IN CONTROL

The job of a commissioner is a lot different today than years ago,” laughed Jacquelyn A. Stewart, chairwoman of the Michigan Liquor Control Commission (MLCC). “These days, it’s a full-time job.”


The Michigan Liquor Control Commission: Chairwoman Jacquelyn A. Stewart (standing), and (from left) Commissioners Walter Keck, Seymour Podolsky and Ena Weathers.


Indeed, running the MLCC is easily the equivalent of running a large corporation, with the added intricacies of balancing political sensibilities and bureaucratic necessities. For fiscal year 1998, the MLCC estimates that 5 million mixed cases of distilled spirits were sold in the state, for an estimated gross revenue of $590 million, the largest spirits sales total of all the control states. And system-wide operating expenses were slashed about 50% from the previous year to $16.2 million.


But the greatest challenge for the commission has been in shepherding the system through the tremors of a significant change that privatized the distribution system and downsized the MLCC staff by more than 400 in the past two years.


Chairwoman Stewart heads the effort, a woman who began her career working as an investigator for the prosecuting attorney of Oakland County, MI. Coordinating the prosecutor’s political campaigns, she grew acquainted with numerous elected officials, and in 1989 Governor James Blanchard appointed Ms. Stewart as an administrative commissioner at the MLCC. Subsequently, then Senate Majority Leader John Engler supported her appointment through the Senate. She served in that capacity for 5 1/2 years until she was assigned as a hearing commissioner in January 1995. She was quite pleased, she said, when the Governor John Engler approached her in October 1997, and asked if she would serve as chairwoman.


Obviously, she accepted the challenge. “Michigan is now the most privatized of the control states,” she said. “This goal has been accomplished while maintaining equal revenue, the control of beverage alcohol products and the integrity of the control system.”


Michigan has always been more privatized than most control states. For years, only distilled spirits products have been purchased, owned and distributed by the state, with private sector wholesalers handling all the state’s beer and wine business. At one time, all the state stores actually sold distilled spirits at the retail level. But by the late 1980s, the state withdrew from the retail business. Instead, the 76 state stores became strictly wholesale spirits outlets, mini-warehouses that supplied the several thousand licensed outlets in the state. Meanwhile, the thousands of Specially Designated Distributor (SDD) retail outlets continued to sell spirits directly to consumers. Other changes took place in the late 1980s. The MLCC turned over fortified wine to the state’s wine wholesalers, and, more importantly, the state went to a bailment system, which saved the state a significant sum of money.


But the largest change began to take form in the early 1990s, when the MLCC started examining several options for further privatizing its system. This was a direct result of an initiative by John Engler, elected Governor in 1990, who sought the downsizing and streamlining of government in a variety of areas. And one of his priorities was the way the state handled spirits.


“We focused mostly on administrative efficiencies,” Chairwoman Stewart said. “Ultimately, we decided the best way to do it was to let the industry know that Michigan was no longer going to warehouse and distribute distilled spirits.”


PRIVATIZING DISTRIBUTION


Following a series of studies and hearings, which showed the state saving millions of dollars while also providing licensees with increased savings, the program moved forward, with its targeted kickoff slated for January 1997. The blueprint for the new statewide system established that while the state would remain the wholesaler of distilled spirits products and would still maintain control over many vital functions, including licensing, enforcement, purchasing and retail pricing, private companies called Authorized Distributor Agents (ADAs) would be responsible for the warehousing and distribution of distilled spirits. These ADAs are paid $6.50 per case by the suppliers to warehouse and deliver their brands statewide. The state pays $5.42 to the suppliers on each case purchased by the Commission to offset distribution costs. “We only warehouse it and deliver it,” stated Rick Paladino, president of NWS, Michigan, the largest of the three principal ADAs, which by itself handles more than 50% of the total spirits distribution in the state.


“We had to first contract with at least one supplier and present that to the MLCC to become a statewide ADA,” Paladino continued. “We also had to present our company’s financials, and other relevant information, to show that we could, in fact, put together an organization that was capable of providing these services.”


The process of listing and delisting products has been discontinued. In its place, suppliers can sell virtually any product they choose to through the ADAs (provided the MLCC approves them as appropriately labeled and in accordance with the state guidelines). “Previously, a product had to sell 400 cases in 180 days to become certified, or what we called ‘on the Board’,” said Chairwoman Stewart. “Now, if a supplier wants to sell a product, it can come in. This is a great advantage to licensees, who can now get new products and specialty products much more quickly. Basically, they can sell whatever products they want.”


