Tag Archives: Department of Liquor Control

The Magic of Freedom from the Liquor Monopoly

By Adam Pagnucco.

Montgomery County is witnessing an historic craft beer renaissance.  New small breweries are popping up all over the county offering an incredible array of IPAs, Belgian tripels, pilsners, ESBs, saisons, stouts and even rum rye.  Politicians and customers alike are celebrating, even if they might be a wee bit late to work on the following day.  But this renaissance has been caused by one factor that few so far are talking about.

These breweries are exempt from having to sell their products through the county’s Department of Liquor Control.

brookeville-beer-farm-1

Montgomery County Executive Ike Leggett and members of the County Council at a ribbon cutting for Brookeville Beer Farm.  Photo courtesy of Delegate David Moon.

Until recently, there were three small breweries in MoCo: Growlers in Gaithersburg, Rock Bottom in Bethesda and Gordon Biersch in Rockville.  The latter two are part of chains.  While each establishment could sell to individual customers, they had to go through the Department of Liquor Control (DLC) to sell to restaurants and retailers.  For the most part, it wasn’t worth the bother.

That changed in 2014 when a group of craft brewers wanted to open Denizens Brewing Company in Downtown Silver Spring.  The condition they imposed was that the DLC must not be allowed to carry their beer.  Denizens co-owner Julie Verratti told the Sentinel, “There’s no freaking way in hell I would ever trust my product to the Department of Liquor Control.”  According to the article:

Veratti said the main reason she does not trust the DLC to deal with her product is because she believes the warehouse employees would not properly handle it.

“It’s not their product so they don’t give a sh**,” Veratti said. “They don’t care if it sits out and I doubt half the people in the warehouse have knowledge of how to handle beer.”

Paul Rinehart, founder of Baying Hound Aleworks, whose brewery had to go through the DLC prior to the change in law, called using the DLC as a distributor “not fantastic.”

Rinehart said when using the DLC his brewery “ran into issues where our product would get lost” and would often hear from clients that their product orders had been either delivered incorrectly or not delivered at all.

Despite the DLC upgrading their inventory system to Oracle, which rolled out on Feb. 1 and has its own problems, Rinehart said he has no plans to use the DLC to distribute again.

“I’m just afraid of my product getting lost again,” Rinehart said.

The result of Verratti’s advocacy was a 2014 state bill that allowed micro-breweries to bypass the DLC and sell craft beer directly to restaurants and retailers as well as on-site customers.  This was the key reform that enabled Denizens to grow in MoCo.  Once again, from the Sentinel:

Had it not been for the change in law that gave breweries the ability to deliver their product directly to their customers, Julie Veratti, co-owner and director of business outreach for Denizens, said her brewery would not have distributed inside the county at all and instead would have just distributed the product to Washington, D.C. Denizens opened for business after the change of law came into effect.

And so MoCo micro-breweries are now free of DLC entirely.  Disasters like DLC’s week-long meltdown in last year’s holiday season do not affect them at all.

The result of all this is a BOOM in craft brewing.  Since the DLC exemption was passed, Denizens (Silver Spring), 7 Locks (Rockville), Waredaca (Laytonsville) and Brookeville Beer Farm (Brookeville) have opened.  A fifth brewery attempted to open in Rockville but encountered permitting and zoning issues with the city government and moved to Baltimore.  The chart below shows all active licenses and permits pertaining to MoCo microbreweries.  Fifteen of eighteen originated in 2014 or later.

moco-brewery-licenses

The lesson to be learned here is that removal of the county’s liquor monopoly leads to economic growth and job creation.  Those are important considerations for a county that has seen its private sector jobs base shrink between 2001 and 2014 and has just raised property taxes by 9 percent.  The state’s Bureau of Revenue Estimates has found that the county could create more than 1,300 jobs and nearly $200 million in annual economic activity by tossing its liquor monopoly into the dustbin of Prohibition.

Will the county embrace economic prosperity and job creation?  Or will politicians continue to defend the monopoly while cutting ribbons for breweries who are exempted from it?

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How to End the Monopoly and Recover the Money

By Adam Pagnucco.

In the latest development in the county’s continuing liquor monopoly saga, the County Executive has established a task force to explore options for scaling back or eliminating the monopoly.  One condition applies: the monopoly earns money for the county and the Executive does not want to lose it.  Last February, he told Bethesda Magazine, “I have no problem with privatization per se, but we need to make sure the county’s residents and taxpayers are protected on the financial issue.”

That’s a reasonable point of view.  Here’s a proposal to End the Monopoly without taking a financial hit.

