[In the last issue of StateWays, control state commissioners and administrators presented their views on several topics, including the effects of the information technology revolution, the controversy surrounding the direct shipment of beverage alcohol products, the commitment to preventing the abuse and misuse of beverage alcohol products through a variety of continuing programs, and other predictions about how the control states might evolve in the coming years. In this issue, we continue, and conclude, the discussion.]

To Privatize… Or Not

One of the recurring issues facing all control states is the degree to which they are now privatized… or could privatize… in the foreseeable future. It is generally acknowledged that Michigan represents the most privatized of all control states, particularly since transforming its distribution and warehousing functions in 1997. However, the Michigan Liquor Control Commission remains totally committed to control state principles and still retains final say over all workings of the beverage alcohol system statewide. (See “In Control,” in the January/February 1999 issue of StateWays.) Indeed, as William Vasil, superintendent of Ohio’s Division of Liquor Control, said: “During the past decade, we witnessed major changes in many control states’ methods of operations. Much of the change was driven by the ideology of elected officials supporting the doctrine of smaller and more efficient government, and privatization of government services where feasible. What we found was ‘privatization’ took on a different meaning in each state.”

For example, in Oregon, OLCC Chairman Philip D. Lang, explained, “We no longer hear the overly simplistic ‘government is bad, private is good’ outcry. Perhaps people have a more balanced view of privatization of government services. As we adopt standard business practices and modernize, we can become as efficient as a private company while providing control state benefits.

“In Oregon, our merchandising program already is semi-private and cost effective; stores are run by private, contracted businesspeople. Price-Waterhouse studies (Michigan, 1990; Virginia 1992), and others, have concluded that privatizing must result in either higher consumer prices or less state revenue. Oregon’s prices already are comparatively high. For now, consumers do not want to pay more and the state does not want to lose revenue, so there will probably be no change in the near future.”

According to NABCA President Ken Wynn, of Utah, “The privatization effort will always be out there. It is an issue we will never see in Utah, but other states will see renewed efforts and thousands of dollars expended to privatize. The best defense against privatization is making sure you serve the public better than private industry can, improve your bottom line by constantly looking for and implementing more efficient and customer-friendly programs.

“I know it can be done, as we have been successful here in Utah. We installed a toll-free telephone number that is posted in all of our stores, we created a special order desk and will special order anything anyone wants, and we do not require a deposit. We are presently looking at installing kiosks in our largest stores to provide customers with food and beverage parings, recipes, best buys and new products. We just recently opened a licensee warehouse to service licensees in split case or full case orders, and have made every item sold in the state available through this outlet. We have installed fax machines in our stores to take orders, allowed licensee tastings, and have recently revised our post-off program to be implemented in March. We converted our warehouse to a bailment warehouse, and we do not charge any bailment fees. We are a partner with industry and try not to impose undue costs and hardships on our partners.”

Interestingly, Ohio’s Vasil clarified public misconceptions concerning his state’s current system. “Ohio’s changes were commonly referred to, and perceived by the public, as privatization of the liquor sales system. In fact, no major elements of control were sacrificed by replacing costly state-operated stores with private contract agencies. The division still selects the agents and outlet coverage, purchases and owns the spirituous liquor inventory, sets prices, and monitors agency operations including hours of operation and other merchandising issues.

“The store conversions achieved significant savings by eliminating the operating costs, thereby increasing revenue contributions to the state’s General Revenue Fund, with no lessening of the control standards.

“As some private and political groups continue to push toward complete privatization of alcohol beverage sales and distribution, this issue will be driven not only by important social ramifications, but also by the pragmatic impact of proposed changes on the states’ abilities to maintain or increase treasury revenue streams in the long term.

“Given the significant revenues realized under the current agency sales system and the generally conservative nature of the state, I do not look for any major changes to Ohio’s sales system in the near term.”

Iowa Administrator Jack Nystrom pointed out that “after many studies we have concluded, using actual numbers and facts, that the cost of spirits to the consumer would increase approximately 20%. Otherwise we would have to raise additional money through taxation to eliminate the shortfall. In Iowa we have control over the product which is vitally important to regulation and enforcement.

“We have been a bailment state since early in 1987 and found it to be very beneficial to our operation.”

