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Vermont Mulls Pros and Cons of Privatizing Liquor Sales

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KYM BALTHAZAR
  • Kym Balthazar

The Vermont Department of Liquor Control warehouse in Montpelier buzzed with activity as beeping forklifts hauled cases of liquor into the back of a large truck on the Wednesday before Memorial Day weekend. Workers were busily restocking Vermont's 80 state-controlled liquor stores in anticipation of the unofficial start of summer, which historically coincides with a statewide uptick in alcohol consumption.

Warehouse manager Barry Richardson, who's worked at DLC for nearly 25 years, managed the traffic flow. On average, four trucks leave the warehouse four times a day, each hauling about 1,000 cases — or enough liquor for four stores, he said. State employees deliver to most outlets every other week, though Vermont's busiest liquor stores, such as Beverage Warehouse in Winooski and Burlington's Pearl Street Beverage, get weekly shipments.

Has Richardson's job changed much since the 1990s?

"A ton," he said, adjusting a case of Absolut vodka bound for the truck. "[We carry] way more items."

Indeed, this warehouse regularly stocks more than 1,000 different items sold in Vermont liquor stores and another 1,200 to 1,300 specialty orders that come from bars, restaurants, liquor store owners and their customers. The inventory is organized not by liquor type or brand but by the products that move the fastest; the biggest sellers are stacked, floor to ceiling, along the outside walls for easier access. Those coveted spots can change from year to year, reflecting Vermonters' shifting tastes for spirituous beverages.

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"Kahlua used to be our fastest mover. For a while, that was our password on the security system," Richardson recalled. "Right now, Knob Creek is pretty hot. Bulleit Bourbon is also flying."

Anyone who's ever had a margarita, Manhattan or mai tai in the Green Mountain State has drunk from the river of booze that flows through this warehouse, the only one of its kind in the state. Vermont is one of 17 "control states" in which unelected state officials direct the distribution and sale of all high-proof spirits — vodka, gin, rum, whisky, tequila, etc. Liquor manufacturers own every bottle in this "bailment warehouse" until it ships out, at which point the DLC pays for it.

That bottle arrives at a state liquor outlet, or "agency," where it belongs to the state — not the merchant who stocks it — until a customer purchases it. As most Vermont booze buyers quickly discover, that transaction goes through a separate, state-owned cash register, which is different from the one used to ring up beer, wine, chips and other groceries. The state's archaic, DOS-based machines still rely on dial-up internet connections to process credit- and debit-card transactions, which can be ponderously slow and often account for the long lines of customers waiting to check out.

Some suggest this byzantine business model could be made more efficient and lucrative for the state by allowing private industry to take it over. State Auditor Doug Hoffer says it's time for an "honest conversation" about whether the control-state model is really the best way to sell liquor in Vermont. He also sees an inherent conflict of interest in the DLC's mission to both promote liquor sales and restrict its availability.

"I'm not one to advocate for privatization as a rule. I think government has an important role to play in many areas of our lives," said Hoffer, who ran on both the Democratic and Progressive tickets.* "But I struggle to find a justification for the sale of spirits as a core function of state government. I just don't see it."

Longtime DLC commissioner Michael Hogan countered that the control-state model actually provides Vermonters with "the best of both worlds" by carefully controlling how powerful spirits are sold while also keeping prices affordable and availability limited. He suggested that the allure of inviting private industry to take over liquor sales and distribution in order to make more money will only invite more problems, from market oversaturation to alcohol abuse.

"Privatization is always percolating in the background, and it's percolating even more when the state has more revenue needs," Hogan said. "Now that the state has been dealing with deficits year after year, they're looking to fill in holes. But I think that's the biggest mistake Vermont could make."

From Moonshine to $18 Million

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It's easy to forget that, for much of its history, booze-loving Vermont was a dry state. From 1852 until 1933, it was illegal to sell hard alcohol in the Green Mountains, though local moonshiners and smugglers supplied Vermonters during the Prohibition years.

