Mighty Montgomery

The Department of Liquor Control (DLC) for Montgomery County, Maryland is the only member of the National Alcohol Beverage Control Association (NABCA) to represent a county rather than a state. It administers for an area of less than 500 square miles and a population of less than one million, but it was able to transfer over $30 million to the county government’s general fund in 2009 alone. When compared to the other NABCA members, it ranks number 12, out of 19, in terms of 2009 sales, reporting a total of $220.7 million for that year.

The DLC is the sole wholesaler of beer, wine and spirits in the county and is the sole off-premise retailer of spirits (except for one grandfathered retailer). The DLC’s 25 stores sell beer and wine as well. The DLC licenses, regulates and serves as the one wholesaler for anything alcoholic for the county’s approximately 950 licensees, which include beer & wine stores as well as bars and restaurants. It runs its own warehouse as well as a fleet of over 40 24-foot-long trucks. It shares enforcement responsibilities with the local police. (The DLC’s five inspectors issue administrative violations, while the police issue criminal ones.) The department employs over 300 full- and part-time people.

The biggest difference between the DLC, as a control county, and an agency in a control state isn’t the size and complexity of its operation. However, being one of four control counties in an otherwise open state does present some differences. For example, since private wholesalers exist in Maryland, they send their reps into Montgomery County. “Sometimes, it’s the wholesaler’s rep, helping a restaurant out with its wine list, who fills out the request for a special order and even brings it into us,” said George Griffin, the DLC’s director.

And the Montgomery County DLC is unique in other ways. For one, it is the only control agency that acts as the sole wholesaler for beer as well as for spirits and wine. “I find that makes more sense to people, especially when you’re explaining things from a public-policy standpoint,” said Griffin. “Why control one and not the other? Why is a beer that is 20 percent alcohol different from a 40-proof cordial?”

Handling beer does add to the complexity of the DLC’s operations. Its warehouse has to have refrigerated storage as do some of its trucks. “We make three separate types of deliveries: wine and spirits are one, beer is another and draft beer is the third,” said Griffin.

And beer is a different animal when it comes to purchasing, said Gus Montes de Oca, chief of operations. Montes de Oca had over twenty years of experience working at a beer wholesaler before coming to the DLC. Beer is a high-volume, price-sensitive product with a more limited shelf life than either spirits or wine. “Beer turns over quickly. We don’t carry more than 20 to 30 days of inventory in beer as opposed to 60, 70, 80 days of inventory you could do for wine and spirits,” he explained. “Beer has a shelf life of 110 to 120 days, while spirits and liquor have no shelf life.”

And the DLC’s most intense competition doesn’t come from where you might expect: the other counties in Maryland. “Our biggest competition in retail comes from the District of Columbia, which we border on the northwest,” said Griffin. “It has the lowest liquor-store prices in the country.” The Montgomery County DLC stays competitive with D.C., Griffin reported, often advertising its prices in The Washington Post, where they run side-by-side with the advertised prices of private D.C. retailers. “Plus, convenience counts for something too,” Griffin said.

Up to the Challenge

Like most local government agencies across the country, the DLC has had to respond to poor economic conditions for the last two fiscal years. “The year that ended on June 30, 2009 was the most challenging in memory [for the DLC],” wrote Griffin, in the department’s annual report for 2009. But not only has the department been meeting its targeted transfer amounts to the county’s general fund (the $30.4 million it transferred in 2009 was its largest transfer ever), it’s doing so even while implementing a county-mandated budget reduction of five percent.

This fiscal year, ending on June 30, 2010, was also a difficult but ultimately successful time for the department. “I was very concerned. We needed a three-and-a-half percent growth in sales [to earn enough to make the department’s targeted transfer to the county] and through January, I didn’t think we were going to hit that,” said Griffin.

As Griffin pointed out, sales are ultimately consumer-driven. “You can do everything you can managerially – reduce your advertising expenditures, tighten your inventory, play around with pricing – and we did – but ultimately, you haven’t made a nickel until the consumer buys something,” he said.