Clearly, the political environment of each state often plays a role in the privatization debate, as Idaho Superintendent Dyke Nally noted: “This issue will likely resurface every 5 to 10 years as administrations and legislative members change. The biggest obstacles to privatization are probably increased availability of alcohol to the underage population and the loss of revenues generated for the state and local governments.”

Pennsylvania’s Jones, agreed, adding, “There are no current plans to revisit privatization in the Commonwealth, although it is possible that this will be an agenda item during our newly re-elected Governor Tom Ridge’s second term, which ends January 2003.”

Said Ed Buelow, of Mississippi, “Privatization is an issue which surfaces periodically in our state, but one which we have not chosen or been required to adhere to. We plan to continue utilizing bailment.”

And in Vermont, “there are currently no privatization efforts,” according to Interim Commissioner Michael Hogan. “Because Vermont is in the liquor business, there is less alcohol abuse, a greater selection of products and lower prices for consumers. And more dollars spent on spirits go to the support of public programs, including those for the prevention and treatment of alcohol abuse.”

Sales Trends and Marketing

A snapshot of beverage alcohol sales trends from several control states across the country reflect similar trends that are occurring nationwide. For example, in Utah, chairman Wynn pointed out that “high-end tequilas, small batch bourbons and single malt Scotches have had huge increases in Utah, and I look for that to continue. We have also had tremendous growth in box wines, and our premium wine stores are selling everything they are getting. I also look for more activity in the cordial area. New products are constantly coming on the market and are proving successful.

“We have improved merchandising in our state stores. We encourage managers to create displays, feature post off, decorate their stores for special holidays, and treat customers as they would like to be treated. We allow licensed company representatives to create shelf talkers about their products, and allow them to be posted on shelves and displays. We have implemented employee product knowledge classes to better equip our employees in providing true and accurate product information to customers.

“Bottom line — we are a retail business, and we must be equipped to outdo private retailers,” Wynn stated.

Chairman Jones of Pennsylvania added, “Most control states know the value of good and responsible merchandising. Although now legal, the PLCB itself chooses not to advertise product or prices in the media. Some vendors do, however.

“The majority of control states now can merchandise in store just as in the open states and are aggressively pursuing this initiative, realizing the additional profits from these practices.”

“If our economy remains strong, the spirit categories that will likely continue to grow include tequila, rum, single malt Scotches, imported gin and imported vodka,” said Oregan’s Lang. “Consumers are more aware and interested in higher-quality products, and retailers will continue to feature more expensive product alternatives for their customers. These higher-quality products provide more profit, and counteract dollars lost from consumption rates that have decreased drastically since the 1980’s. Suppliers and consumers profit alike from a diverse, expanding product line.

“We expect Canadian whisky, domestic vodka and bourbon to continue to remain flat or decline.”

In Idaho, Superintendent Dyke Nally noted that “Per capita consumption of spirits has declined steadily from 1.08 gallons in 1987 to .97 gallons in 1996 and 1997. We believe per capita consumption will begin increasing slightly over the next several years because Idaho’s population is becoming more heterogeneous with immigration from all over the country.

“We believe the 2002 Winter Olympics in Park City, Utah will provide Idaho with substantially more tourism and visibility, and will have significant residual effects on future tourism, immigration and consumption.

“In merchandising, we have avoided deep discount sales in the past to avoid promoting intemperance. We have discussed alternative pricing techniques to encourage up-selling, consuming better quality while consuming less. We will continue to explore that approach over the next few years. In the meantime, we will continue to use in-store display and shelf-set techniques, which promote buying quality products.”

“Vermont sales for FY98 were up 1.67% or about $600,000,” said Vermont’s Hogan. “Case sales were up about 1% and bottle sales were up 1.70%. I don’t think consumption is increasing, but people are trading up to premium products and looking for sale items. The categories we see increasing are tequila, flavored rums, prepared cocktails, Irish whiskey and ports.”

Mississippi’s beverage alcohol consumption “continues to be static,” according to Chairman Buelow. “We are seeing a shift slightly from spirits to wine. As our wine list continues to expand, we expect to see an increase in wine consumption.”