In 1933, when the 21st Amendment voided the Volstead Act, Vermont was one of 17 states, along with jurisdictions in Alaska, Maryland, Minnesota and South Dakota, that chose to adopt a control model to regulate alcohol. Although each state's system differed somewhat, the common denominator was that the state owned the liquor at some point in the purchasing process.

In 1933, Vermont created the DLC to oversee the sale and distribution of all hard alcohol in the state. Surprisingly little has changed since then. Until 1986, Vermont owned and operated all its own liquor stores. In the ensuing decade, it began converting state-owned stores to privately licensed liquor "agents." The last ones transitioned in 1996.

Today, 80 agent retailers have exclusive contracts to sell liquor in their area. They offer the same sales on the same days, at prices listed in the DLC's statutorily mandated quarterly, 802Spirits. Those prices cannot vary, regardless of the store's proximity to competitors just across the border in New Hampshire, New York or Massachusetts. Similarly, every restaurant, bar and nightclub pays the same price for a bottle of Jim Beam or Jack Daniels as the average Joe Vermonter.

Pro-privatizers argue that liquor could easily be sold through the same business channels as beer, wine, cider and other lower-proof alcoholic beverages. Currently, Vermont has four major beer and wine distributors — Baker Distributing, Farrell Distributing, g.housen and Calmont Beverage — and three smaller private wholesalers, which collectively sell to the more than 1,200 retail outlets statewide. Those stores range from small mom-and-pops to major national chains such as Walmart, Costco, Shaw's and Price Chopper.

Not everyone is convinced it's wise to mess with Vermont's spirit world. Some, including officials at the DLC itself, argue that Vermont's liquor control system works fine and doesn't need fixing. They contend that Vermont, like other control states, has done a better job than "open states" of reducing overconsumption and keeping high-proof spirits out of the hands of minors.

Moreover, privatization opponents also say that any financial benefits — notably, higher tax revenues reaped from greater liquor sales, the eliminated costs of staffing and maintaining a state warehouse, and the one-time windfall of selling off all its inventory — would be short-lived. They contend that such gains would be more than offset by other public health and safety costs, including higher rates of alcoholism, drunk driving and more emergency room visits.

Hogan points to Maine, which privatized its liquor wholesaling in 2004, and Washington, which fully privatized in 2012. In both states, there's evidence that competition decreased, consumer prices increased, and many small retailers and artisan distillers got squeezed out.

Vermont has considered privatizing before; the legislature mandated studies in the 1990s and again in 2004. The state paid $50,000 for the last one, from Virginia-based Management Analysis, Incorporated, which suggested ways of improving efficiency in the DLC's warehouse but made no recommendation to abandon the control-state model.

Auditor Hoffer decided to give the matter another look. Last November, he issued a report with the unsexy title "Liquor Control System: Fiscal Impact of Privatization Projected as Neutral, but DLC Could Take Other Actions That May Increase Profits." In it, Hoffer didn't come out for or against privatization, which may explain why lawmakers, and the press, greeted the report with a collective yawn.

But the analysis did raise a fundamental question: Is the sale of liquor a "core function" of state government, akin to plowing streets and patroling highways? If not, Hoffer suggested, then lawmakers should reconsider whether private industry can do the job safely, efficiently and more profitably for taxpayers.

Doing so, Hoffer acknowledged, would leave a lot of cash on the barrel: In fiscal year 2013, the DLC took in nearly $30 million in net liquor revenue, $18 million of which went to the general fund, $12 million to run its operations. Between 2003 and 2013, liquor sales at state-controlled stores contributed more than $167 million to state coffers.

Although the report doesn't say as much, in a recent interview Hoffer pointed out that his office was "intentionally conservative" in its calculations of the fiscal impact of privatization. Hoffer said he didn't want to make any "risky or imprudent assumptions about what the future might hold" if liquor sales were privatized. But he suggested that liquor tax revenues could be significantly higher because private wholesalers and retailers would have more incentives to sell more booze than state-controlled stores do now.

Part of the problem, Hoffer explained, is that owners of many state liquor outlets have little incentive to move their product, because that's not where they make most of their money. Most state liquor stores are located within larger retail outlets that also sell beer, wine and other groceries. Liquor is just another product to get customers in the door.