And through January, consumers weren’t always buying, at least not as much as usual. The department’s stores did manage to grow their sales, even in the face of consumers “trading down,” buying less expensive brands.  But the department’s wholesale business plummeted as the county’s hospitality industry suffered.

However, Griffin reported that the economy in Montgomery County has turned a corner since January. “February, March and April were all good months [in terms of both wholesale and retail sales],” he said. The department was able to make its FY 2010 transfers, which totaled approximately $29 million.

But while general economic trends are looking brighter, the budget situations for the county government and the state of Maryland remain dire. “It’s an indication of how severe the situation is that we, a revenue-generating government agency, were asked to participate in the budget-cutting,” Griffin said. In Montgomery County, even the normally sacrosanct police, fire, rescue and public-safety agencies are experiencing budget cuts. Griffin believes that the county’s budget situation will remain tight for the next couple of years.

“After two rounds of budget planning, we got the low-hanging fruit [of cost savings] and then the medium-hanging fruit – we eliminated unfilled positions, we tightened our inventory, we deferred purchases,” said Griffin. “We’ve done all the ‘easy’ things and now we’re actually eliminating jobs.” The department eliminated a total of 12 positions. While three of them, in the retail stores, had not yet been filled, nine of them are people who have lost their jobs. The county as a whole eliminated more than 400 positions.

Yet, Griffin sees light at the end of the tunnel. “While, in the short term, difficulties will continue, the long-term picture is bright,” he said. “The long term is the pot at the end of our rainbow.” He sees the economy improving. “Our on-premise licensees had a really tough year, but we see their business coming back,” he noted. “The next 12 to 18 months are going to be better than the last 12 months.”

And he sees the DLC as being well-positioned. “We’ve made a lot of progress in the last eight years,” he said. “The real challenge in any downturn is to keep the momentum going. The source of encouragement for us is that we’ve already made some long-term investments – and those are going to pay off.”

The two biggest, most recent investments the DLC has made are its new warehouse and headquarters, which it is scheduled to move into in 2012, and a new point-of-sale (POS) system, which is currently being rolled out in all 25 stores and is expected to be fully operational by September.

The warehouse facility is, in a way, an example of making lemons out of lemonade. The DLC is located near a number of other government agency offices, on the same street. The county government decided to redevelop that real estate, so all the agencies must move.

The DLC found a new location, both offices and a bigger warehouse, a few miles away. This new warehouse measures over 200,000 square feet, while the DLC’s current warehouse is 140,000 square feet. The DLC needs the space. “In this business, the warehouse is never large enough,” said Montes de Oca. He estimated that the current warehouse is at least 30,000 square feet too small for the operation. And, indeed, the DLC has been leasing a second warehouse for its overflow. Once in the new warehouse, the DLC will be able to close down this second, leased facility.

The DLC bought its new space, for approximately $30 million, and will spend about $15 million renovating it to meet its needs: the DLC will install the refrigeration it needs for beer storage as well as general climate control for the whole warehouse, reconfigure interior walls and install a conveyor system. The actual construction will start in early July.

Rather than, as is usual, using government-obligation bonds, issued by the county’s government as a whole, for funding the warehouse purchase and renovation as well as the DLC’s share of other Montgomery County capital projects, the DLC issued “Montgomery County Liquor Control Revenue Bonds,” backed by its own profits. These bonds were awarded a strong rating of “AA-” by Wall Street rating agencies that had closely examined the DLC’s operations. This move means that the DLC’s financing will not impact the county’s total debt funding capacity.

The DLC is replacing its POS system simply because “our old system has run its course,” explained Montes de Oca.  The DLC’s current POS system is 15 years old. It is not PCI compliant, meaning it does not meet the security standards required by the major credit-card companies. In order to comply with those requirements, the county stores have been running their credit-card transactions through a separate system. “We are, in effect, processing these transactions twice: first at our register and then through the credit-card processing system. It is a cumbersome process,” said Sunil Pandya, the DLC’s chief of administration.

