Pa.'s liquor control system lets state keep a tight grip on the bottle
No program in recent memory has been a bigger hit than the Chairman's Selection, which uses the state's massive purchasing power to buy wines at discounted prices.
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Imagine that you owned every Starbucks in Pennsylvania, with a guarantee that no competing coffee shops could open anywhere in the state.
Not only that, any restaurant that wanted to sell coffee had to get a license from you, and you got a percentage cut for every cup of coffee served, plus another cut any time a new coffee shipment came in from another state.
Think you could make some money?
That scenario is similar to Pennsylvania's Liquor Control Board monopoly of the wine and liquor business. From inventory, to distribution, to pricing, to the number of outlets and hours of doing business, Pennsylvania maintains one of the tightest, most restrictive liquor-control systems in America.
Proponents of Pennsylvania's liquor-control structure point to its purchasing power -- it is one of the largest single purchasers of wine and spirits in North America -- for bringing in quality wines at reasonable prices while generating millions of dollars for the state treasury. More importantly, they say, the tight controls guard against purchases by underage or inebriated customers, and a portion of the money the system generates pays for alcohol-education programs.
Yet, increasingly, the system looks like an arcane relic that imposes exorbitant taxes and burdensome regulations while forcing most party planners to make three separate stops to buy beer, wine and food.
"The system still suffers from the hardening of the arteries that you see in any government bureaucracy. The government should not be in the business of selling wine, and the idea that they could do a good job of it is illusory," said Mark Squires, a Philadelphia-based attorney and wine writer who runs a bulletin board for wine enthusiasts on the erobertparker.com Web site of renowned wine critic Robert Parker, Jr.
Critics say Pennsylvania's liquor-control system simultaneously advocates for responsible drinking while angling for ever-increasing sales. It operates as one of the most lucrative and influential business enterprises in Pennsylvania, yet remains susceptible to political influence and back-room bargaining.
As for preventing underage drinking, opinions are surprisingly varied. It is much more likely, experts say, that wayward teens will get alcohol from an adult who's willing to buy it for them, or sneak it from Mom and Dad's liquor cabinet, than risk trying to buy it in a store. Others contend the state would better keep alcohol from minors if it focused on enforcement and got out of the retail liquor business.
The PLCB is a huge operation, employing more than 3,600 full- or part-time store clerks and managers, plus a staff of more than 400 in its Harrisburg headquarters. The store-clerk positions are good, secure jobs, with the average salary above $30,000, with health benefits and a pension.
"I'm not saying they are undeserving, but the main beneficiaries of the current system are probably the employees who work for the liquor stores," said Holger Sieg, a professor of economics at Carnegie Mellon University who specializes in public finance. "If you look at the wages and benefits and compare them with employees in unregulated states, you will find significantly better salaries" in Pennsylvania.
Indeed, a phone survey of privately owned liquor stores in neighboring Ohio suggests that clerks there typically earn half what Pennsylvania clerks make, with no benefits.
"No question about it, they are good jobs, and we view that as a positive for the community," said Bill Epstein, spokesman for the United Food and Commercial Workers Union, which represents state-store clerks.
PLCB Chairman Patrick Stapleton agreed. "Our employees do have a livable wage and they do have health care, and that's important to us."
The current setup is also advantageous to wholesalers, who only have to worry about one customer, Pennsylvania, instead of the hundreds of retailers within its borders.
John E. Jones III, now a U.S. District Court judge, was PLCB chairman in 1997, the last time there was a major initiative to privatize the state-store system. "The proponents were few and the objectors were many," Judge Jones recalled.
He said the primary objectors were state-store employees, who believed privatization threatened their jobs, and others whose pro-temperance beliefs favored the tightest possible controls.
"What that taught me from a political standpoint is that there was no overarching passion within the General Assembly, or in the public at large, for privatization. Unless and until there is a general hue and cry, it is very unlikely there will be a privatization initiative that succeeds."
Rep. Robert Donatucci, D-Philadelphia, long-time member and current chair of the House Liquor Control Committee, recalled that in 1997 "Gov. Ridge did everything in his power" to privatize state stores, but found little support from committee members.
"This is a very conservative state. They didn't even want to hear about it," he said.
The money that the PLCB contributes to the state treasury annually -- nearly a half billion dollars last fiscal year -- is another factor, Judge Jones said. "The LCB has made itself financially indispensable in many people's eyes."
The Pennsylvania Liquor Control Board, formed after Prohibition under temperance-minded Gov. Gifford Pinchot, marks its 75th anniversary in 2008.
State stores once were user-unfriendly places where a clerk behind a counter fetched wines for customers who had to make their selections off a list. Over the years, stores opened their aisles to customers and broadened the selection. A little more than five years ago, Jonathan Newman took over as chairman of the PLCB and put more emphasis on expanding and improving the selection of wines.
Following a traumatic upheaval in top leadership a year ago, the board said it intended to set a more business-like course, "branding" stores, cutting back inventory and closing poor-performing stores.
Yet that tells only part of the story.