First, let’s recall that the goal of last winter’s End the Monopoly campaign was never to abolish the Department of Liquor Control (DLC).  Rather, we were seeking to allow private sector competition with the DLC at both the wholesale and retail levels.  Licensees would be able to buy from the county, private wholesalers or both and consumers would be able to buy all beverages, including spirits, from county stores, private stores or both.  That does not mean that DLC would get wiped out.  Indeed, it has one competitive advantage that no private wholesaler has: it is a one-stop shop for all alcoholic beverages.  Some licensees are willing to tolerate DLC’s problems in return for the convenience of dealing with one bill and one truck.  DLC’s Acting Director claims that their performance is improving and the county employee union President told the latest meeting of the task force that he has spoken to dozens of retailers who wish to stay with DLC.  If they are correct, private competition will not eliminate DLC, but it could reduce its revenues.

The closest relevant example to what would happen if DLC were exposed to competition is Worcester County, Maryland, which opened up its spirits monopoly in 2014.  Worcester’s DLC Director testified to the MoCo Delegation that within a year, the county had lost 42% of its wholesale business to private competition but had kept 96% of its retail business.  Now Worcester County’s monopoly was run far more poorly than MoCo’s DLC as it was found guilty of massive violations of state law back in 2010, so MoCo’s DLC could fare much better with competition.  But for the sake of argument, let’s use its experience as a starting point.

Any analysis of what would happen to MoCo’s DLC under competition must recognize that the liquor monopoly makes two payments to the county: a direct return to its general fund and debt service paid on bonds guaranteed by liquor profits.  Potential shortfalls in both those areas must be addressed.

The General Fund

DLC’s operating profits, projected to be $20.7 million in FY17, are paid directly into the county’s general fund.  That amount accounts for 0.4% of the county’s $5.3 billion operating budget.  What would happen to those profits if the private sector were allowed to compete with DLC?  According to the county’s Office of Legislative Oversight, DLC’s FY14 revenues were split pretty evenly between wholesale ($136 million) and retail ($127 million) operations.  If Worcester County’s experience occurred in MoCo, 42% of the wholesale revenue and 4% of the retail revenue would be at risk from competition, so DLC’s total revenue would decline by 24%.  If DLC’s operating costs scale with its operating revenues, its net income would fall by $5 million.

How do we make up that money?

First, the county could open up more county liquor stores.  (Indeed, it is already doing so.)  In FY13, the county earned $795,000 in annual gross profit per liquor store.  So if that gross profit figure still holds, seven new liquor stores could cover a $5 million gap.

Second, new tax revenues will be available in a world of competition.  The state’s Bureau of Revenue Estimates released a report last year finding that if DLC were completely abolished, $22.8 million in tax revenues would be generated, mostly from customer repatriation.  (That is actually larger than DLC’s return to the county’s general fund.)  The problem is that only $1.8 million would accrue to the county in local income taxes, while the rest would go to the state (primarily through sales taxes).  The solution is to have the state share its incremental revenue increase with the county for a period of time.  After all, if the county is giving up a financial asset, it should share in the returns from that.

A formula could be constructed that ties incremental increases in state revenue from alcohol sales in MoCo to DLC’s reduced income.  For example, in Year X, if DLC earns $5 million less than its baseline and the state earns $6 million more than its baseline, up to $5 million could be returned to the county.  The formula should cap returned receipts to the county at the amount that the state gains so that the state doesn’t lose money.  And it could be temporary and transitional since at some point MoCo would be expected to behave like nearly all other counties in the nation and pay its bills with no liquor monopoly.

The math is clear: it’s entirely possible for the county to suffer no net losses at no cost to the state with incremental revenue sharing and a few more liquor stores.

The Bonds

The county has issued three tranches of revenue bonds guaranteed by liquor profits, the last of which matures in FY33.  The outstanding balance on the bonds is $114 million as of June 30, 2014 and DLC is projected to pay $10.9 million in debt service on them in the current fiscal year.  If the liquor profits available to pay for these bonds were to disappear, another source of revenue must be found to replace them.

Such a revenue source can be easily found in the county’s budget: county cable franchise fees.  Federal law allows local jurisdictions to charge cable companies in return for using public right-of-way.  The maximum amount allowed by federal law – 5% of cable bills – is contained in the franchise agreements the county negotiates with Verizon, Comcast and RCN.  Because cable bills rise every year, the county gets more money out of this as time passes.  Also, because this money is unencumbered by DLC’s employee and capital expenses, it is not subject to cost changes like DLC’s profits are.  Cable franchise fees are actually a more stable revenue source to guarantee bonds than are liquor profits.

According to the county’s cable budget, the county is projected to collect $17.7 million in cable franchise fees in FY17.  Of this amount, $3.8 million is passed on to the Cities of Rockville and Takoma Park and the Maryland Municipal League in compensation for use of municipal rights of way, leaving $13.9 million available.  The county has obtained legal advice holding that the county can do virtually whatever it wants with the 5% cable franchise fees.

