'30s State Store model unfit for today's market

By David Ozgo

Many have called for the modernization of the state's liquor store system, including the Pennsylvania Liquor Control Board. But while modernization is clearly needed, if it's going to happen, it needs to be done right.

Consumers simply want modern stores that are conveniently located and that provide a good selection of products at competitive prices. So it should not surprise anyone that a system designed in the post-Prohibition 1930s is not up to the shopping standards of 2015.

Despite the LCB's best efforts to trim expenses, the agency faces daunting personnel costs. By the LCB's own estimate, expenses are expected to grow at four times the rate of sales. The day will quickly come when the only revenue that Pennsylvania will generate from wine and spirits sales will be the various state taxes that are imposed. Anything that looks like a traditional operating profit will disappear.

Imagine a monopoly that cannot turn a profit. Obviously, this is a business model in need of drastic reform.

Senate Bill 15 calls itself a modernization bill, but it is not written with the best interests of consumers in mind. The bill's proposal to get rid of "proportional pricing" is perhaps the most egregious attack on the Pennsylvania consumer in the state's history.

Currently, the LCB is required to mark up all products by a proportionate amount over the state's acquisition price. This requirement works to consumers' advantage when suppliers (distillers) give the LCB promotional discounts. The LCB is required to pass the discount along to consumers, and shelf prices go down. If the proportional pricing requirement were lifted, the LCB would be free to keep any discount offered by suppliers, stealing what should have been a savings for consumers.

While ending proportional pricing might sound innocuous, when implemented, it would mean higher prices in State Stores. This is a bad idea considering that the commonwealth already loses millions of dollars each year to low-cost stores in bordering states.

The LCB argues that it merely wants the same pricing freedom that any private-sector retailer has. It is true that private retailers in other states vary their markups. However, private-sector retailers also face competitive pressures to limit their markups. In the absence of competition against state liquor stores, Pennsylvanians need the protection that the proportional pricing requirement provides. Previous legislatures made the requirement the law for a reason.

Another defective section of S.B. 15 is the proposed "store within a store" concept.

Without a doubt, Pennsylvanians need more stores from which to buy wine and spirits. But S.B. 15 proposes to put small State Stores operated by LCB employees inside existing grocery stores - essentially renting space from grocers.

It is not clear that grocery stores would offer competitive rents or even want non-employees working in their stores. More importantly, however, the big problem the LCB faces is high personnel costs. It makes little sense to expand a business model in which expenses grow faster than sales. Volume will not solve the LCB's problems when expenses cause it to lose money on every sale.

Pennsylvania should consider using existing private-sector license-holders to serve as agents of the state, or agency stores. Virtually every so-called "liquor-control" state uses this model, though some take a hybrid approach that has state stores coexisting with agency stores. This could be a way to expand the marketplace, keep costs down, and still keep the LCB intact.

There are other provisions in S.B. 15 that simply would not work and may be illegal. Suffice it to say the bill is a poorly crafted policy that puts the LCB and its needs above the needs of the consumer. While the marketplace is in need of reform, we urge lawmakers to focus on the consumer - the people the State Store system is supposed to serve.