Cop and Competitor

802 Beverage, Wine & Spirits is a relatively new state liquor outlet that opened last September in the Ethan Allen Shopping Center on North Avenue in Burlington. Formerly known as Merola's, it was previously located about a half mile north of its current location.

Shoppers there can choose from an impressive selection of local, domestic and imported beers, wines, ciders and other alcoholic beverages. With more than twice the space of its old location, the store also has racks of domestic and imported wines.

The liquor bottles, meanwhile, are tucked away to one side of the store and segregated from the rest of the retail operation like the adult-movie section of a video store. There are no posters or other promotional material aggressively marketing spirits.

How do retailers like 802 Beverage get into the booze business? Basically, storeowners apply for a license to sell distilled spirits on their premises. Whether they receive DLC approval is based in part on their proximity to other agent stores and potential sales growth in that area. Hogan said the DLC does market research to determine whether a new outlet will generate additional revenue for the state or simply pull sales away from another nearby store. In that respect, state liquor sellers are buffered from the normal pressures of market competition.

Once they're licensed, agent stores earn a fixed 6.7 percent base commission on the liquor they sell and can also collect up to an additional 1.5 percent in "incentive commissions," which the DLC determines based on 12 performance factors. Those include whether the store is clean and well organized, whether it routinely checks IDs for underage buyers, how well it manages inventory and whether it meets state-determined sales goals based on past historic data for that area.

But as Hoffer pointed out in his report, 11 of those 12 performance categories cannot be measured objectively because no standards have ever been established. Nevertheless, in 2013, nearly three-quarters of the state's 78 existing stores at the time earned incentive commissions totaling $1 million. Contracts with state agents are initially awarded for one year at a time but can eventually increase to three- and five-year contracts. Hoffer characterized such arrangements as "entitlements," adding that, short of flagrant and repeated rules violations, "the people who have them are good for life."

At the same time, though, agent stores don't have a lot of skin in the game, largely because they don't own the liquor bottles on their shelves — those are owned by the state until a customer buys them — and thus have little incentive to aggressively turn inventory. While he doesn't think that most state liquor agents do a poor job of selling spirits, Hoffer suggested there's little incentive for them to focus on their liquor operations over the rest of their retail business.

"Return [on investment] is always — it has to be and should be in a capitalist system — a function of risk," he explained. "If something doesn't sell, you don't care, because it's not your money sitting on the shelf."

Hoffer sees "some inconsistency, if not hypocrisy" in the fact that the DLC already licenses private businesses to sell beer and wine. Except for restrictions on their hours of operation and the age of customers to whom they can sell, those licensees essentially can do whatever they want to move their products. As such, Hoffer sees no substantive difference between distilled spirits and other alcoholic beverages.

Following the same logic, he isn't convinced that increased liquor sales would automatically lead to greater social ills, such as more DUIs and overconsumption.

"College students can go out and buy as much beer as they want and still fall out of a frat-room window," he said. "I don't believe there's any research that says that spirits require greater control than beer and wine. There's no reason not to follow the beer and wine path and license it rather than control it."

Vermont grocers, club and tavern owners or restaurateurs are not clamoring to privatize liquor sales. Then again, some who acknowledge the benefits of switching to a privatized model won't say so publicly, because they're wary of invoking the DLC's ire.

Most of the Vermont beer and wine distributors contacted for this story either didn't return calls or declined to comment on the record. But, as one suggested privately, "every distributor in the state" would jump at the opportunity to also sell booze; they already have the staff, trucks, delivery routes, franchise arrangements and retailer relationships. Nevertheless, this distributor wouldn't belly up to the bar and push that agenda publicly.

"You have to understand. They are our police," he explained, referring to the DLC and its enforcement authority. "And our police are also our competitor."

A Spirited Defense

The DLC's administrative headquarters doesn't call attention to itself at the terminus of Green Mountain Drive in Montpelier, just beyond Green Mountain Power's solar panels. The interior is another story: Along with their family photos, many staffers proudly display Vermont-made products such as Sapling maple liqueur, Barr Hill Gin, WhistlePig rye and Silo vodka at their workstations.