How is the cable money currently spent?  Most of it is given out to the PEG (public/education/ government) TV channels.  The two largest are the county’s in-house news channel, County Cable Montgomery, and the non-profit Montgomery Community Media, which is also financed by private sector contributions.  The problem is that no one knows how many people actually watch this programming.  The huge majority of their YouTube clips get a few dozen views each at best.  Is this truly worth millions of dollars of public money?

The county could easily retire its current liquor bonds and replace them with new bonds that are guaranteed by both liquor profits and cable franchise fees.  Liquor profits would be the first source of debt service payment, with any shortfall covered by cable fees as a supplement.  Even if liquor profits entirely disappear, the $13.9 million in annual cable fees – an amount that has been growing steadily for years – could cover the $11 million in annual debt service by themselves.  And over the long term, this arrangement would be temporary as the bonds will eventually be paid off.

There you have it.  Through a combination of a few more stores, incremental revenue sharing with the state and restructuring of the liquor bonds, the county could free itself from its liquor monopoly with no significant financial consequences.  No new taxes or fees are necessary.  And the county would see the creation of new jobs, more income, more economic activity and greater competitiveness with its neighbors as a result.

It’s a huge opportunity.  Will Montgomery County go for it?

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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.

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MoCo Doesn’t Need Its Liquor Money

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

Even though MoCo consumers are fleeing the county’s archaic liquor monopoly, county officials are going all out to save it. Their arguments boil down to essentially one point: we need the money, and terrible things will happen unless we get it. The County Executive’s spokesman has said that a reduction in liquor monopoly money “means a reduction of county services or an increase in taxes.” And Council Member Hans Riemer has said that a loss of liquor money would mean “jeopardizing our ability to hire teachers or police officers.”

Are they right? Let’s look at the data.

First, let’s consider the nature of the county’s budget. It is not a static, zero-sum thing. Rather, it is a dynamic and growing thing that increases almost every year. The county deliberately sets property tax rates to increase collections at the rate of inflation (its charter limit) regularly. Income and energy tax collections rise with private-sector growth. State aid, mostly going towards public schools, has been rising. All of these factors have contributed to a steadily growing county budget.

The chart below shows a comparison of total county revenues, net income from the county’s Department of Liquor Control (DLC), and the rate of inflation in the Washington-Baltimore metro area from Fiscal Year 2004 through Fiscal Year 2016.

MoCo Revenue vs Inflation

A few things stand out. First, total revenues grew in ten of these twelve years, with small declines occurring in 2010 and 2015. (Data for the latter year is still an estimate). Second, total revenue has been growing at an average rate (4.2% a year) that is almost double the rate of local price inflation (2.4%). Third, net income from the liquor monopoly is a tiny fraction of the county’s budget and has been largely stagnant. In 2004, liquor money was 0.74% of the county’s budget; in 2016, it is projected to be 0.47%. Part of this is because the county has begun issuing bonds against liquor profits and thus must pay debt service. But another part is that the monopoly is poorly managed. Over this period, the county saw an average annual revenue gain of $25 million from liquor and $140 million from other sources.

That means county revenues would still go up even without liquor monopoly money. There would be no need for cuts.

Comptroller Peter Franchot has proposed allowing the private sector to compete with the county’s Department of Liquor Control (DLC). What would happen to county revenues if that were to occur? That depends on how retailers, restaurants and consumers react. Let’s consider what would happen if DLC were well-managed, price competitive and truly focused on customers. Under this scenario, it might lose just 25% of its net income. Here’s how county revenues would have performed since 2004 if that were the case.

DLC loses 25 percent

In the real world, the county’s total revenues grew by an average 4.2% a year. If DLC had lost 25% of its net income, the county’s total revenues would have grown by an average 4.1%. There would be almost no difference to the county’s bottom line.

Now let’s suppose that DLC loses 50% of its net income. Here’s how that scenario would have played out.

DLC loses 50 percent

The county’s average annual total revenue growth changes from 4.2% to 3.9%. Again, not much difference.

Finally, let’s look at what would have happened had DLC net income disappeared entirely.

DLC loses 100 percent

The county’s annual total revenue growth changes from 4.2% to 3.7%. The latter number is still 55% greater than the average rate of price inflation in the Washington-Baltimore area (2.4%). Furthermore, let’s keep in mind that this scenario would only occur if DLC were so awful that all of its customers fled. If that’s the case, why should DLC be protected by a monopoly at all? And the data above completely omits any extra revenue the county would earn from a revitalized private sector free of the monopoly that it calls “an Evil Empire.” Extra money from property taxes and income taxes could close some of this gap.

This discussion is not exclusively hypothetical. In July, the County Council passed a mid-year savings plan that trimmed $54 million from the budget it had passed only two months before. That amount is more than twice as much as the county earns from its liquor monopoly. Public education and public safety were not jeopardized. That’s because the overall budget provided for a $209 million increase from the prior year’s estimated revenue. County government continues to grow and no apocalypse has occurred.