FISCAL YEAR COMPARISON


 
 YEAR-TO-DATE 10/97-7/98
 YEAR-TO-DATE
10/96-7/97

 % Change

Gross Sales
$496,475,760
$472,843,282
5.0%

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Licensee Discounts
$84,530,454
$80, 175,219
5.5%

Cost of Goods Sold
$322,099,496
$295,885,199
8.9%

Gross Profit
$89,845,810
$96,782,864
-7.2%

Operating Expenses (1)
$15,409,428
$26,637,638
-42.2%

Bailment Revenue
$0
$975,786
-100.0%

Net Profit (not including taxes and grants) (2)
$74,436,382
$71,121,012
4.7%

Liquor Taxes
$66,712,042
$63,186,481
5.6%

Other Revenue Collected
$51,471,779
$50,284,513
2.4%

Total Net Revenue
$192,620,203
$184,592,006
4.4%

Mixed Cases
(Distilled Spirits) sold
4,157,209
4,149,262
0.2%

Average Price Per Case (3)
$119.43
$113.96
4.8%

(1) Operating Expenses do not include Liquor Purchase Revolving Fund transfers for grants. Licensing and
(2) Enforcement expenses attributable to the General Fund are included in Operating Expenses.
Net Profit is arrived at after deducting all operating expenses including the General Fund portion of Licensing and Enforcement expenses. Net Profit for 1997/98 in the Liquor Purchase Revolving Fund is $76.5 million.
(3) Gross sales divided by number of cases sold = average price per case.

Source: Michigan Liquor Control Commission


 


All the retail licensees in the state must order their distilled spirits from one of the ADAs. These orders are placed once a week, through a touch-tone order entry system, and delivered once a week on specific days. Once the order is placed with the ADA, it is transmitted to the MLCC, which transmits it to the vendor. Officially, the state purchases the product from the vendor, who then ships the product directly to the ADA warehouse.


Licensees no longer pay for delivery, as they had under the old system; however, it is still a COD system, so that retailers must pay immediately upon receipt of their products. The ADA drivers collect the payments and the ADAs must deposit them with the state daily. The ADAs then send a daily report to the MLCC reconciling their deposit slips (plus or minus adjustments) with sales.


By the fall of 1996, suppliers selling products in Michigan had contracted with one of the three principal ADAs that had been selected: either NWS, Michigan (a division of National Wine & Spirits Corp.), General Wine & Liquor Corp. and Trans-Con. Since then, two much smaller ADAs have been added, and another small ADA is being considered as an addition.


Meanwhile, the state had begun the process of vacating its warehouses, leasing some of them to the ADAs, and ending its trucking contracts to make the transition to the privatized system. At the most crucial moment — when the state’s warehouses were essentially empty and when the ADAs were about to begin their distribution function — a circuit court judge imposed a temporary restraining order, blocking the plan from taking effect. This was in response to a suit challenging the entire privatization plan, brought by the Michigan State Employees Association (MSEA). The organization represented a large number of MLCC employees, many of whom were at risk to lose their jobs as a result of the plan. Needless to say, the restraining order threw the entire system into disarray: the state had functionally withdrawn as distributor, the ADAs were not yet permitted to distribute the products, so that no one was able to fill orders from thousands of licensees. This state of affairs lasted for 12 days until the restraining order was overturned by a higher court, allowing the new system to begin operating.


 Major Authorized Distributor Agents in Michigan


General Wine & Liquor Co.
Sydney Ross, President
373 Victor Avenue
Highland Park, MI 48203
Tel: (313) 867-0521

NWS Michigan, Inc.
Rick Paladino, Director
Michigan Operations
17550 Allen Road
Brownstone, MI 48203
Tel: (888) 697-6424
A division of
National Wine & Spirits Corp.
Jim LaCrosse, Chairman and President
700 W. Morris Street
P.O. Box 1602
Indianapolis, IN 46206
Tel: (317) 636-5458


Trans-Con Co.
790 Industrial Court
Bloomfield Hills, MI 48302
Tel: (888) 990-0600
(Three Divisions)

J. Lewis Cooper Co.
12311 Mark Twain
Detroit MI 48227
Tel: (313) 835-6400


Fabiano Bros. Inc.
1219 N. Mission
P.O. Box 469
Mt. Pleasant, MI 48804
Tel: (517) 773-3605


Henry A. Fox Sales Co.
4494 36th St., SE
Kentwood, MI 49512
Tel: (616) 949-1210


RUNNING SMOOTHLY NOW


“Everything started off almost two weeks behind,” said Chairwoman Stewart. “To be honest, we played catch-up for about seven months. Now, everything is working smoothly.”


