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MBDA's Memorandum on Liquor Privatization Proposal 5-21-12

June 8, 2012


MEMORANDUM

To: All Members of the PA House of Representatives

From: Mark Tanczos, President, Malt Beverage Distributors Association of PA

Date: May 21, 2012

 

Subject: Liquor Privatization Proposal—Possible Vote

 

As the House of Representatives considers a floor vote on a liquor privatization amendment, The Malt Beverage Distributors’ Association (MBDA) would like to share our position on the proposed amendment provided to us in April for review. For the many reasons noted below, MBDA must oppose this amendment.

MBDA is a trade association representing the retail beer distributors in the Commonwealth. We are comprised of local, family-owned, community businesses that are only permitted to sell kegs and cases of malt and brewed beverages for off-premises consumption and a few related products in a heavily regulated environment. We have demonstrated the skill and competence to responsibly and safely sell beer products to Pennsylvania consumers for almost 80 years.

As local Pennsylvania businesses, we have almost 10,000 full and part time employees and pay annual gross salaries of about $180 million per year. You will find our names on the programs and jerseys of youth sport teams and we donate our time and resources to many other charitable and civic causes. As local business leaders, we also serve as coaches, local government officials, and volunteers for numerous other activities that give back to our communities. In the case of most of our members, these businesses represent their sole livelihood.

The current privatization proposal would provide beer distributors with the first right to purchase a Wine and Spirits license (W/S license) at set option prices factored on historic county sales. The remainder of the 1,600 licenses would then be auctioned to other retailers on a county basis. For the initial ten year period following privatization, beer distributors purchasing a W/S license would have the right to sell liquor, wine, and beer from the same licensed premises. Other W/S licensees may purchase an additional license to sell beer during this initial period, but would not be permitted to sell all three products from the same “licensed premises.” However, they will be allowed to obtain an LCB- approved interior connection for the second license, so in reality, liquor, wine, and beer will be sold within the same building

At first glance, this proposal would seem to be beneficial for beer distributors, and we appreciate the thought and effort that went into attempting to craft a privatization plan with beer distributors in mind. However, when the long-term effects of this proposal are analyzed, it becomes quite clear that the plan will have a devastating impact on the future business existence of all beer distributors.

Therefore, we oppose the amendment for the following reasons.

While beer distributors get the first right to purchase a W/S license, the remainder of the licenses will be bought at auction by big box retailers such as supermarkets and other large national chains. Some of these companies, like Giant Foods, will be headquartered in foreign countries. These are massive corporations with enormous resources. They will quickly purchase a license to sell beer (if they don’t already own one), and configure their store complexes with an approved interior connection to sell all three products under the same roof. These alcohol products will be in addition to the thousands of other products they sell. There is just no way beer distributor W/S licensees will be able to compete against these goliaths on price, location, or consumer traffic.

The “option” price established for beer distributors to buy a W/S license is also problematic. This price – hundreds of thousands of dollars in most markets – is not driven by any economic evaluation of value, but rather by the state’s need for revenue. Very few distributors will be able to afford to purchase a W/S license. Therefore, most will find themselves with an untenable dilemma – highly leveraging their assets to purchase a W/S license at an inflated price to stay in business, or stand aside and watch their business dissolve as big retailers purchase all of the required licenses to dominate the market.

Ultimately, this amendment is really intended to drive beer distributors out of the market and force them to sell their D licenses to big retailers. We are an industry of small businesses, many of which have been passed through families for generations. We have made big financial and emotional investments in these businesses, even as the law has long handcuffed us by severely limiting what we can sell, when we can sell it, and limiting the number of licenses we can own to one. This proposal will force most distributors to sell their licenses within the first two years of privatization since the value of the D licenses will decline as the initial ten year period dissipates, and other W/S licensees get full market privileges. The big retailers will certainly recognize this fact, and will do their best to minimize the value of D licenses that do become available for sale.

Quite frankly, we don’t want to be forced to exit the businesses that we love. Instead, we would like the General Assembly to work with us to change alcoholic beverage laws in a manner that allows us to better serve our customers and compete in the beer market against the ominous rising tide of grocery and convenience stores now selling beer.

From a public safety standpoint, retailers with a singular interest in the product they sell provide the greatest service and control. This is particularly true with the sale of alcohol. For example, a violation for sales to minors is devastating to a beer distributor if the license is suspended. The same scenario with a larger retailer is merely an inconvenience as they go about selling the thousands of other products offered in their stores. We believe the movement of beer sales to businesses not solely depending on the product for their existence is a bad idea for our state.

Even if we were starting with a blank slate, we believe our system should still be based on a model where retailers would have the singular interest in the sale of alcoholic beverages. Sales that come from a retailer that relies on the profits of alcohol sales to pay the bills would prevent the use of alcohol sales as a loss leader. In addition, there is no way to significantly change the current system without putting a great deal of hardship and hurt on a lot of good, hardworking people. Real lives and families are going to be gravely impacted here. That, to me anyway, does not sound like a good public policy.

We want to thank you for your attention to this letter, and we would ask that you oppose the privatization amendment if it is brought before you for a vote. If you should have any questions, or if MBDA can provide any further information about our position, please do not hesitate to contact me.

 
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