In New Hampshire, Chairman Byrne explained that “The NHSLC has a marketing philosophy that allows vendors/brokers to build displays and use their point-of-sale materials to enhance the display. We permit the use of rebates, co-packs and consumer sweepstakes, etc. NHSLC also allows point-of-sale material in off-premise licensees. While this type of merchandising will continue in the future, however, I believe that industry will be more selective in ensuring that the consumer understands and perceives the value they are contributing to the program. Programs without perceived added value only dilute consumers interest and increase the cost of merchandising.

“During the last three years NHSLC has increased its focus on merchandising wine products in our state stores. This trend will continue in the future. Wine depletions are increasing and contributing a greater share of profits to the NHSLC. As consumers continue to embrace wine as a healthy product, its depletions will grow in New Hampshire.

“Fifty years ago, when New Hampshire first became a control state jurisdiction after prohibition, vodka did not exist as a spirit category in our system. Today, three out of our top five brands are domestic vodkas. Seeing what categories and new products will exist in the next millennium will be interesting.

“The blended whiskey category clearly continues in a downward spiral. We mainly see this trend in U.S. bottled non-Canadians. This may be a category that will either experience a metamorphosis or disappear. One can only guess where blended Scotches will go.

“It is our belief that consumers will continue to call for premium brands into the next millennium. Single malts, small batch/single barrel bourbons, the tequila, vodka and even gin categories will all present premium and unique brands. Consumers will continue to consume with greater moderation, but be more discriminating in purchases. To accommodate these new brands, the NHSLC will continue its focus on category management, with emphasis on moving unproductive SKU’s from the system.”

In Pennsylvania, Chairman Jones noted that “wine sales overall should continue to grow annually by 3% over the next few years. Imports overall will show slight growth, while domestic varietals, especially at premium level, will continue to show dramatic increases. Also, value-priced wines from emerging countries, Chile, Spain, Argentina, Portugal, Australia, will steadily grow. The premium end of all wines should enjoy healthy growth, especially if economy continues to grow. Sales of spirits overall will probably continue to decline slightly.”

Randall Smith, administrator of the Alabama Alcoholic Beverage Control Board, noted that a better selection of table wines will continue to play an important role in his state. “Customer response to our streamlined operation allowing wine wholesalers to directly deliver to ABC stores was better than expected,” he said. Table wine sales are up more than 8% since implementation of this system. We are confident sales will continue to increase as wholesalers utilize the product flexibility afforded by the direct delivery concept.”

“Imports and premium brands continue to do well in Virginia,” said Chairman Clarence Roberts, “and show no signs of changing. With the diversification of spirit lines in recent years (more products, especially in the higher end), it seems that spirits can compete with other alcoholic beverage products more effectively than in previous years.

One of Virginia’s long-term goals is to expand its network of stores to ensure that one is convenient to all potential customers. For many years the network has remained stagnant as population grew. Virginia would also like to invest additional funds in modernizing some of our older stores to add innovate shelf arrangements and lighting. Our goal is to offer a modern shopping environment that offers a wide selection for the customer.”

In Oregon, the state wholesales and retails distilled spirits, while the private sector handles wine, said Chairman Lang. “We expect suppliers and customers to rely on the media and electronics more and more for relaying and gathering information about products. In Oregon, distilled spirits retailers are very limited in advertising. However, we are currently exploring the idea of upscaling liquor stores while coping with the same challenges that face the rest of the retail world: land prices, increased wages and other costs.”

“Change in the demographic makeup of our consumer market will have an effect on product/price decisions as we proceed into the first third of the 21st century,” declared Ohio’s Vasil. “As the economy has remained strong, the baby-boomer population segment in its peak earning years has had a positive impact in stabilizing the demand trend and supporting an upward trend in qualify and pricing of alcohol beverages.

“As this segment enters retirement at a reduced income level, and is replaced by the generation X segment, which is forecasted to have less disposable income earning capability, the alcohol beverage industry and control jurisdictions will face a changing mix of economic factors and market preferences. Therefore, maintaining a fresh-yet-manageable assortment of products will be critical.

“Some categories, such as single malt Scotches and tequila, which have enjoyed recent explosions of customer acceptance, as well as premium and superpremium product introductions, may require pruning to reflect consumer demand changes in order to maintain a balanced product flow.”


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