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The State of Wine & Booze

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Except for a few aged Stalinists, I can't think of anyone who will lament the demise of our Soviet-style state store system, but don't expect Pennsylvania to move into the same league as New Jersey or Delaware when it comes to price and availability of wine and spirits.Stalin Use This.jpg

Rep. Mike Turzai, the Republican leader who is pushing the idea, states boldly that "privatization will result in lower prices, more convenience and better selection."

Don't bet on that.

Gov.-elect Tom Corbett and the legislature aren't thinking of privatizing the 650-store system as an exercise in promulgating free enterprise. If that was the case, they would take off the shackles the state has imposed on the sale of wine, spirits and beer since the 1930's. Let a thousand flowers bloom.  Let wine stores sell beer. And supermarkets sell wine. Allow for more stores in more locations.

That isn't what is planned.

What has been proposed is switching the current state-run monopoly into state-licensed private monopoly - with heavy regulation, lots of taxes and license fees that, in effect, would make the state an equity partner in any private company that buys and opens a store.

The model is not the free market, but casino gambling, where the state restricts the number of casinos (so it can rake in a lot of money selling licenses) and takes a big share of the gross.

The reason the idea has legs for the first time in 25 years is that the state is facing a $4 billion deficit in 2011 and sale of the liquor stores is a way to bring in cash - several billions worth, to hear Turzai explain it.

It will do that, under Turzai's bill, by selling licenses for up to 750 retail stores and 100 wholesale distributors in the state.  Since the state wants to raise $2 billion through this scheme, each license is likely to cost several million dollars.

Who would be willing to pay those fees? Big liquor retailers who can open super stores with lots of inventory and square footage. A mom-and-pop operation - say, a group that wants to open a boutique wine store -- is unlikely to be able to afford the fees.

And, the state isn't interested in having many new stores. It currently operates 625 stores around the state. Under the Turzai bill, the number would increase to 750. The stores would not be permitted to sell beer.  There appears to be no provision for supermarket or super-store licensees (such as Walmart and Wegman's) and no provision for a tiered licensing scheme to let small operators pay less.

We won't have much trouble finding licensees to set up shop in Philadelphia, but if you live in a rural area, where state stores already are few and far between, you may end up having to travel a good distance to get a bottle of Gallo red or Absolut vodka.

Finally, let's consider that promise of lower prices.

The state system is a huge buyer of wine and spirits. (It sells 6.4 million bottles of Chardonnay alone in a year.)  In fact, it is the largest single buyer of wine and spirits in the world, which gives it the market muscle to get the best deals and it sometimes passes those savings onto consumers.

The system grosses about $1.9 billion in sales each year and the Liquor Control Board likes to make much ado about how it contributes $500 million to the state budget annually. But, don't be misled; the LCB doesn't make a half-billion in profit. Last year, it made a $105 million - a margin of 5.5%.

Most of the money the LCB brings in comes from two sources: the six percent state sales tax, which brought in $112 million; and an 18 percent "emergency tax" placed on each bottle that dates from 1936 and raises $271 million. No one is talking about abolishing those taxes.  (The emergency continues after 74 years!)

In addition, the Turzai bill plans a levy  -- ranging from $3.50 to $7.00 on each gallon - to make up for the profits the LCB now turns over to the state treasury.

So, if you are a new liquor store operator by the time you figure in your per-gallon levy, the 22 percent in state taxes, and your multi-million dollar license fee - not to mention normal business expenses -- how much wiggle room are you going to have to offer big discounts to customers?  Not much.

To put it another way, the state wants to get out of the business of selling wine and liquor, but not out of the business of making money from wine and liquor.  And that will come at the expense of the consumer.

A few caveats: Turzai's bill is the template of a deal, not a deal.  It will change as it goes through the legislature and some of these provisions may be changed.

But, if I were you, I wouldn't throw out those Mapquest directions to Wine World in New Jersey.

 

-- TF

 

 

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