Finally, consider this. There are more than three thousand counties in the United States. Very few of them have MoCo’s resources. All of them except us have figured out how to pay for their priorities and balance their budgets without needing a liquor monopoly. Are MoCo’s elected officials the only county leaders in the entire United States who can’t figure out how to live without one? I think not; I have seen them deal with much more serious budget problems effectively.

The county government doesn’t need its liquor money. So let’s End the Monopoly.

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MoCo Consumers Flee from the Department of Liquor Control

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

Last week, Montgomery County Council Member Hans Riemer wrote a guest blog on the reasons why county residents opposed the county’s alcohol system in a recent poll by Comptroller Peter Franchot. Council Member Riemer wrote:

While the poll does show the general dissatisfaction with the alcohol regime our residents endure, it unfortunately does not specify which parts of the regime are the culprit, state or local. In my many conversations with residents, I find that the primary complaint relates to the state of Maryland’s unfortunate ban on the sale of beer and wine in grocery stores.

This is important because if the council’s plan is enacted, the county liquor stores survive and actually increase in number in order to increase consumer options and pay for reform. We need them. Considering that, I would ask how important is it to residents to replace county liquor stores with private ones? While I am sure that there is some support for that, it is not clear to me that it is a very high priority for the community. I don’t hear a lot of complaints that we have county stores. Mostly just that there aren’t enough of them. What about you?

In fact, there is overwhelming evidence that MoCo consumers are fleeing the county’s alcohol monopoly and it has nothing to do with the availability of alcohol in grocery stores. Consider the following.

  1. Sales of alcohol are low in MoCo.

Data from Gallup and the U.S. Department of Health and Human Services link alcohol consumption to income and education. In other words, as income and education levels rise, alcohol consumption tends to rise too. Since MoCo is one of Maryland’s highest-income and best-educated jurisdictions, the county should be one of its leaders in alcohol consumption. However, that is not reflected in per capita sales data collected by the Comptroller’s office. In terms of per capita sales deliveries to retail licensees inside each county, MoCo ranks 13th of 24 jurisdictions in wine, tied for 23rd in spirits and dead last (by far) in beer. Among the counties out-ranking MoCo in per capita wine sales are Calvert, Carroll, Cecil, Garrett, Harford and Kent, all mostly rural jurisdictions with far less disposable income than MoCo. Does anyone believe that MoCo residents drink less wine than people in Western Maryland? Grocery stores cannot explain this discrepancy because the huge majority of counties in Maryland have restrictions on grocery store sales of alcohol. As Comptroller Peter Franchot has said, MoCo residents simply cross the border to buy liquor.

  1. MoCo residents flee the county to go to Total Wine.

Total Wine, which is headquartered in MoCo and owned by MoCo residents, is one of the nation’s largest alcohol retailers and is famous for its big stores, huge selection and low prices. The company refuses to open a store in MoCo because the county’s alcohol monopoly “doesn’t favor the free market.” But Total Wine has plenty of MoCo residents among its customers. The company estimates that over 20% of its McLean store sales and nearly 25% of its Laurel store sales are accounted for by MoCo customers. David Lublin’s price comparison explains why: Total Wine blows away county liquor stores on both price and selection. Other jurisdictions gain at our expense.

  1. The Department of Liquor Control’s own consultant found major problems in its operations.

A consultant hired by the Department of Liquor Control (DLC) found a host of problems in county liquor stores. Here are three from the consultant’s 2014 report.

Lack of administrative flexibility – Unlike most County functions, DLC operates in a wholesale/retail sales environment. In many instances, it lacks the flexibility and ability to respond quickly, which is necessary for it to best serve its customers and do so profitably. This lack of control over key decisions also manifests itself in other identified weaknesses.

Staffing – The DLC often lacks the ability to apply normal staffing techniques found in private retail. For example, there are generally two peak seasons for liquor retail operations: the Winter Holiday season and Summer Fourth of July season. Most DLC stores would, for comparison purposes, be similar to an independent liquor retail store (as opposed to a ‘Big Box’ chain store or grocery store). In these establishments, it would be likely that rather than adding permanent full-time staff to handle these peak seasons, the business would hire temporary staff. However, because of County collective bargaining agreements, they generally do not have this flexibility, which either leads to staffing shortages (which can negatively impact sales) or a working environment for existing staff that hampers morale and productivity.

Older stores/locations/rental contracts – In several instances, stores are in obvious need of basic repairs or refurbishment – including scarred floors and counters, old racks, lighting and entrances. Given that the DLC leases all of its locations, in many instances it has little leverage to demand improvements prior to the end of the lease.

Lack of flexibility, staff shortages and sub-standard stores. Is this what MoCo consumers deserve?