Again, the DLC turned a necessity – replacing this old system – to its advantage. The new system – Microsoft RMS installed by the local company STG – will have touch screens and the aforementioned integrated credit-card processing in the stores, but it will also be able to produce much better reporting for the DLC. “The new system will dramatically improve our monitoring of customer sales patterns and of how we track our promotions, for example,” said Pandya. Indeed, he continued, “We are expecting a lot of efficiencies from the new POS system.” When the DLC had to eliminate positions in order to cut its budget, it found that it could eliminate six of them because of the new reporting efficiencies of this POS system as well as other reporting efficiencies instituted in Pandya’s administrative division.

The new POS system cost a total of $2 million. “But we expect it to last 15-plus years,” Pandya pointed out, “and we estimate that our new efficiencies will save us $600,000 a year. Even if only a third of our savings come from the POS, that alone pays for the system – and we’re not even talking about the efficiencies we’ll have in the stores.”

Pandya, who, as chief of the DLC’s administrative division, is also in charge of its information technology (IT) staff, has instituted other technological efficiencies in his division. One, instituted six months ago, allows suppliers to input changes in the cost of their products to the DLC online. These are then automatically run through the DLC’s pricing formula by its computer system in time to be printed in its monthly newsletter to licensees. “Previously, that work took two people to do. Now, it takes one,” said Pandya.

The DLC’s escrow-account system – where it keeps money on deposit for large licensees, such as hotel chains, so that they don’t have to have checks drawn up for each and every delivery – has been automated and streamlined, as has the Department’s accounts-payable system and a number of its reporting functions, such as the gallon-usage report it must generate for the state in order to pay the appropriate sales and excise taxes.

The DLC tweaked its usual procedure for selecting the new POS system. “We issued an RFD, inviting bids, of course,” said Pandya, “and the companies came to give presentations to us on their systems.” But the DLC added another step to the process. A committee, which included a number of the DLC’s retail and store managers, ranked the bids it received, based on the presentations, and invited the top five to bring a prototype of their system into one of the county’s state stores and demonstrate its capabilities. “All were given the same script and had to show how the system actually worked,” said Montes de Oca.  “Before, companies could just say, ‘Yes, it’s going to work.'” And having to actually demonstrate their abilities “did eliminate a couple of the companies,” said Pandya.

Interestingly, the DLC worked to keep its requirements for customization of the system to a minimum. “Our experiences in the past have shown us that customizations can cause too many issues,” explained Pandya. “One major issue is support. If the company upgrades its system, the upgrade won’t include our customizations and those will require special attention.”

The operations division, whose responsibilities include purchasing, the warehouse and delivery operations and the retail stores, continues to look for ways to improve as well.

Its listing process is a case in point. How many products it lists and how it chooses them is of special importance to the Montgomery County DLC because, unlike many control agencies, it does not run a bailment system. In other words, it buys what it orders when it orders it, to the tune of about $160 million per year invested in inventory.

Montes de Oca has looked at many approaches to the listing process over the years, searching for the most efficient and user-friendly. “There is no magic process,” he said. “Some states, like New Hampshire, are wide-open. They will list a product as long as it maintains certain sales figures. That’s the same as us: we require that a product maintain a certain percentage of its category’s sales. But there are thousands of liquor and wine products and we can’t list them all.” And there are always new ones coming down the pike. At the DLC’s last listing meeting alone, it approved more than 25 new products for either full or partial distribution within the county.

Some control agencies, Montes de Oca found, hold listing-committee meetings only twice a year, which can be inconvenient for suppliers. “It’s difficult, you have to be fair to the suppliers,” he said. “You carry everything; there is no one else for them to go to.”