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For decades, the DLC attracted little attention or scrutiny from lawmakers or the press; it answers to neither the legislature nor the governor but to the appointed members of the Vermont Liquor Control Board. But five months after Hoffer's report, the Burlington Free Press discovered the department had been making undocumented overtime payments to William Goggins, the DLC's director of education, licensing and enforcement. That policy, approved by Hogan, drew condemnation from the governor and prompted two legislative investigations. Neither Goggins nor Hogan was accused of any misconduct, but shortly after the series of negative articles, the commissioner announced his retirement.

A Howard Dean appointee who's worked for the DLC for 17 years, Hogan is still on the job — through at least the end of June — and seemed no worse for the wear in a recent interview. Dressed in a sharp suit and tie, and with his salt-and-pepper beard cropped closely, the 68-year-old looked like he stepped out of a glossy magazine ad for a top-shelf single-malt Scotch.

Hogan stands behind his decision to authorize his staff's overtime pay. As he put it, "We had a need to do certain work, and the overtime accomplished it." But he said he hoped that lawmakers wouldn't use the controversy as a justification to upend Vermont's liquor-control system.

Hogan pointed to data compiled by the National Alcohol Beverage Control Association showing that, historically, control states generate two to three times more revenue per gallon of liquor sold than do "open" states — even though control-state consumers buy less alcohol. Since the state buys in bulk and has no middleman, i.e., the wholesaler, it can make more money per bottle and still offer consumers reasonable prices.

"We also believe we're more responsible sellers of alcohol than the private sector is," he added. "Alcohol consumption is lower in control states than it is in open states, across the board."

Does that mean Vermont has a problem with the way beer, wine, cider and other alcoholic beverages are marketed and sold? Not necessarily, Hogan clarified. But he pointed to a row of cans on a shelf behind his desk, many of which are alcoholic beverages that look like soft drinks. He suggested that such products, which often contain high concentrations of sugar and caffeine, are deliberately formulated and packaged to appeal to underage drinkers.

Unlike distilled spirits, which must first undergo a state review process to determine whether they're "appropriate" for sale in Vermont liquor stores — for example, grain alcohol isn't sold in Vermont stores due to its high-proof content — these products can be offered anywhere beer and wine are sold.

"Whenever privatization comes up, it's all about the revenue side. It's never about the public safety or public health side. That always gets stuck in the background," Hogan said. "That's what happened out in Washington State."

In November 2011, Washington voters overwhelmingly approved Citizen Proposition 1183, which effectively ended the state's 78-year-old monopoly on liquor sales. On June 1, 2012, Washington became the first state since the end of Prohibition to fully dismantle its liquor-control system. The campaign was backed by large national retailers, especially Costco Wholesale Corporation, which spent about $20 million convincing voters in its home state that private industry would bring more competition, lower prices and better selection.

But Washington consumers may have been slipped a mickey. As the Seattle Times reported last year, the average cost of a liter of liquor, after taxes, was $24.39 — up from $21.19 before privatization. One study, by the nonprofit Tax Foundation, found that Washington consumers were paying more than $35 per gallon for spirits, up by more than $8.50 pre-privatization.

"In Vermont, what would we gain if we went from 80 stores to 1,200? Nothing," Hogan argued. "In Washington, the consumer was basically sold a bill of goods. They don't have cheaper prices. They have higher prices and less selection."

They also have major "border bleed." Published reports indicate that privatization prompted Washington consumers to begin driving to neighboring Oregon and Idaho to purchase cheaper booze. One Idaho business even set up shop right at the state line to capitalize on the flow of Washingtonians.

Small Vermont businesses, especially those along the New Hampshire border, already have two strikes against them. Whereas New Hampshire has no tax at all on liquor, Vermont has a 25 percent tax built into the retail price, plus a bottle deposit and 6 percent sales tax.