  1. D.C. liquor stores camp out at our border.

The graphic below shows seven liquor stores in D.C. within four blocks of the MoCo border. If MoCo consumers were happy with the county’s alcohol system, why would this be happening?

DC liquor stores

  1. The only county liquor store with true competition is losing money and will close.

Most county liquor stores are insulated from competition because they are the only suppliers of spirits in their vicinity. The one exception is the store in Friendship Heights, which is adjacent to the D.C. border. Since the surrounding area is affluent and wealthy people often buy up-scale beverages, one would expect this store to be a strong money maker. But the store lost $278,431 in 2013 – the only county liquor store that lost money – and will soon close. It’s not a coincidence that D.C.’s Paul’s Wine and Spirits is just three blocks away. The county’s decision to close this store is an admission that its stores can’t compete with the private sector. And if that’s the case, why should they be protected by a state-ordered monopoly?

MoCo’s alcohol monopoly and its accompanying fleet of county liquor stores are unacceptable to county consumers and that was clear long before this blog released the Comptroller’s poll results on the subject. So what is the county doing about that? Why, it’s opening more county liquor stores. That’s like promising Kirk Cousins more playing time with every interception he throws.

Look folks. Our system’s premise is that MoCo residents are children, inferior to our fellows in the rest of the region, and that we must be controlled by the heavy hand of government for our own good. Well, guess what? We’re not children and we know what we want: the same freedom of choice that everyone else in the region has. We don’t want excuses. We don’t want tweaks. We don’t want vague promises of improvement.

We want to End the Monopoly.

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Hans Riemer Responds on Opposition to the County Alcohol Monopoly

Today, I am pleased to present a guest post by Montgomery County Councilmember Hans Riemer (D-At Large), author of the proposed changes to the County liquor laws. (You can read a counterpoint in a previous post by Adam Pagnucco.)

I was very interested to see the results from the survey question commissioned by Comptroller Franchot. I expected to see that residents of Montgomery County are deeply dissatisfied with the alcohol regulations they endure under the county and state. That is why I led the effort to raise these issues and end the DLC’s wholesale monopoly as chair of the Council Ad Hoc Committee on Liquor Control.

I strongly believe our county alcohol regime holds back the vibrancy of our restaurant and nightlife economy and negatively impacts the choices residents get in stores. Our state regime, which denies the convenience of shopping for beer and wine at grocery stores or other large chain retailers, is also badly out of touch with our residents.

While the poll does show the general dissatisfaction with the alcohol regime our residents endure, it unfortunately does not specify which parts of the regime are the culprit, state or local. In my many conversations with residents, I find that the primary complaint relates to the state of Maryland’s unfortunate ban on the sale of beer and wine in grocery stores.

This is important because of the council’s plan is enacted, the county liquor stores survive and actually increase in number in order to increase consumer options and pay for reform. We need them. Considering that, I would ask how important is it to residents to replace county liquor stores with private ones? While I am sure that there is some support for that, it is not clear to me that it is a very high priority for the community. I don’t hear a lot of complaints that we have county stores. Mostly just that there aren’t enough of them. What about you?

Most importantly we don’t know from this poll how much support would exist for getting rid of county stores if it means having less funds available for schools, police, parks, and the like. Because the warehouse would have to move to the capital budget if the DLC were eliminated, the plan would also affect school construction and other capital needs.

After six months of council work sessions with stakeholders, and detailed survey work with stores and restaurants, the Council proposal focuses on something we know factually to be true.  We can come up with an efficient and effective distribution regime by allowing the private sector to deliver craft beer and fine wine. This ends the monopoly by giving the private sector 25,000 boutique brands to distribute, while the county retains only the 4,500 big brands.

The statewide policies of course can only be addressed at that level.

In conclusion, this one poll question does not tell us all very much about the complicated decisions that together our county and state must make. So we will need to use our best judgment.

My belief is that if the county can accomplish what it has proposed and if the state can reform the statewide policies that need to be addressed, the combination — a huge change from the status quo — will bring our residents what they want and deserve.

You can read more about our proposal here, which was unanimously supported by my Council colleagues, and the County Executive, as well as restaurants, stores and the county employee union. It will be before our county delegation for their consideration this coming session.
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Poll: MoCo Voters Oppose County Alcohol Monopoly

Today, I am pleased to present a guest blog by Adam Pagnucco:

A poll commissioned by Comptroller Peter Franchot has found massive opposition to Montgomery County’s liquor monopoly.

Among those polled, 69% support eliminating the County monopoly with slightly  higher levels of support for repeal–74%–among people who describe themselves as definite voters. The results indicate that residents across party, gender, age, education and ideological lines favor getting rid of the laws granting the county control over alcohol sales.

The poll question was asked in a broader statewide poll on a number of issues.  The statewide poll, conducted by Normington, Petts & Associates in September 2015, had roughly 500 respondents with 84 in Montgomery.

