As states seek to maximize tax revenues from beverage alcohol, America’s control markets are being transformed. In the nation’s 17 control states, stores are getting bigger, operating hours are expanding and stock lists have lengthened.
Last year, the New Hampshire Liquor Commission (NHLC)—often regarded as one of the most progressive control agencies—opened a 24,000-square-foot retail store in Salem, its largest ever. The NHLC will top that location in September when a 32,000-square-foot superstore debuts in Nashua offering 13,000 wine SKUs and 5,000 spirits SKUs. Those outlets stand in stark contrast to the 5,000-square-foot state shops that were typical in New Hampshire a decade ago. The state’s 79 locations are all serviced from a new state-of-the-art, 241,000-square-foot warehouse in Nashua.
“We added close to 5 percent in new retail square footage last year, and we’re on track to add the same again this year,” says NHLC chairman Joseph Mollica, who’s finishing up a campaign to modernize the state’s oldest stores. “If you want to compete against the Amazons of this world, you have to give consumers a good reason to choose you.”
The NHLC’s prices are so low that more than half its sales come from consumers crossing state lines to shop there. People travel to find products they can’t find elsewhere—a practice considered unthinkable in the days when New Hampshire’s prices were kept high and assortments narrow, all aimed at limiting consumption. Now, the NHLC’s selection has evolved to include such high-end rarities as The Macallan M single malt Scotch whisky ($5,000 a 750-ml. bottle).
The Michigan Liquor Control Commission (MLCC)—currently the nation’s largest control state operator—has more than quadrupled its spirits list over the past two decades to over 8,000 SKUs today, according to chairman Andrew Deloney. The Wolverine State has also become a great place to own a distillery, winery or brewery: The MLCC allows producers to serve cocktails on-premise, set up satellite sales facilities and sell unlimited packaged items for off-premise consumption. In addition, a recently passed law allows beverage alcohol sales at farmer’s markets—and there are hundreds of them around the state.
“As a control state, we have flexibility,” Deloney says. “Neighboring states like Indiana are still debating whether grocery stores ought to sell cold beer. We’ve done away with most restrictions.”
Rising Spirits Sales
Control state volume rose by 2.7 percent last year to 49 million nine-liter cases, up from 35.5 million cases in 2000, according to Impact Databank. Big brands such as Smirnoff vodka—up 3.4 percent in control states to 1.88 million cases last year—and Fireball cinnamon-flavored whisky—up 8.4 percent to nearly 1 million cases—have sizzled in these environments.
Would they do even better in open states? Washington aimed to answer that question when the state voted to privatize all beverage alcohol sales in 2011. But the experience has been a disappointment, as high taxes and the addition of a new distributor channel added layers of costs and sent retail prices soaring. “Lagavulin 16-year-old single malt Scotch whisky was priced at $76 a bottle when Washington was a control state, and it’s now at $116 in most stores,” says Jason Parker, owner and distiller at Seattle-based Copperworks Distilling Co. Founded in 2012, Copperworks produces craft gins that have gotten placement in just 40 stores in all of Washington, retailing at $39 a 750-ml. bottle. “In the old days, the retail price would have been $29 in a state store, and we would have sold a lot more of our products,” Parker says.
In most states, the push toward privatization has stalled, although Pennsylvania came close in 2015 when the General Assembly passed a privatization bill after years of wrangling. But governor Tom Wolf vetoed the measure, citing Washington state as a key reason. “When Washington pursued the outright privatization of liquor sales, consumers saw higher prices and a less plentiful selection,” Wolf noted in July 2015. The issue isn’t completely resolved in Pennsylvania, as the state’s Republicans continue to promote privatization legislation.
Meanwhile, the Pennsylvania Liquor Control Board (PLCB) is expanding its stores and highlighting Pennsylvania craft products in special sections. The PLCB also has launched a website for customers to order rare, niche products beyond the usual 3,500 SKUs found in each store. It’s opened 82 Fine Wine and Good Spirits Premium Collection stores, which can be as big as 12,000 square feet. Nevertheless, Pennsylvania feels the heat from neighboring Delaware, which has no sales tax.
“Total Wine & More has put up stores right across the Delaware River and advertised in the Philadelphia Inquirer,” says PLCB chairman Tim Holden. “They’re trying to take a piece out of our hide.” He cites a recent academic study that estimates Pennsylvania loses between 3 percent and 8 percent of its alcohol sales to border states. But the state is fighting back: The Pennsylvania House and Senate passed a major wine and spirits reform bill on June 7th. The bill eliminates restrictions on hours and Sunday operations for state liquor stores, relaxes pricing requirements, and allows store loyalty programs. In addition, the law allows limited off-premise wine sales in grocery stores, restaurants and hotels and legalizes consumption and sale of beer, liquor and wine in casinos.
In Oregon, a bill promoting privatization was proposed earlier this year, but didn’t gain enough support to make it onto the November 2016 ballot. Oregon has 17 state stores along its northern border with Washington, and sales in those stores have jumped by a third since Washington privatized, according to Steven Marks, executive director of the Oregon Liquor Control Commission (OLCC).
Marks is now expanding the state’s current roster of 248 agency stores, which are operated by independent contractors. Portland’s rising population recently led to the approval of 14 additional “open recruitment” stores. Among the approved venues are four Walmart locations, as well as a World Foods, a Tobacco Outlet and a Troutdale Mixer Shop. “In the past, we’d identify where we wanted new stores built,” Marks explains. “Recruitment of agents is now a more open process, and we’re allowing people to decide where they’d like to put their stores. The business is becoming more competitive as a result.”
North Carolina, meanwhile, is in the process of expanding stores from as little as 2,000 square feet up to 4,000 square feet, and its product markup is instructive. For an average 40-percent abv spirit, the distiller’s cost represents just 34 percent of the final price. Federal excise taxes represent 18 percent, state excise tax is 22 percent and the state board takes a 21 percent slice. Further surcharges, freight costs and fees to pay for warehousing are added on to arrive at the final bottle price. A 750-ml. bottle selling for $15.70 on the shelf nets the producer just $6.22.
Neighboring Virginia is also steadily adding to its store roster, opening five locations last year and seven so far this year to bring the total to 358. A new website, launched a year ago, allows state residents to order online and have products shipped to their preferred store for pick-up. And last year, for the first time ever, the Virginia Department of Alcoholic Beverage Control began advertising its Black Friday sale in newspapers and on radio. COO Travis Hill adds that the department has also supported efforts to break up row-on-row shelving layouts in state stores to “move beyond the cookie-cutter look.”
State legislatures are showing a willingness to be flexible. In Ohio, store and bar hours are set by the Statehouse. With the Republican Convention set to descend on Cleveland this July, local bar and restaurant owners asked for a chance to expand their business hours. Special legislation was passed allowing them to stay open as late as 4 a.m. According to the law, in certain Ohio cities, any future event drawing more than 3,000 people over as many as 10 days will trigger similar rights.
At one time, a 4 a.m. bar closing in a control state would have evoked loud protests from religious or neighborhood groups, but not anymore. “The new bill didn’t seem controversial—there wasn’t any significant opposition,” says Jacqueline Williams, director of the Ohio Department of Commerce. If bars are staying open until the wee hours, one might guess that Ohio voters could be ready to dump the state control mechanism altogether, as they threatened to do in Pennsylvania. “As it turns out, privatization hasn’t gotten much traction in Ohio at all,” Williams says. “Nobody seems to be eager to change our status as a control state.”