PROFILE: OREGON LIQUOR CONTROL COMMISSION

Getting Down To Business
The Oregon Liquor Control Commission focuses on sound business practices.
By Cheryl Ursin

In explaining her job as the director of the Oregon Liquor Control Commission (OLCC), Pamela Erickson said, “I am like the CEO of a company, and the commissioners, who hired me, are [like] the board of directors.”

Pamela Erickson (right), Director of the Oregon Liquor Control Commission (OLCC), meets with OLCC Chairman Phil Lang and OLCC Deputy Director Karen Gregory.

It is a telling observation. The OLCC, under the leadership of Phil Lang, chairman, has focused on implementing the best, most efficient practices it can find, most borrowed from the world of business. “As long as we are in the business of wholesaling and retailing, it makes sense to run our operation like a business,” declared Lang.

The Oregon Liquor Control Commission — with a 124,000-square-foot distribution center, located in Milwaukie, a suburb of Portland, 11 offices throughout the state and 215 employees — purchases, warehouses and distributes distilled spirits to Oregon’s liquor stores. Those 238 stores are run by liquor agents, who are under contract to sell both to the public and to on-premise licensees. The OLCC’s Regulatory Division issues liquor licenses as well as alcohol-service permits, required for anyone who serves alcohol on-premise, and handles compliance.

In fiscal year 2002, the OLCC had a record $254.5 million in distilled spirit sales, a 5.1% increase over the previous year. The OLCC returned $104 million to the state and paid agents $21.9 million in compensation, from which agents pay all of the stores’ operating expenses.

When Lang became chairman early in 1998, one of the first things he asked for was a retail business plan. Erickson, the director, was uniquely suited to produce one. While she has 16 years of experience in state government, Erickson also has experience in running businesses — an exposition center, a sports stadium and a center for the performing arts — owned by government. “I did businesses plans for all of them. All were in crisis and I had to go through every aspect of their business completely,” she said. (Erickson has also worked in law enforcement, yet another bit of useful experience for her position at the OLCC.)



Bill Knight, OLCC warehouse employee, demonstrates the new radio-frequency scanner that has improved efficiency at the 124,000-square-foot state distribution center.

Chairman Lang also has an abundance of experience relevant to the OLCC. He has almost 36 years of experience in business, as a senior vice president at an insurance company. He also served nine terms in Oregon’s House of Representatives, the last one as Speaker of the House. He was a special agent in the Air Force and he even worked as a state police officer in between college and law school.

In the business plan that Erickson drafted and Lang and the Board of Commissioners approved, the biggest push was to modernize the OLCC’s retail system, especially the agencies themselves.

The OLCC ran all state stores, with agencies only in sparsely populated rural areas, until 1969. These state stores, often called “Greenfronts” because of the institutional green the stores were painted inside and out, were converted to agencies in a process that lasted from 1969 to 1983. In many cases, the state employee who had been the manager of the store became the new agent and the store stayed at the same location.

Until recently, the last new agency added to the system opened in 1985. “At that point, things seemed to freeze in time,” said Erickson. “No new stores were added, even as the population of Oregon grew by almost a million people.” Tourism to the state also increased. The OLCC is charged with making distilled spirits reasonably available to on-premise licensees and to the public. Yet, with no new agencies, regions of the state were being underserved.

Guided by its new business plan, the OLCC has opened six stores in the last two years, the latest one in November. “And we’re going to open another one as soon as the agent finds a location,” reported Erickson. The plan is to add two to five new stores every two years.

With new stores and with existing ones, the OLCC encourages agents to find prime retail spots, often in shopping centers and/or near major supermarkets. Agents scout out new locations for their stores themselves. The OLCC’s Merchandising Division, the division in charge of the agencies, has a rating system it uses to analyze the proposed location. “We want it to be a better location, not just a cheaper one,” said Karen Walsh, the OLCC’s director of store operations. “We want to make sure the move is a step in the right direction.”

Because these new, prime locations cost more, the OLCC is looking to address that additional cost, which, like all of a store’s operating expenses, is borne by the agent. “We’d like to have a number of the stores relocate, but rents, especially in shopping centers or on main thoroughfares, high-visibility locations, have skyrocketed,” said Karen Gregory, the OLCC’s deputy director.

That’s one reason why increasing agent compensation is on the OLCC’s to-do list, although whether it can be done, in the face of budgetary constraints, is another matter. “Agents’ compensation is the number-one priority for us,” said Chairman Lang. “We submitted it with our budget for the upcoming legislative session.”

