‘Little Guys’ in Pennsylvania Want Slow Brew on Privatization

In the end of March, the Pennsylvania House of Representatives passed a bill to privatize liquor and wine sales. It is now under consideration by the state Senate.

Under the current law, the Pennsylvania government sells all liquor and wine in state-run shops, with beer sold separately by state-licensed distributors. In 2011-2012, these state stores generated over $2 billion in revenue, with $494 million going to the Pennsylvania Treasury. But don’t worry about Pennsylvania losing money – Governor Tom Corbett has estimated that the state will take in revenue of over $1 billion over a 3-4 year time period just from privatization alone, not including the revenue the state stands to bring in from taxing alcohol sales.

What many describe as antiquated, the law (Utah is the only other state with a similar setup) dates back to Prohibition. While Governor Corbett has praised the bill as moving the state into the 21st century, some worry the aggressive changes would lead to more job losses in the state, which had an 8.1% unemployment rate in February. Pennsylvania’s push to privatization follows closely on the heels of Washington state, which privatized its state-run liquor stores in June 2012.

The Case for Privatization "The private sector is going to employ many of these folks [who currently work at state stores], especially the good employees," says Rep. Mike Turzai, who introduced Bill 790 in the House.

“I introduced the bill to move the sale of wine and liquor to the private sector, because right now there’s an inherent conflict of interest. We should be the entity that’s licensing, taxing and regulating alcohol, and not be the same entity that’s selling it,” adds Turzai.

But some argue the proposed initiative will lead to job losses -- both in terms of the workers of the state-run stores, and the small private beer distributors who are licensed by Pennsylvania.

“In addition to the 3,500 employees that work in the state-run retail stores that would lose their jobs, most of the beer distributors will also be put out of business [by House Bill 790],” says Wendell Young IV, the president of the United Food and Commercial Workers Union that represents the employees at Pennsylvania’s liquor stores.

Aside from privatizing the state stores that sell liquor and wine, House Bill 790 would create an unlimited number of licenses to sell beer, which would increase competition for the small beer distributors and according to supporters be a win for consumers.

But it may not be a win-win.

In Pennsylvania, beer distributors are generally small, often family-run businesses with few employees. While the potential influx of competition could hurt business, they say some of the current laws already do that. They are limitied to only being able to sell cases of beer – no six- or twelve-packs allowed.

Mark Tanczos, the owner of Tanczos Beverages in Bethlehem, PA and the president of the Malt Beverage Distributors Association, says if the system is privatized, beer distributors will be “hard pressed to compete right off the bat,” even though distributors will have the first chance to buy the liquor and wine licenses sold by the state—but for a hefty price.

“It’s a huge investment,” Tanczos says, “running anywhere from $37,000 to $98,000, depending on your county.”

According to Tanczos, the beer distributors are at a disadvantage compared to big-box retailers, who under the legislation would also be able to purchase licenses. Doug Auvio, a co-owner of Forestville Beer Inc. in Forestville, PA says, “It would help if we could sell everything under one roof – but affording it is another question. I’m trying to secure a loan from a bank, because we would have to buy coolers and inventory, and a new cash register.”

Tanczos is in the same boat: “We don’t have the ability to spread costs over groceries and convenience items. It’s just another item on the shelf for these stores, with very little cost to get up and running.”

Philadelphia Rep. Bill Keller agrees with the “little guys” mentality. “With the purchasing power of the big-box retailers, the small family-owned businesses for two or three generations won’t be able to buy in the same volumes. It’s a fallacy that this is good for small businesses,” says Keller.

And, according to one small-town brewer, the avalanche of competition would be lethal. “If they kept licenses just to the supermarkets, we could possibly survive,” says Brian Mutschler, the manager of Brewers Outlet in Chadds Ford, PA. “But the way they sent it to the Senate – it would pretty much kill us.”

But Rep. Mike Turzai, who introduced the bill, says the beer distributors actually stand to receive a unique benefit from the legislation, one they can win if they choose not to compete by “cashing out and selling their licenses.”

What About Pennsylvania’s Brewers? Bill Covaleski, the president of Brewers of Pennsylvania, is also the co-founder of Philadelphia-based Victory Brewing Company. He says the biggest fear is the privatization bill would introduce too much change to the existing retail landscape, and could put existing retailers at a disadvantage.

While Covaleski says Pennsylvanian beer distributors are “shackled” by the case-only law, “the model has worked pretty well for 80 years and has created great beer diversity.