Pennsylvania's is a liquor-control system that demands, and expends, massive amounts of money. Its operating costs came to more than $1.2 billion and employee costs continue to mount: The state store at Towne Square Way in Brentwood reported a $36,000 increase in personnel costs last fiscal year; the Hermitage, Mercer County, store saw a $59,000 increase. Store leases, warehousing and transportation costs alone amounted to $284 million last year.
None of this is a real threat to PLCB's self-sufficiency, not when the operation collected $1.69 billion in sales and was able to transfer nearly a half-billion dollars to the state treasury. But all that money masks inefficiencies that no private business would tolerate.
Here's a prime example: In the state-store distribution system, all wine and spirits must go through one of three warehouses, in Pittsburgh, Scranton and Philadelphia.
That means that even though a state store is just a few miles from some Erie County wineries, the winery has to truck its wares all the way to Pittsburgh when the local store needs to be restocked.
Then the wine is loaded on another truck that goes back up I-79 to the store. Liquor Control Board CEO Joe Conti said the board is looking at ways to make the process more efficient. Then there is the sometimes-curious management of the state's 623 stores.
With the board's new emphasis on mirroring a private retail business, 13 stores were closed in 2007 and three were opened. Another three stores were closed this month.
While most of the closed stores were considered poor performers, others that lose even more money, or are located close to other state stores, remain open. In some cases, these stores have connections to, or sit within the district of, influential state politicians. In others, the reason for their continued operation remains a mystery.
And there is the liquor code itself, a statute that 75 years later still declares its intent "to prohibit forever the open saloon" -- even as it allows special operating hours for the Super Bowl and other Sundays, too.
"Some of the wording makes it look like it was written by the Quakers in the 1750s," said Mercer County attorney Jack Cline, who has represented liquor-license holders before the state Supreme Court.
The state also can be a source of frustration for wine drinkers. While programs such as the Chairman's Selection have been popular, fine-wine enthusiasts bristle that they can't find special vintages or must face red-tape delays when ordering a wine that's not in PLCB's inventory.
"You just can't get things when you want them. I buy stuff here, but nobody who is a really serious collector can buy everything in Pennsylvania and be happy," said Mr. Squires. "The reality is that if you live somewhere near New York, New Jersey or Delaware, you have many better choices."
That's against the law, though. Anyone in possession of wine or liquor purchased in another state and brought here is subject to a $25 fine per package, the cost of prosecuting the case, and up to 90 days in jail. Under Pennsylvania's liquor laws, many fine-wine collectors are scofflaws.
And, despite a 2005 U.S. Supreme Court decision that was supposed to put in-state and out-of-state wineries on equal footing for shipping wines directly to customers, Pennsylvania is still listed as a "no-ship" state on the California Wine Institute's Web page.
Neither Federal Express nor UPS will ship wine to private residences here, either. If there's wine in the gift basket, it's not going to be delivered.
Peter Heim, a sommelier in the Harrisburg area, said he finds "the system is very, very helpful in a lot of ways," primarily because of discounted prices.
With the introduction of the higher-end Sommelier Collection program last year, "you find a lot more higher quality item than you used to," said Mr. Heim., who often deals directly with distributors to place an order. "These are items that used to be totally unavailable."
But Greg Pollock, chairman of the Pittsburgh chapter of the American Wine Society, said he gets frustrated trying to buy the French wines he likes to collect. "If you were a collector of wines and a collector of guns, it would be much easier to buy guns than it is to buy wine."
Local wine educator John Eld said that, without a working relationship with a distributor, getting a particular wine can be a lengthy, and often unsuccessful, venture. "If it's not on their offerings list, that wine for them does not exist."
Whatever inefficiencies and inconveniences exist, though, one thing seems certain -- the PLCB continues to be a money machine, with its control over which wine and spirits come into the state, in what quantity and at what price.
Restaurants particularly feel the brunt of this. Any restaurant wanting to stock fine wines has to special order any item not on the PLCB's list. Kevin Joyce, proprietor of The Carlton in Downtown Pittsburgh, estimates that 90 percent of his wine menu was acquired through the special-order process, which statewide accounted for $68 million in sales in 2006-07.
Special orders work like this: If someone wants to buy wine that is not in the PLCB inventory, he orders it through the store from a vendor, who delivers it to the state store, where the buyer must pick it up. Although PLCB does little more than store the shipment for a few days, it still takes a 30 percent markup, plus the 18 percent Johnstown Flood Tax and sales tax.
That may explain the sensitivity of local restaurant and bar owners to Allegheny County's new 10 percent poured-drink tax -- it comes atop multiple layers of other taxes they wouldn't pay in other states.
Without question, there's a big pay-off for the state under the current system. It could hardly be otherwise when a $10 bottle of wine costs about $18 after the markups, charges and taxes get tacked on.
Wine and spirits in Pennsylvania might not be the highest taxed liquid in the world, as the restaurateur Mr. Joyce likes to term them, but the state system is a huge generator of monopoly money.
First Published January 27, 2008 12:00 am