Discussing organizational details are, from left, OLCC Director Pamela Erickson; Steve Pharo, OLCC Director of Purchasing and Distribution; OLCC Commission Chairman Phil Lang; and Linda Ignowski, OLCC Regulatory Director.

Currently, 8.54% of the OLCC’s sales revenue is set aside to compensate agents. It is distributed to agents via a formula that includes a base amount, plus a commission on each bottle sold. Compensation as a percentage of sales is smaller for the larger agents, called “exclusives,” which are large-volume stores that sell distilled spirits exclusively and are located in densely populated areas. Smaller stores, called “non-exclusives,” because they are existing businesses, such as hardware stores, that also sell distilled spirits, get a larger percentage of their distilled spirit sales as compensation. The dollars, however, are substantially smaller. Non-exclusives are generally located in very remote, very sparsely populated areas. (Rural towns with populations numbering in the hundreds abound in Oregon.)

Why the higher percentage of sales for the non-exclusives? “If we didn’t do that [and didn’t have an agent in that area], we wouldn’t have distilled spirits available to the public there,” explained Lang.

Lang would like to see the percentage of sales set aside for agent compensation rise to at least 9%, although he acknowledged, in the present economic climate in Oregon, getting that increase will be an uphill battle.

Another effort to reward agents who had built up a business for their stores was adopted in 1997. The Resignation Buy-Out Plan requires an incoming agent to pay the outgoing — and usually retiring — agent a fee, 2% of the store’s average annual gross alcohol sales over the last five years. If the store’s fixtures are deemed, by an appraisal firm chosen by the OLCC, to be in good condition, the incoming agent also buys those from the retiring agent.

“It’s a token payment, really, not enough to retire on,” said Lang. The idea is that the payment represents recognition of the business the outgoing agent has built over the years with hard work and capital investments.

The plan has also had another, perhaps unexpected benefit. When first proposed, many within the OLCC feared that requiring an incoming agent to make this payment would reduce the number of people applying to be agents. “Before, we had a huge pool of applicants and I thought we’re not going to have as many, there aren’t going to be many people who can make that payment and run the store for a couple of months before they get their first paycheck,” said Deputy Director Gregory. “But the people we do get now are serious people who understand business, who take a look at the profitability and make a real business decision. It’s upgraded the type of person applying, which has led to a higher quality of agent, which has had a real change, a real effect, on the whole system.”

OLCC Director Pam Erickson says, “I am like the CEO of a company, and the commissioners, who hire me, are [like] the board of directors.”

Not that the existing agents weren’t good at the job. Many were. And most are happy as agents, evidenced by the fact that most agents retire from the position.

But the influx of new agents, who are now required to submit a plan of operation to the OLCC, has provided a shot in the arm for all the agents. “It’s inspired a kind of rejuvenation among existing agents,” said Gregory. Indeed, said Erickson, “If someone has done a wonderful job renovating their store — and we’ve got some pretty remarkable examples — we trot that around, and we have gotten others to remodel that way.”

Improving store appearance, whether an agent is new or old, has been a big priority for the OLCC. “Some of the stores were shabby, dirty,” said Erickson. “State legislators complained, one even said that he never went into those ‘dirty, little stores.’ The stores weren’t being held to a standard; there was no demand that they do better.”

That changed when the OLCC gave its annual evaluations of agents some teeth. Now, the scores received on these evaluations determine what kind of contract agents will be offered at their next renewal.

To be awarded a 10-year contract, an agent must score an “Outstanding” on his or her evaluation, which rates things like customer service and inventory control as well as store appearance. A score of “Satisfactory” results in a five-year contract. Agents who receive an “Unsatisfactory” score get a one-year contract. And that’s with the understanding, Phil Lang said, “that they have only that one year to get corrections made.”

Currently, 20% to 30% of the system’s agents receive “Outstanding” scores. “The system is working,” reported Lang. “On this last go-round, none rated unsatisfactory — and that is pretty good.” In contrast, in 1999, an inspection of the agencies turned up an average of over two unacceptable store-appearance items per store.

Store appearance and customer service were also helped by the number of new agents entering the system in recent years. Agents who started in the mid-’80s are now retiring. And the incoming ones often have impressive retailing experience. Phil Lang remembered the application of one new agent, in particular. “She had been the manager of the largest Target [store] in the Portland area,” he said. “She was a troubleshooter for Target.” Upon becoming an agent, at an existing store, she substantially improved the store’s appearance and watched sales increase significantly.

The next goal for improvement in the agencies is inventory control.

“At one point, we had very bloated inventory,” said Pam Erickson. And the commission was, at the time, facing budget cuts of up to $4 million. “We said we think we can do that by adjusting our inventory,” she explained.

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