Since last year, the DLC has held listing inventory committee meetings once a month. This committee is co-chaired by Montes de Oca and Pandya. Diane Wurdeman, retail operations manager, and two of the DLC’s buyers also attend. If the timing of this monthly meeting is inconvenient for a supplier, that supplier can present the new product to Montes de Oca and he, in turn, will present it to the others at the scheduled meeting.

One of the most difficult aspects of making listing decisions, Montes de Oca said, is balancing the needs of the DLC’s retail stores with those of its licensees. That’s one reason why Wurdeman is in attendance. “She thinks entirely in terms of retail,” explained Montes de Oca, “and I think in terms of the 500-plus bars and restaurants and the 200 to 300 beer and wine stores in the county and what their needs are. It’s a balancing act.”

And the delisting process is at least as important. The DLC looks at delisting every day. “The buyers are continually looking at sales figures and will notify a product’s reps as soon as they see that it has dropped below its required sales level,” said Montes de Oca. “We have to: if we didn’t delist, we’d be carrying 50,000 products and three-quarters of them wouldn’t be selling.”

But, he said, the DLC does work to be understanding. If the supplier makes a case for the product, the DLC will continue to carry the product for a limited time, from 30 to 90 days, to give its sales a chance to improve. “We will give them another opportunity,” said Montes de Oca, “but, really, we’re usually right about the product.”

“We have made a conscious effort to improve our stores over the last eight years,” said Director Griffin. The DLC had, over that period of time, renovated about three to four of its stores per year, installing new floors, counters, shelving and ceilings. When it could, it moved its existing stores to better locations. Though budget cutting has necessarily slowed this process, the DLC continues to keep an eye out for possible improvements. “We’re looking at two or three locations right now,” said Montes de Oca.

All Together Now

Four years ago, the DLC and the county’s Board of Liquor Commissioners underwent a restructuring. Though the board, with its five appointed citizens, still retains its authority to grant licenses and decide on violations and still holds its bi-monthly meetings to do so, it no longer handles the processing of license applications. “It didn’t make sense: to get your license from one government agency and then have to go to another to buy your alcohol,” said Griffin. Now, the bulk of a licensee’s dealings with the county government comes from a single source, the DLC. “It’s much more efficient for them.”

Plus, said Kathie Durbin, chief of the resulting new division in the DLC, Licensure, Regulation and Education (LRE), the new structure enables licensees to develop good relationships with the DLC. “They purchase alcohol from us. They interact with us every day. It’s a nice communication tool,” she said. “Because we can really build a relationship with them, we don’t have to threaten them. If they have a question, they think, ‘Oh, I can just call.'”

Relationship-building is so important to the DLC that it is a factor in determining just how streamlined its processes can be. While license applicants can access and fill out all the forms they need online, “we still want to talk to them,” said Durbin. “We are dealing with alcohol, after all. So, we streamline the application process but with the caveat that we will, if we need to, sit down with them.”

Bringing everything – licensing, inspections, compliance checks, education and community outreach – under one roof enables the DLC to be a better source of information to its licensees. “A large percentage of businesses are totally on board and are excited about the resources we can provide them – such as responsible-alcohol training materials in different languages. Everything is free to them, funded by grants or donated by industry,” said Durbin.

Director Griffin pointed out another advantage. “One thing that helps business is a degree of certainty in their marketplace,” he said. “If the marketplace is orderly, if everyone is clear on what the rules are, it just makes more sense.”

Because the DLC keeps an eye on the long term, even as it makes its way, in the short term, through less than ideal economic conditions, Griffin remains excited about the future. “When we can expand staff again, I’d like to have more people in the purchasing office and in the customer-service office, where they work primarily with licensees,” he said. “We’d like to have more people working on the special-ordering of wine and also have more direct, one-to-one contact with licensees.”

The DLC also looks to opening more stores to keep up with population growth in the county. “Realistically, we could double the number of stores,” Griffin said. He is also looking forward to investing more money in IT, including new warehouse-management and transportation-management systems eventually.

 “It’s difficult right now, there’s no getting around that,” he concluded, “but the long-term picture is bright.”


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