The MoCo residents were asked whether they favor or oppose a “proposal to get rid of the laws making Montgomery County an alcohol controlled county.”  Following are the responses from each segment of the poll with a sample size of at least 20 respondents.

(Editor’s Note: Though 84 is a small sample size with an inevitably large margin of error of 10.9%, the difference between the share of favor and oppose getting rid of the monopoly is so large that it is statistically significant despite the small sample.)

Do you favor or oppose a proposal to get rid of the laws making Montgomery County an alcohol controlled county?

Full Sample (N=84)
Strongly favor                       48%
Somewhat favor                  21
Somewhat oppose               6
Strongly oppose                  17
Don’t know                              7

Total favor                              69
Total oppose                         24

Definite Voters (N=72)
Strongly favor                       52%
Somewhat favor                  22
Somewhat oppose               5
Strongly oppose                  14
Don’t know                              7

Total favor                              74
Total oppose                         19

Men (N=51)
Strongly favor                       55%
Somewhat favor                  18
Somewhat oppose               6
Strongly oppose                  18
Don’t know                              3

Total favor                              73
Total oppose                         24

Women (N=34)
Strongly favor                       38%
Somewhat favor                  26
Somewhat oppose               6
Strongly oppose                  16
Don’t know                            13

Total favor                              64
Total oppose                         23

Age 18-44 (N=30)
Strongly favor                       57%
Somewhat favor                  20
Somewhat oppose               0
Strongly oppose                  18
Don’t know                              4

Total favor                              78
Total oppose                         18

Age 45-59 (N=34)
Strongly favor                       49%
Somewhat favor                  20
Somewhat oppose               9
Strongly oppose                  14
Don’t know                              8

Total favor                              69
Total oppose                         23

Age 60+ (N=20)
Strongly favor                       34%
Somewhat favor                  25
Somewhat oppose             11
Strongly oppose                  23
Don’t know                              8

Total favor                              58
Total oppose                         34

Education, some college or less (N=23)
Strongly favor                       38%
Somewhat favor                  14
Somewhat oppose             12
Strongly oppose                  27
Don’t know                              9

Total favor                              52
Total oppose                         39

Education, college graduate or more (N=60)
Strongly favor                       53%
Somewhat favor                  22
Somewhat oppose               4
Strongly oppose                  14
Don’t know                              6

Total favor                              75
Total oppose                         18

Registered Democrats (N=46)
Strongly favor                       50%
Somewhat favor                  17
Somewhat oppose               9
Strongly oppose                  19
Don’t know                              5

Total favor                              67
Total oppose                         28

Registered Republicans (N=23)
Strongly favor                       42%
Somewhat favor                  25
Somewhat oppose               4
Strongly oppose                  18
Don’t know                            11

Total favor                              67
Total oppose                         22

Liberal Ideology (N=29)
Strongly favor                       52%
Somewhat favor                  14
Somewhat oppose               4
Strongly oppose                  24
Don’t know                              6

Total favor                              65
Total oppose                         29

Moderate Ideology (N=25)
Strongly favor                       60%
Somewhat favor                  17
Somewhat oppose               7
Strongly oppose                    7
Don’t know                              9

Total favor                              77
Total oppose                         14

Conservative Ideology (N=31)
Strongly favor                       36%
Somewhat favor                  31
Somewhat oppose               8
Strongly oppose                  19
Don’t know                              6

Total favor                              67
Total oppose                         27

The poll has an important caveat: its small sample size.  However, it was conducted by a respected national polling firm with decades of experience and lots of clients around the country.  Furthermore, its results are consistent: every demographic asked favored ending MoCo’s status as an alcohol control jurisdiction.  Democrats and Republicans have many disagreements, as do liberals and conservatives.  But in MoCo, they agree on one thing:

End the Monopoly.

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Adam Replies to Gino on Liquor Control, Part III

Guest Blogger Adam Pagnucco replies to MCGEO’s Gino Renne

My reply to MCGEO President Gino Renne’s response to my post on the county’s Department of Liquor Control (DLC) concludes.

  1. The union says that if DLC were eliminated, union jobs would be replaced by non-union jobs.

MCGEO: “Mr. Pagnucco claims that privatization would not result in the loss of high paying union jobs. This is his most egregious of claims, especially for a former union employee. Where’s the evidence that ‘many private wholesalers’ are represented by IBT? Or even evidence that union membership will not suffer a net loss? Mr. Pagnucco needs to explain himself on this one.”

I’m happy to do so. As MCGEO states, I am a former union employee. I spent sixteen years working as a strategic researcher on organizing campaigns in the building trades. When President Renne writes, “It’s extremely difficult to organize a union in your workplace these days,” he’s absolutely correct. I have seen the extreme tactics that some employers use to keep their workers from unionizing. If I thought that the only alternative to DLC was a group of exclusively non-union employers, I would have misgivings about that.