“We absolutely fear that Victory wouldn’t be represented with big box retailers,” says Covaleski.  He says that 36% of Victory’s sales are in Pennsylvania.

“I speak with small brewers in Pennsylvania frequently, as the president of the Brewers’ Association. My hopes and fears regarding privatization are the same as most of my counterparts,” he says.

Privatization Lessons from Washington State Some liquor store owners in Washington say Pennsylvania brewers have good reason to worry.

Julie Ganas, who purchased a liquor license in 2012 after managing a state-run store for six years as a contractor, says that her sales have gone down 50-60% since privatization.

“It’s been very, very difficult to compete with big box retailers, mainly because they’re so much larger and get volume purchasing discounts. [It’s] hard to get competitive pricing through distributors,” says Ganas.

Brian Smith, a spokesman for the Washington Liquor Control Board, describes the transition as “mixed.” Prior to privatization, Smith says there were 167 state-run stores and 162 contract stores. “Now, we have 1,430 locations with liquor licenses – and that’s just spirits retailers,” he says.

May Hurt SMBs, but Government Still Getting Paid While Smith says prices for liquor have risen since privatization, the primary reason is due to the fees written into the initiative, to make up for the lost revenue to the state. “There’s a 10% fee whenever a distributor sells to a retailer, and when a retailer sells, there’s a 17% fee tacked on,” he says.

Because of these fees, the profit margin for many storeowners has been diminished. Michelle Tate, who had worked in a state-run liquor store and now co-owns Pop’s Liquors in Tacoma, Washington, says that getting rid of the 17% would help keep in her business. “Another storeowner said that he was making only 17 cents on each bottle of Jack Daniels that he sold,” says Tate, as business owners try to keep prices low enough to be attractive to consumers.

Tate also suggests that giving the owners who purchased the state stores a “head start” before selling licenses to big-box retailers would have helped them deal with competition.

“We’re going to keep on going, and hope there will be some changes before we go out of business,” says Tate. As for Ganas, she says that if she knew then what she knew now, she would not have bought her liquor license from the government.

Many for Modernization, Debate Over How In Pennsylvania, legislators say they hope to craft a bill that pleases all the businesses involved in the industry. Republican State Senator Dominic Pileggi says the House bill “is a good starting point, but everyone agrees that the final bill will be different.”

He adds, “Our goal is to treat all these businesses fairly and represent the investment they’ve made in their businesses in both time and capital. Any change will be one that allows them to have a return on their investments.”

One possibility is modernizing the current system in Pennsylvania in order to satisfy consumer needs, rather than fully privatizing the system. State Senator Jim Brewster, a Democrat, says there’s some bipartisan support for such a bill. “I’m disgusted with any administration that would continue to eliminate jobs, when we’re supposed to be creating jobs as politicians,” he says.

In terms of modernization, Rep. Keller says, “We need extended hours, Sunday hours – I think that would be the way to go.”

As for beer distributors, modernization is a step many are more than willing to take. For decades, they’ve been pushing for package reform, which would enable them to sell beer in 6- and 12-packs, as well as in growlers. “We want to give consumers what they’re asking for – that’s what business is,” says Tanczos. “We’ve been asking for this for 76 years!”

Mark Garvin, the owner of a beer distributor in Hillsville, Pennsylvania, says, “If we could sell 12-packs, that would be great, because people can right now go to Ohio for that.” But he worries that total privatization would greatly affect his business, due to the influx of competitors.

If the current laws are loosened to include a mix of privatization and modernization, there’s an argument some business owners may be persuaded to bring their businesses to Pennsylvania, creating more jobs in the state.

Rocko Varma, the owner of Tim’s Liquors in Hockessin, Delaware, resides in Philadelphia, but operates a store in Delaware in part to avoid the “inconvenient” sales situation in Pennsylvania.

He says that a fair amount of his customers are Pennsylvanians, as his store is located near the state’s border.

“I would open a store in Pennsylvania … from experience, I would bring in anywhere from six to ten employees, part-time and full-time combined,” he says.

Paul Gupta, the owner of Wilmington, Delaware-based Brandywine Liquors, also lives in Pennsylvania. Currently, he says that half of his customers are Pennsylvanians who want a one-stop shop for their alcoholic beverages.

Gupta says that while he would consider buying one of the state-run stores at auction, the small size of the stores – when compared to the footprint of would-be big box competitors – would be likely to dissuade him.

“Right now, the bill would be impossible for small business owners to be protected from the competition,” Gupta says.