Update: Virginia liquor prices will rise by an average of 24 to 29 cents a bottle in early December, raising about $15 million in the next 19 months to help fill a state revenue shortfall and begin a modernization program that officials at the Department of Alcoholic Beverage Control say is long overdue.
The ABC Board voted unanimously on Monday to adopt a series of measures that will raise revenue without an across-the-board markup of distilled spirits prices in the state-run monopoly, which already is among the top five most expensive states for liquor in the country.
Instead, the three-member board increased the warehouse handling fee, marked up the price of mini-bottles, and endorsed an industry suggestion to round up prices to "9", such as $21.99 instead of $21.90 or $21.95. The actions, effective Dec. 8, will raise about $5.3 million in the remainder of the fiscal year that ends June 30 and about $9.5 million in the following full fiscal year.
"We made some tough choices today," ABC Chairman Jeffrey Painter said. "I think we made some very sound business decisions."
The revenue measures will allow ABC to meet Gov. Terry McAuliffe's requirement for an additional $2.5 million in this fiscal year to help close a $2.4 billion projected shortfall for the biennium, while allowing the 80-year-old state agency to begin modernizing technology that in some cases risks catastrophic failure and in others still relies on paper transactions.
"ABC is frequently referred to as the golden goose of the commonwealth," said Chief Operating Officer Travis G. Hill, referring to the $387 million in profit and taxes the monopoly generated for the state general fund last year. "In order for the golden goose to continue to deliver strong results for the commonwealth, it must be allowed to re-invest some of its profits."
The department expects the actions -- including an increase in the warehouse handling fee from $1 to $2 a case -- to increase the price of an average bottle of distilled spirits by 25 to 29 cents, while raising the cost of 50-milliliter mini-bottles by 15 cents a bottle.
But the price increase could be higher for liquor brands that cost more than the system average of $15 per bottle.
Scott E. Harris, founder and general manager of Catoctin Creek Distillery, said his Roundstone Rye brand costs about $45, or three times the average. The distiller also expects to be hurt by the handling fee increase because it packages its brands in cases of six bottles instead of 12.
"Any markup is a price increase, and a price increase is a tax increase, whether you call it that or not," he said after the meeting.
Harris, who employs 20 people and produces up to 70,000 bottles of spirits at his distillery in Loudoun County, asked the board to waive the increase for small Virginia distilleries and consider expanding the ABC retail system to stores within grocery stores as a way to boost revenue without raising prices.
ABC officials said they will study the possibility of "stores within stores" as part of a longer term strategy, including extension of store hours, to increase the $800 million annual sales to $1 billion. Thy also intend to seek legislation in the General Assembly next year to make it easier for local distilleries to operate retail state stores on their premises.
First, however, ABC will seek support from legislators for raising money to replace the agency's obsolete financial management system and improve technology to protect retail customer transactions, make it easier for wine and beer wholesalers to pay excise taxes, and allow restaurants and other establishments to pay for their licenses online.
"We want to work with them and get them to buy into our investment plan," Hill said after the meeting.
Hill acknowledged that raising prices could dampen sales, especially in Northern Virginia, adjacent to privatized markets in Maryland and the District of Columbia that charge less at retail and sell at wholesale prices to restaurants and bars.
"It's a fine line we have to walk to make sure we're not increasing prices to where you're pricing anyone out," he said.
Earlier: Virginia consumers are about to get a taste of higher liquor prices to help the state balance its budget and run its monopoly on distilled spirits more efficiently.
The Virginia Alcoholic Beverage Control Board will meet today to consider options for raising money to pay a small portion of the state’s projected budget revenue shortfall and a potentially big bill for modernizing the 80-year-old agency so it can generate even more money for a state that has become dependent on it.
Gov. Terry McAuliffe announced last month that he has directed ABC to mark up prices to generate $2.5 million to help fill a projected shortfall of $2.4 billion, but the agency also is looking to keep a portion of profits that netted $140 million for the state last year to pay for new technology necessary to run the business better and reach the governor’s goal of expanding annual gross sales from $800 million to $1 billion.
The current state budget requires ABC to boost net profit to $144.7 million in the first year — including the additional markup and $300,000 in operating efficiencies — and to at least $145.3 million in the second. That doesn’t include about $200 million a year in taxes on spirits.
“It’s a matter of letting us keep some of what is generated,” said Travis G. Hill, who became chief operating officer at ABC early last month.
“We never do,” observed S. Chris Curtis, secretary to the ABC Board and a former enforcement director who retired and then returned to the agency.
Instead, ABC is likely to have to generate more money to begin to pay for what Hill estimates ultimately will cost “tens of millions” of dollars to replace aging and archaic technical systems to run the agency. Those needs include:
- a financial management system that handles $1.8 billion in transactions a year, which have accumulated to 23 million transaction records that the department cannot purge;
- a licensing system that relies on paper files for 17,700 restaurants and other establishments, which cannot pay by credit online to establish or renew their licenses;
- a system for collecting taxes that relies on manual entry of paper records; and
- initiatives to increase online commerce, beginning with a new Web option in February that will allow people to place and pay for special orders of products online for the first time.