Fortunately, that is not the case here. The International Brotherhood of Teamsters has been organizing beverage manufacturers and distributors for more than a century and has a Brewery and Soft Drink Conference to represent their workers. The union is also active in our local area. Washington Wholesale LLC, a distributor in D.C., is organized by Teamsters Local 639. Republic National Distributing Company, the second-largest distributor in the nation, is organized in Maryland by Teamsters Local 355. Reliable Churchill LLLP, the largest distributor in Maryland, is organized by Teamsters Local 570. If DLC loses market share to the private sector, it’s likely that unionized firms like these will pick up at least part of it.

This is deeply troubling to President Renne because non-union workers and Teamsters members have one thing in common: neither group pays dues to MCGEO. And that’s the real issue here.

So here’s a question for President Renne: what would happen if private distributors were allowed to compete with DLC? Restaurants and retailers who are happy with DLC could stay with them. Those who are unhappy could buy from the private sector. If DLC has lower prices as MCGEO claims and if their customer service is improving, they should hold on to most of their market share. If not, why should they be protected by a state-mandated monopoly? What do you say, President Renne? Can your members compete with the Teamsters?

  1. The union defends the County Council’s proposed “do-nothing fee” for DLC.

MCGEO: “The ‘fee’ Mr. Pagnucco complains about is paid by the distributor to allow for its participation in the Montgomery County market. Its structure has not yet been determined, just that there will be a fee.”

A quick briefer on the do-nothing fee. DLC has many commonly consumed beverages in its regular stock, but it often has trouble filling orders for specialty items it does not usually carry. These are known as special orders. Here’s a typical complaint:

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.

The County Council has recommended that restaurants and retailers be allowed to go directly to private distributors for special orders, but there are two big caveats. First, DLC determines what is in its regular stock and what is a special order. Second, the council wants to allow DLC to collect a fee on any direct sale by a distributor to “replace DLC estimated revenue lost by allowing the sale of special order beer and wines by private wholesalers.”

DLC loves this because it will get paid without having to do any work. Distributors aren’t so crazy about it. They would have to incur the costs of direct delivery to customers (of shipments that in some cases would be very small) and pay the extra fee on top to DLC because… well, the county just wants the money. Multiple distributors predicted in a hearing before the council that the economics would prevent them from participating in such a “reform.”

But the attitude behind the do-nothing fee is itself even worse. Whoever came up with this idea must believe that our county is soooooo much better than all of our neighbors that we can get away with imposing ridiculous impediments to doing business that no one else in our area would dare to do. Well guess what, folks? Residents and businesses have options. MoCo is a great place to live, shop and work, but so are the District, Frederick, Howard, Northern Virginia and most places near here. If you put enough measures in place to punish employers and consumers, they can and will go elsewhere. That’s the problem with the do-nothing fee and, indeed, DLC itself.

Comptroller Peter Franchot, the state’s top enforcer of alcohol laws and a MoCo resident, says of DLC, “Montgomery County is the last bastion of a medieval state system where the county, if you can believe it, sells all the spirits, alcohol, and we’re not just talking retail, we’re talking wholesale… This is a system that is incredibly slanted against the consumer and the ordinary citizen.”

He’s right. Why are we putting up with this? No one else in the Washington metro area has to deal with anything like this. We are the only ones.

It’s time for a revolt. It’s time to End the Monopoly.

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Adam Replies to Gino on Liquor Control, Part II

Guest Blogger Adam Pagnucco replies to MCGEO’s Gino Renne

My reply to MCGEO President Gino Renne’s response to my post on the county’s Department of Liquor Control (DLC) continues.

  1. The union claims that state monopolies on alcohol sales enhance public safety.

MCGEO: “Dr. Roland Zullo, a research scientist at the University of Michigan, examined the impact of state ownership of retail alcohol distribution on 23 different crimes grouped in six categories. Dr. Zullo finds that state control of retail alcohol distribution is associated with statistically significant reductions in crimes that have been linked to alcohol consumption, including domestic abuse, assault, and fraud. Control states also had lower rates for vehicle theft and vandalism (using a slightly lower threshold for statistical significance, the 10% rather than the 5% level).”

Guess what? This “research” was financed in part by DLC. That’s right, the study MCGEO is citing is an unpublished, non-peer-reviewed working paper paid for by the National Alcohol Beverage Control Association (NABCA), a trade group of government alcohol merchants. George Griffin, DLC’s Executive Director, is a former President of NABCA and a current member of its board. The organization’s budget is partially financed by dues payments from its members, one of whom is DLC. NABCA is fighting efforts to end government alcohol monopolies and was greatly dismayed when Washington state voters got rid of their state monopoly in 2011. So NABCA paid for the working paper cited by MCGEO and it was completed a year and a half later.