Local Toll

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Privatization would likely put the squeeze on small liquor outlets in Vermont. Another potentially endangered species: local artisan distillers. Under the current system, they have been "growing at a very nice rate," according to Marcia Gardner, the DLC's director of sales and marketing. "We'd probably see some of them go out of business, because they wouldn't have the distribution channels available to them that they have now through us."

Many of Vermont's 18 craft distillers agree. Duncan Holaday is founder and master distiller at Dunc's Mill, which produces 1,000 to 2,000 cases of rum annually from its St. Johnsbury distillery. When he opened his first distillery 17 years ago, there were virtually no other small spirits producers in Vermont, and the DLC "didn't know what to do with me."

Since then, Holaday has helped other artisan distilleries get up and running; he founded Vermont Spirits Distilling Co. in Quechee and designed the original still at Caledonia Spirits in Hardwick, which has since been redesigned and updated.* While Holaday admitted he's "no expert on liquor control," he said the DLC has been "a very positive force" for the growth of small producers, enabling them to get on the shelves of Vermont liquor stores alongside multinational brands.

"I like where we are now," he said. "I think it's been a good thing for Vermont to be a control state."

Todd Hardie, founder and owner of Caledonia Spirits, said the DLC has been "incredibly responsive" to the needs of Vermont producers, allowing them to sell from their own premises and at up to 10 different farmers markets each year. He said it would be a mistake to mess with a system that has brought "fair prices for consumers" and "careful regulation and control to a product that deserves to be managed carefully." Jettisoning that system for private industry, Hardie concluded, "would only hurt our state."

Michael Hodge, national sales manager for WhistlePig Rye Whiskey in Shoreham, agreed that the DLC's support for Vermont producers has been "really spectacular" in encouraging growth in his company's sales — from 1,000 cases in 2010 to more than 16,000 today.

But Hodge, who markets WhistlePig in 30 other states as well as Canada, the UK, Taiwan and Australia, all of which have different regulatory models, also acknowledged downsides to the control-state model. They include the "blessing and curse" of standardized pricing statewide, which doesn't allow consumers to shop around for bargains.

Additionally, because Vermont's bars and restaurants must buy their liquor directly from the state, Hodge said it makes it more difficult for him to get WhistlePig on the shelves or introduce bartenders and their staff to the product.

"Most of the time," he admitted, "we don't even know where [in Vermont] WhistlePig is carried and where our best accounts are," which is information he routinely gathers in other states and countries.

Some restaurateurs see clear advantages to letting private industry take over — assuming, they caution, it's done correctly and profitably for taxpayers.

Burlington restaurateur Tim Halvorson has seen many changes since he got his first liquor license 35 years ago. Notably, Vermont's blue laws that restricted the sale of alcohol on Sundays have since been abolished.

Halvorson said he would prefer to buy his booze wholesale, as he does with beer and wine, which would make Vermonters' wining and dining experience more affordable. "I'm not someone who thinks the state does a bad job of it," said the owner of Halvorson's Upstreet Cafe and E.B. Strong's. "But if it's something the private sector can do better and save the state money, then I'd be all for it."

For his part, Hogan agreed with some of Hoffer's conclusions in the auditor's report — notably, that certain warehouse operations could be streamlined and that the DLC could do a better job of gathering more timely data on sales from store to store.

But such modernizations, he contended, can still be done within the framework of the control-state model. He points to the DLC's new, $4 million point-of-sale computer system, which is scheduled to roll out this fall. That system, Hogan suggested, will be "a life-changer" for retailers and will "make the consumer so happy."

"Really, what's the citizen of Vermont going to gain by [privatization]?" he asked rhetorically. "More problems on the roads? More underage drinking? Higher prices? Today, Vermont consumers cannot say, 'I do not have enough places to buy alcohol.'"

Correction 6/10/15: State Auditor Doug Hoffer ran on both the Democratic and Progressive tickets, not just as a Progressive.

Clarification 6/12/15: An earlier version of this article stated that Holaday designed the Caledonia Spirits still. In fact, he designed the original still, which has since been updated.

The original print version of this article was headlined "Cashing Out?"

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