Indeed, the problem hotline that seemed to be ringing off the hook in the early months of the changeover still exists, but the volume of complaints now is way down. And that’s not bad for a system that’s responsible for sometimes more than 40,000 deliveries a week to 17,000 accounts overall.


“The hardest part of the change, and probably one of the most difficult,” said Chairwoman Stewart, “was the layoff of employees. But part of the deal was that the ADAs had to make a commitment to interview and hire as many previous state employees as possible.”


In fact, the ADAs and the MLCC have struck a very congenial working relationship according to all the parties. There are monthly meetings between the MLCC representatives and the ADAs. “These meetings have been very productive,” said NWS, Michigan’s Paladino. “We have been able to have an open airing of issues of mutual concern and to talk about how to solve any problems that we see.”


DISTRIBUTION: BEFORE & AFTER PRIVITIZATION


BEFORE
State-Run Distribution System
(State Is Wholesaler)


Suppliers get products approved and put on Board (listed) in Michigan. Board codes are carried in inventory.



Suppliers ship pre-authorized quantities of distilled spirits into state warehouses.



The state ships quantities of distilled spirits from state warehouses to state stores for predetermined weeks of supply. The state buys and owns the distilled spirits shipped to state stores.



Licensees place orders for distilled spirits from state stores once a week.



The state store assembles orders and prepares invoices. The state establishes retail prices.



Licensee picks up order or hires a delivery service. The licensee pays for the distilled spirits. State employees deposit the money.

 AFTER


Privatized Liquor Distribution System
(State Is Wholesaler)


Distilled spirits suppliers contract with an Authorized Distribution Agent (ADA) of their choice to distribute distilled spirits in Michigan.



There are three principal ADAs that have been certified by the Michigan Liquor Control Commission (MLCC), from which every retail licensee must order their spirits.



Products no longer go through listing and de-listing process; instead, suppliers can ship any product to the ADAs, after the MLCC approves that the product is appropriately labeled and packaged, according to Commission regulations.



Suppliers ship their desired quantities of distilled spirits to ADA warehouses, based upon sales forecasts and the products’ sales history.



Once a week, licensees place orders for spirits products carried by each ADA.



ADAs transmit order quantity totals to the MLCC each day. The state buys the spirits products. The the state pays suppliers the distribution costs. (The state pays suppliers $5.42 per case, and the suppliers pay the ADAs at least $6.50 per case.)



The ADAs assemble orders and prepare invoices. The state establishes all retail prices.



The ADAs deliver the distilled spirits products to licensee premises, and in turn receive immediate payment from the licensees. The ADAs then deposit the payments with the state.


Though there are still minor problems — often involving the ADAs communicating with retailers on deliveries and other scheduling matters — the system is operating the way it had been envisioned. And business is good. “We grew by more than 100,000 cases last year to more than 5 million,” said Chairwoman Stewart. “I don’t think people in Michigan have increased their per capita consumption, though. I just think the growth is a function of a recent population increase in the state and a much-improved economy here.”


Clearly, the remaining members of the commission as well as the staff are also playing a major role in helping the system run smoothly. Walter Keck came out of a well-deserved retirement in 1997 after Governor Engler appointed him to be an administrative commissioner. Keck had worked more than a quarter century for the Commission staff, from head of enforcement to business manager. Now, Chairwoman Stewart has given him the demanding job of streamlining the licensing process not only to increase efficiency but also to make the entire operation more “consumer-friendly.” The other administrative commissioner (along with Chairwoman Stewart) is Seymour Podolsky, who has served on the MLCC since 1991. Commissioner Podolsky, a Harvard-trained lawyer, brings a tremendous amount of experience to all the Commission’s functions, having helped run his family’s wholesale beer and wine distributing company in Michigan for more than 30 years. For now, Commissioner Ena Weathers is the only hearing commissioner, until the vacancy for the fifth commissioner is filled, due early this year. Appointed in 1997, Commissioner Weathers has a law degree from the University of Michigan Law School, and experience as the general counsel for the 14,000 member service employees union. And as a hearing commissioner, she travels throughout the state handling the caseload of violations that must be heard and decided upon. She also is on the NABCA’s educational committee and has been involved in several of its initiatives.

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