For what it’s worth, the study found no statistically significant relationship between state control of alcohol sales and crime for 20 of the 23 measures it examined. Maybe NABCA needs to pay for a better study!

  1. The union opposes blogging(!)

Maybe this is beside the point, but it is too hilarious for me to resist.

MCGEO: “This [County Council DLC] resolution came after months of hearings, testimony and input from stakeholders. If you don’t like the way the process was playing out, Mr. Pagnucco, why didn’t you participate in it? Why are you using your friend’s blog to post your opinion without allowing for public input or participating in the public forum?”

So MCGEO regards blogging as an illegitimate way to participate in public discussions. Who knew? I have a long history of writing in favor of MCGEO’s positions and they have never before uttered a peep of protest. To the contrary; they republished two of my blogs on their website and used another on a handout. Their former Executive Director once asked me to write a piece supporting legislation the union wanted that would have allowed library workers to unionize, and since I favored the bill, I did. But in the one instance when I have publicly disagreed with them, I am told to cease my annoying prattling!

Do you think that MCGEO will resume its recognition of the value of blogging once I start agreeing with them again?

I will finish up tomorrow.

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Adam’s Reply to Gino on Liquor Control, Part I

Guest Blogger Adam Pagnucco replies to MCGEO’s Gino Renne

Last week, MCGEO President Gino Renne, leader of the local union that represents most Montgomery County employees, responded to my post on the county’s Department of Liquor Control (DLC). President Renne has led MCGEO for more than twenty years and is an aggressive advocate for his members. I appreciate his taking the time to talk about DLC on Seventh State.

A few of his statements deserve examination. Let’s start with the one that is arguably most important to county consumers.

  1. The union claims DLC, an extra middle-man with an extra mark-up, actually has lower prices than our neighbors.

MCGEO: “Across all categories except special order beer, costs are 2-10 percent cheaper than neighboring jurisdictions.”

David Lublin put this argument to shame through his price comparison of DLC and Total Wine, which refuses to open a store in MoCo. Now let’s be fair: Total Wine not only blows away DLC, they beat almost everyone on price. How do they do it? The company explains:

We are committed to having the best wine selection with an emphasis on fine wines. This differentiates us from many retailers in the United States who specialize in one geographic area or price category. Our typical store carries more than 8,000 different wines from every wine-producing region in the world.

In addition to a world-class selection of fine wines, the typical Total Wine & More also carries more than 2,500 beers, from America‘s most popular beers to hard-to-find microbrews and imports, and more than 3,000 different spirits from every price range and category.

Total Wine & More is committed to having the lowest prices on wine, spirits and beer every day. Our tremendous buying power and special relationships with producers, importers, and wholesalers offers us considerable savings, which we pass on to our customers.

This business model is very difficult to implement with an extra middle-man interfering with the supply chain, especially one like DLC that is notorious for botching orders of specialty beer and wine. And so Total Wine will not open a store here even though its headquarters is in MoCo and its founders live here. MoCo customers are forced to drive long distances to access the company’s selection and low prices, and they do. Total Wine estimates that MoCo residents account for more than 20% of sales at its McLean, Virginia store and almost 25% of sales at its Laurel store.

But let’s set aside Total Wine for a moment and examine MCGEO’s assertion further. If DLC offers lower prices as they contend, that would be great news. Non-residents would be flocking into MoCo to get deals. We might even expect a proliferation of MoCo stores close to the county’s borders ready to lure non-residents in.

In fact, the opposite is true. There at least seven D.C. liquor stores within four blocks of the MoCo border. See the map below. The one DLC store near the border is in Friendship Heights and it is the only DLC store that is losing money. How is it possible for DLC to lose hundreds of thousands of dollars a year by selling alcohol to rich people? Perhaps one reason is that the District’s Paul’s Wine and Spirits is just three blocks away.

DC liquor stores

Alcohol sales data collected by the Maryland Comptroller’s office suggests substantial flight of customers away from MoCo. Both the U.S. Department of Health and Human Services and Gallup find positive correlations between alcohol consumption and education level, while Gallup finds an additional correlation with high incomes. Since MoCo is one of the highest-income and most-educated counties in the state, it should be a mecca for alcohol sales. But that is far from the truth. In terms of per capita sales deliveries to retail licensees inside each county, MoCo ranks 13th of 24 jurisdictions in wine, tied for 23rd in spirits and dead last (by far) in beer. Among the counties out-ranking MoCo in per capita wine sales are Calvert, Carroll, Cecil, Garrett, Harford and Kent, all mostly rural jurisdictions with far less disposable income than MoCo. Comptroller Peter Franchot, the principal enforcer of state alcohol laws and himself a MoCo resident, says of DLC, “Most people in Montgomery County go to Prince George’s, the District or Virginia to buy their alcohol because it’s such a disgrace.”

I will have more tomorrow.

 

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