The 2016 passage of Pennsylvania’s landmark liquor modernization legislation, Act 39, resulted in many consumer-friendly changes to the commonwealth’s alcohol marketplace. Since its passage, however, we have repeatedly raised concerns about the Pennsylvania Liquor Control Board’s implementation of the flexible pricing provision, and the serious negative impact it is having on consumers and spirits sales.
Now come alarming new concerns by international spirits and wine organizations that the LCB’s flexible pricing scheme is in violation of World Trade Organization international trade law.
As reported in an Aug. 8 Inquirer article, “Groups warn Pennsylvania about setting liquor prices ‘in secret, behind closed doors," eight groups representing spirits and wine producers from Canada, Europe, and New Zealand sent a letter to Gov. Tom Wolf stating, “We understand the PLCB may believe it is easier to raise additional revenues for the citizens of Pennsylvania in secret, behind closed doors, but we believe such an approach is inconsistent with the operation of an open and fair market.”
While the legislature passed Act 39 with good intentions, surely it did not intend for the LCB to use flexible pricing to gouge consumers or remove transparency and accountability from the government agency.
Prior to the LCB’s flexible pricing authority, the LCB was required to price all products by a strict pricing formula, which treated all spirits suppliers equally. Whenever a wine or spirits supplier offered a discounted price, the LCB was required to pass that discount on to Pennsylvania consumers. Consumers no longer have such protection.
While the LCB claims it has been transparent in its approach and is committed to “productive and collaborative negotiations with suppliers,” our companies do not feel that the process has been transparent or collaborative.
Under the “flexible pricing” scheme, the LCB negotiates the cost and markup on every item, keeping the details of the negotiations shrouded in secrecy. The LCB routinely increases its 31 percent markup, confiscating any consumer savings and increasing the LCB’s profit margin.
The LCB provides no schedule or justification for the categories or brands it targets for price changes, and gives little lead time to suppliers to respond to the notice of price changes.
Wine and spirits suppliers are left with little room to negotiate. They can accept the arbitrary price increase, which results in higher prices for consumers and lost sales, or remove their product from the Pennsylvania marketplace. Either way, consumers lose.
Pennsylvanians are now witnessing firsthand the shortcomings of flexible pricing. Since 2016, the last year before flexible pricing was implemented, through 2018 the average markup over the Free on Board Shipping Point price for spirits increased from 59.7% to 65.1% —- a 9% increase.
During a recent hearing on the issue, the LCB’s director of marketing and merchandising told legislators that in 2018, supplier prices increased on 455 items and decreased on 307. Yet, the agency increased retail prices on 570 items and decreased them on 167. This demonstrates that the LCB is not passing savings on to Pennsylvania consumers.
In light of new claims by international spirits trade associations that the flexible pricing model is in violation of international trade law, in addition to the numerous negative real-world results of this monopolistic pricing model, we urge the legislature to more closely scrutinize the LCB’s flexible pricing authority.
A better alternative is legislation introduced by State Rep. Jesse Topper (R., Bedford) that would repeal flexible pricing and reinstate the proportional pricing formula. It’s time to bring transparency back to the process and restore the savings to Pennsylvania consumers.