The markup “just got rolled out as the budget filler, but for us it’s a lot more than that,” Hill said. “It’s about investing in the business.”
ABC officials expect to pay for those technological improvements over a period of years, but they will look today at revenue options that include raising the price of 50-mililiter “mini-bottles” sold at most of the state’s 350 retail stores, increasing the handling fees on cases of booze that enter the state warehouse on Hermitage Road in Richmond, and rounding up prices to, for example, $21.99 from $21.90 or $21.95.
Tim Wilson, a division manager for the Sazerac Co. Inc., a New Orleans-based company that owns A. Smith Bowman, a distillery in Fredericksburg, said “simply rounding up to the next nine instead of the current zero or five would generate the desired budgetary shortfall necessary that the governor has requested” and would do so “without the risk of negative impact on the Virginia ABC business.”
Potential damage to the business is paramount to officials at ABC and the General Assembly money committees, which have counted on expanded sales from additional stores and Sunday operating hours to help generate more revenue.
Some legislators already are asking for more money from ABC to offset spending cuts at agencies they favor, such as state police, forensic services and corrections, which will lay off more than 500 employees and close three correctional facilities this fiscal year to help close the projected shortfall.
“The question is, where would you reduce?” said Robert P. Vaughn, staff director of the House Appropriations Committee, who noted that ABC relies heavily on part-time employees who receive few state benefits.
Vaughn also is concerned that a markup of liquor prices could have the unintended effect of reducing sales by prompting consumers to “buy down” from higher priced brands that produce more money per bottle for the state than lower priced alternatives.
“The question is, is raising the price counterproductive?” he asked.
Vaughn said the state has increased sales by adding 24 retail stores in the past three years and broadening the ability of ABC stores to sell on Sundays across the state.
“All of these (changes) have produced more revenue to the state over the last few years as we have tried to expand their revenue generation,” he said.
The liquor industry, bloodied in its last attempt to persuade Virginia to privatize the business in 2011, favors the expansion model, which would generate more taxes and profit for Virginia, as well as more sales for its producers.
“We respectfully ask that instead of increasing the markup for a 12th time since 1979, the (Virginia) ABC embark on a path of modernization by adding new stores, allow for earlier Sunday openings, reviewing the license fee schedule, and upgrading its IT capability,” said David Wojnar, vice president of the Distilled Spirits Council of the United States, who acknowledged that some of those proposals, such as earlier Sunday openings, would require legislative approval.
One revenue proposal that has general support is increasing the markup of mini-bottles, which is now at 49 percent, compared with 69 percent for larger bottles of the same spirits.
There also is some support for increasing the warehouse handling fee, now at $1 per case. “Our folks say it costs more than $2 to handle a case in the warehouse now,” Hill said.
However, increasing the fee per case could have a bigger effect on “the little guys,” distillers of lower-priced liquor brands that sell at a greater volume, than higher-priced brands that would be hurt more by a general markup, said W. Curtis Coleburn III, who retired as chief operating officer at ABC this year after 20 years at the department.
The Virginia Hospitality and Travel Association urged ABC to establish wholesale pricing for restaurants and other licensees by exempting them from any markup. Currently, licensees have to pay the same retail prices at state stores as consumers, so they worry that a markup would force them to raise the prices they charge for drinks.
A growing niche industry of craft distillers say a markup also would hurt them most by pricing them out of bars and restaurants. “Sadly, this means big-bulk alcohol from Kentucky and Indiana is more prevalent in Virginia restaurants than our own handmade Virginia liquors,” said Scott E. Harris, founder of Catoctin Creek Distillery in Loudoun County. “A cost increase to the restaurants and general public will only make this situation worse.”
ABC officials don’t expect to consider the proposal as part of its menu of options today, but they say it’s an idea they could examine in the future. The problem, said former COO Coleburn, is that the state’s profit requirement means “any break you give to restaurants you have to charge to the retail customers.”
Some Virginia distillers say they want to be exempt from any markup that could hurt an industry that is taxed more heavily than beer and wine.
“If implemented, the economic effects of these increased fees will hinder our ability to develop new employment opportunities within the state, obstruct our ability to increase tourism in the region and encumber our opportunities to grow as a small business,” said Gareth H. Moore, chairman of Virginia Distillery Co., a Nelson County distiller that opposes all of the revenue proposals.
“We recognize the need to raise revenue, but any across-the-board proposed markup should not be applied to Virginia-based companies,” Moore said.
Hill, who promoted Virginia distilleries as deputy secretary of agriculture and forestry services before joining ABC, said the department can’t exempt state-based distilleries, but has allowed them to sell their products on-site as state stores.
“We’re working with the distillers to try to help them succeed,” he said.
The challenge for Virginia lawmakers and ABC regulators is a zero-sum game dictated by the state’s profit requirement, said Coleburn, who became the agency’s first chief operating officer in 1999, after the department missed its state profit requirement. It hasn’t missed the target since.
“It’s not because ABC can’t make the profit,” Coleburn said. “It’s because the General Assembly wants more profit.”