MOORHEAD-Several western Minnesota municipalities face difficult questions about whether they should remain in the liquor store business and, if they do, how they can do that profitably.

Forty percent of cities with municipal-owned liquor stores in Becker, Clay, Norman, Otter Tail, and Mahnomen counties lost money on those businesses in 2016, according to an annual state audit. Twenty-five cities in those counties have stores, but in fewer than half did those stores provide any income to the local government.

One city that faced continued losses, Audubon, has already sold its liquor store after it had been municipal-owned for more than a half-century. Other municipalities, such as Frazee and Parkers Prairie, may be forced to consider doing the same.

"At some point, we had to draw a line in the sand," said Audubon Mayor Tony Gordon. "It's been losing $10-12,000 a year just forever. We just couldn't get it in the black."

State law requires municipalities to hold public hearings if their stores report a loss in two of the previous three years. Frazee in Becker County, Barnesville in Clay County, Mahnomen in Mahnomen County, and Dalton and Parkers Prairie in Otter Tail County are required to hold hearings because of the numbers in the latest state audit.

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No city-owned liquor store in the region did worse than the one in Parkers Prairie. Parkers Prairie Liquor, which also includes a bar, lost $90,770 in 2016, the second-highest loss for any city in the state. That amount was 13.5 percent of the store's total sales. The city will hold a public hearing about its liquor store on Nov. 20.

"We've been losing money for years," said Parkers Prairie Mayor Sandra Froemming, who declined to offer any explanation for the store's difficulties.

Frazee's situation

The second-worst performer in the region was Frazee's store and bar, which lost $40,459 in 2016, 6.4 percent of gross sales. Frazee will hold a public hearing about its liquor operations at its Dec. 11 city council meeting.

Frazee Mayor Hank Ludtke said he hoped it won't be necessary to close the business, but that hasn't been ruled out.

"At this point, anything is up for consideration," he said. "I know we can't keep losing money."

Frazee conducted a study earlier this year to determine what could be done to improve the performance of the store and the bar connected to it, Third Crossing Bar & Grill. That study recommended that the bar expand its food menu. Previously, the bar offered little other than reheated frozen pizza, but now it has a full kitchen and its menu includes burgers, chicken, and sandwiches.

Ludtke said the city's liquor operation has been hurt by its location, staffing difficulties and computer issues. The computer system was recently replaced, but the store's manager left a month ago, so that problem persists.

The liquor store is poorly situated on the back side of a building, largely invisible from nearby streets. It faces an alley and, until recently, you couldn't see it from the city's two main downtown streets, Main Avenue and Lake Street, because buildings blocked its view. But three empty buildings on Main were recently demolished, significantly increasing its visibility.

"You couldn't see it before," said Denise Anderson, city administrator.

'It's never cost us a lot'

Barnesville's Fire Hall Liquors lost $8,582 in 2016, 2.1 percent of total sales. The city will hold a public hearing about the store on Dec. 11.

The city's mayor, Gene Prim, said the store has suffered because of Barnesville's nearness to Fargo-Moorhead, where liquor stores can buy in larger volumes and sell their alcohol more cheaply, as well as competition from privately owned 34 Liquor Store just outside the city limits.

Prim said that while the city store has "not made a lot of money, it's never cost us a lot." He also said it has benefits that aren't reflected in its bottom line.

"It creates jobs within the community," he said. "It gives us a handle on the liquor supply. We've done a pretty good job of keeping (alcohol) out of the hands of minors."

Many stores do well

While 10 area cities lost money on their liquor stores, municipally owned liquor stores were a financial boon to other cities.

Perham's Landmark Liquors had a profit of $413,517 in 2016, 12.4 percent of gross sales, the highest of any store in the region. The store transferred $269,250 to the city government, a remarkable 22 percent of the city's overall budget.

Perham City Manager Jonathan Smith said that the city's store has benefited from its location near Highway 10 and proximity to numerous popular lakes that attract significant numbers of tourists.

"We're pleased," Smith said. "We're pretty fortunate. We have a lot of traffic in town on a daily basis. It helps out quite a bit."

Detroit Lakes' city-owned liquor store, Lakes Liquor, earned a profit of $757,615, eighth highest of any city in the state, and contributed $554,500 to the city's budget. The store profit was 12 percent of gross sales.

Statewide, Minnesota's city-owned liquor stores produced record sales in 2016 for the 21st

straight year, $344 million, but higher costs meant profits fell 16 percent compared to five years earlier.

Liquor stores operated in conjunction with bars experienced bigger increases in costs, and were more likely to post losses. All but one of the 25 cities reporting the highest profits in 2016 operated liquor stores exclusively.

Forty-five of 196 cities statewide with municipal-owned liquor stores, or 22.9 percent, lost money in 2016. Because of persistent losses, several cities have closed their stores in recent years. There were 13 fewer city-owned liquor stores in 2016 than there were in 2007.

Municipal liquor store sales, 2016

Ranked by gross sales

Sales rank City Name Gross sales Net Income Profit/loss as percent of sales Transfers to city budget

8 Detroit Lakes $6,313,527 $757,615 12.0% $554,500

14 Fergus Falls $5,797,619 $595,462 10.3% $594,044

32 Perham $3,325,701 $413,517 12.4% $269,250

70 Battle Lake $1,395,474 $102,104 7.3% $106,500

75 Pelican Rapids $1,269,007 $151,699 12.0% $43,300

80 Hawley $1,155,098 $2,952 0.3% $5,000

88 Mahnomen $967,731 -$1,027 -0.1%

98 Lake Park $779,866 $27,750 3.6%

107 Parkers Prairie $672,526 -$90,770 -13.5%

108 New York Mills $652,937 $45,289 6.9% $54,000

111 Frazee $636,160 -$40,459 -6.4%

118 Ada $556,878 $10,923 2.0% $15,000

125 Underwood $531,649 $29,593 5.6% $20,000

129 Vergas $509,898 $5,420 1.1%

130 Twin Valley $508,209 $6,641 1.3%

139 Callaway $473,747 $33,692 7.1% $16,650

147 Audubon $407,678 -$29,932 -7.3% $9,036

148 Barnesville $407,179 -$8,582 -2.1%

152 Ulen $389,237 $6,926 1.8%

155 Elizabeth $379,029 -$388 -0.1%

157 Hitterdal $370,427 -$3,285 -0.9%

159 Ogema $366,398 $41,122 11.2%

172 Dalton $325,423 -$1,458 -0.4%

176 Wolf Lake $311,777 -$16,160 -5.2% $5,000

181 Erhard $279,285 -$3,205 -1.1%