What Would Franklin Do? Alcohol Sales in the Commonwealth

Ah, the dog days of summer where weekends are for kicking back, relaxing with friends and family, reflecting on the joys of not-working, and imbibing a few. Whether in the city, in the ‘burbs, or down-the-shore, odds are many of you will be savoring these memorable moments thanks to the thoughtful folks at the Pennsylvania Liquor Control Board.

If you live in Pennsylvania and you wanted to drink you probably either a) went to a beer distributor to buy a case of beer, b) went to a state-run Wine & Spirits Store, c) went to a bar or restaurant who had to buy from a state-run Wine & Spirits Store, or d) cheerfully joined the other Pennsylvania scofflaws and ran across the border to New Jersey or Delaware where prices for wine and spirits are routinely two or three times less than at Pennsylvania's state-run Wine & Spirits Stores and where the selections are hundreds of times better.

The Pennsylvania Liquor Control Board (PLCB) operates 636 retail stores and licenses over 20,000 businesses to sell alcoholic beverages, which are bought from the PLCB at retail prices providing $150 million in profit to the general assembly in fiscal year 2007 (plus that 6% sales tax and 18% Johnstown flood reconstruction tax, but that is another story, although total alcohol sales provided the bulk of their revenue of $397 million). To dispel the PLCB's myth of economies of scale (this monopoly is the largest purchaser of liquor in the U.S.), one only needs to visit Costco, the number one national retailer of wine, or Total Wine and More, the number two national retailer of wine, both with locations in Greater Philadelphia.

These two behemoths are retailers who truly understand economies of scale as well as the customer experience, to say nothing of choice. Try letting them duke it out in Pennsylvania, and let Trader Joe's in on the fun, and watch prices of wine fall to California levels. Ever hear of Two Buck Chuck? For both consumers and restaurants, purchase choice and competitive pricing for everything from Alsace to Zinfandel would be a given.

But it isn't the vino that's ground zero for the fight over opening up the alcohol distribution market: it's the suds - the $7 billion Pennsylvania beer market. The beer market is large by any measure, but it's not growing, and that's true nationally. And in Pennsylvania, it's thoroughly protected today.

Even as the PLCB has inched ever so slightly into the 21^st century by more liberally interpreting the byzantine Pennsylvania Liquor Code to define the space, seating, and other requirements needed for a license to sell two six-packs, the Malt Beverage Distributors Association (MBDA--better known as Beer-by-the-Case stores) has sued Altoona-based Sheetz, Inc., a convenience store chain, which was granted a deli-license for one store in 2004 to provide take-out beer without serving food. The case went to the Pennsylvania Supreme Court in May of this year, and a ruling is expected soon. The MBDA is also suing Wegman's Food Market in Commonwealth Court after it received its license last year to sell six-packs in six grocery stores.

The MBDA is worried. And it's understandable. Pennsylvania's true perversity is that distributors play a dual role in the market: they sell to both retailers and to consumers. While beer distributors today are reasonably competitive at the retail level (e.g., compare prices per bottle at a PA beer distributor and per bottle at a liquor store in NJ or DE), the issue is one of convenience and choice for consumers. And once every major or corner grocery store and convenience store offers six-packs, the consolidation of the beer distributors will be massive, as only the large ones will survive as true wholesalers. (By U.S. law, since the demise of prohibition, all states must maintain a three-tier market for alcohol sales. Retailers may not purchase directly from manufacturers, but only through distributors.)

The PLCB's control over alcohol sales and their restrictive licensing has a number of other economic consequences. The added business cost of developing new restaurants and bars is huge ($60,000 for a license in the City of Philadelphia and up to $300,000 for one in the suburbs), and that's if you can even get a license, given the Code's overall population-based quota. Add to that the additional cost of paying a License Broker to help find and negotiate the purchase of a license from a current license holder.

Interestingly, this has led to an unintended consequence: the rise of the BYOB in the region. The number of fine-dining BYOBs has increased in Philadelphia from the 1996 opening of Audrey Claire to over 250 by the end of 2007. In terms of economic impact, there are pros and cons to their growth. Since they must compete (and make a profit) on the basis of food, their food quality tends to be higher and a bit pricier. This has added to overall quality and inventory of restaurants for the tourist trade in the region. On the other hand, to manage costs, BYOBs tend to be smaller operations, and therefore generate fewer jobs than restaurants with full bars and wine lists, and BYOBs have smaller revenue streams.

Finally, there is the sheer antiquatedness of it all. Here in the cradle of freedom, the land of the liberty bell, and the home of that avid socialite Ben Franklin, it is perverse that the Commonwealth assumes a dual role of sole sourcer of alcohol and public enforcer. Focusing on compliance and the promotion of responsible drinking should be its primary role as it is in the 45 states that are not "control" states but "license" states.

In the end, the current system exists simply to control how revenue will flow to the state. Privatizing sales and distribution would not eliminate the sales and sin tax (a good source of revenue). A shift to privatization would undoubtedly increase efficiency in the market channel and benefit consumers through more convenience and choice, but it does endanger a revenue stream that Harrisburg has long enjoyed. So the only change we are likely to see is the slow loosening of the beer distribution channel, since the PLCB has already given up control over sales in that channel. But for wine and spirits...select b), c), or d).

--Judith Tschirgi, Senior Executive Fellow