October 9, 2019
Montgomery County has an unusual alcohol policy. Restaurants and private stores must buy every bottle of wine, whiskey or beer from a County warehouse.
(Unless it was made locally, in which case it can be delivered by the maker directly.)
The County also operates 25 no-frills retail stores. They are the only stores where you can buy spirits.
Hundreds of private stores — but only a handful of grocery stores — sell beer and wine.
If you follow local issues, you probably know that our system generates a lot of revenue, $20-$30 million per year, for schools, parks and other priorities.
What might surprise you though is to learn that the net profit is entirely due to the warehouse operation. The County’s retail operation actually loses money — about $5 million a year!
In this year’s budget review, in dialogue with Councilman Katz, the ABS (formerly DLC) shared that they had recently made changes to their accounting practices to better track the profit and loss of each store. They said a few stores actually lose money.
Wanting to better understand the issue, we asked Council staff to analyze the most recent financial data from ABS.
I was shocked to find that almost all of the stores lose money.
The County’s stores have long appeared to be profitable because they were not charged a markup from the County warehouse. This makes the retail operation’s inventory cost seem low and the stores therefore to be artificially profitable. Or put another way, the warehouse was allowing the store to book its profits.
ABS changed the practice so that now the stores must report their inventory at the same cost as private retailers — the cost that includes the markup charged by the warehouse. This was a wise change to make because it enables the County to judge the true cost of providing the service.
The new data for the previous fiscal year shows that 19 of the 25 retail stores are unprofitable with average annual net loss of over -$230,000. While the warehouse operation sent a profit of over $34 million to last year’s County’s budget (including debt service payments), retail operations actually lost more than $5 million.
In other words, if the County had only acted as a wholesaler in these transactions – selling the product to private stores rather than County stores – County resources would grow by $5 million — funds that we could use to support, for example, the education Blueprint for Maryland’s Future.
What should we do about it?
There is no good justification for operating retail stores at a loss.
At this juncture, the most financially advantageous approach would be to retain the warehouse but close the stores and allow private stores to sell spirits.
Creating a license regime for private stores to sell spirits, however, would require state law changes. It is unclear if the state legislature would support that.
There is another option. In 2015, I chaired the Council’s Ad Hoc Committee on Liquor Control. The Committee’s investigations brought issues to light that resulted in a wide array of reforms.
(We also unleashed a craft alcohol production sector, which is thriving now, featuring multiple breweries in downtown Silver Spring, Rockville/Derwood, and Olney/Brookeville; and new wineries and distilleries.)
Based on the Ad Hoc Committee’s work, the state adopted a law allowing the County to sell spirits by contracting with a private store, rather than issue a license to that store. Replacing the County stores in this manner would allow the County to retain control over the location and density of liquor stores in the County, something that many people care about.
It would also enable private beer and wine stores to expand their offerings and generate more customers. And it does not require any further state legislative action. The County Executive could direct the ABS to do it now.
A final option is running the retail operation at a profit. That will require some big changes (but it might be possible).
In my view, residents tolerate the County liquor stores because they believe the stores produce funding for education and public safety among various priorities. But knowing that the County liquor stores actually cost us money is a different story.
With all of the needs in our community, we simply cannot afford to expend resources on services that don’t have a compelling public benefit.
Frankly, the only real consideration is the retail employees. They deserve fair treatment; there may be other jobs in County government.
I hope our letter to the County Executive will encourage him to bring the county union to the table and work out a plan to make it happen.
Let’s get on with it.
What about the warehouse?
While the Ad Hoc Committee recommended a partial privatization of the operation, we stopped short of saying “just get rid of the whole thing.” A big reason is that the warehouse profits were used to secure about $125 million in bonds, a long term financial decision made by the County in 2008 and 2009 that we must live with today.
Anything that would result in losing the revenue stream supporting those bonds would require the County to use our general construction budget to pay them off.
That is about the cost of a new high school. We are currently building three high schools in our construction program — Crown (Gaithersburg), Woodward (Bethesda), and Northwood (Silver Spring) — costing the County about $125 million each. So, to examine realistic trade offs, which school should get cut to pay off the warehouse bonds?
As much as I favor liquor reform, I have long believed that paying for schools is a bigger need and a higher priority for most of our residents.
And Grocery Stores Should Sell Beer and Wine
Finally, an issue that I believe the state legislature must urgently address is allowing grocery stores to sell beer and wine. They are prohibited by state law. Changing it requires creating a state license for grocery stores to sell, which only the legislature can do. It wouldn’t cost us a penny. (Just the opposite, it would generate revenue.)
A lot of people assume this bizarre restriction is part of our County system, but the fact is that it is a state prohibition that was created to protect small retailers from grocery store competition.
It needs to change.
On October 3, Councilmembers Katz, Glass, Rice, and Hucker joined me to send a letter to County Executive Elrich about our discovery that the County’s retail liquor stores are losing $5+ million annually.
We asked the Executive to review the information we provided and respond with a plan of action by the end of 2019.
This post has been updated from a previous version