens – consumers and businesses alike – to subjugate their interests to the liquor monopoly.  Good government demands the opposite: the county should serve the interests of the citizens.  And there’s only one way to do that.

End the Monopoly.

Share