Opinion: Why Does Montgomery Still Have County Liquor Stores?

One word is key: politics

Editor’s note: The views expressed in MoCo Politics are the writer’s and do not represent the staff of Bethesda Beat.

Longtime defenders of Montgomery County’s liquor monopoly state one primary reason for supporting it: It makes money for the county budget. The monopoly is projected to add $28 million to the county’s general fund in Fiscal Year 2020 and pay off an additional $9 million in debt service.

The monopoly has two main components: a wholesale side that handles distribution of nearly all alcohol to county retail and restaurant licensees and a retail side that operates county dispensaries with exclusive rights to sell spirits. And now it has been revealed that, on paper, the retail stores are losing $5 million a year under a new accounting system that applies the same markup fees that private stores pay.

If many county liquor stores are not profitable under this system, why do we have them at all?

Before we answer that question, let’s consider that the stores’ losses are occurring even though the monopoly has been protecting them in the following four ways.

Use of Part-time Employees

In Fiscal Year 2015, the monopoly dramatically expanded its part-time positions to 155, up from 63 in the prior year. Full-time positions rose from 254 to 255 and full-time equivalent positions declined from 338.82 to 336.82.

The vast majority of these part-time positions are found in the retail stores. In the county’s 2018 employee salary file, there are 123 part-time liquor store clerks and 46 full-time liquor store clerks listed.

Part-time liquor clerks averaged salaries of $33,720 and gross pay of $40,425. Full-time liquor clerks averaged salaries of $52,553 and gross pay of $57,224.

The monopoly’s heavy use of part-time workers in its stores helps it keep a lid on labor costs even in the face of generous union contracts. But it undermines one of the rationales in favor of the monopoly, the allegation that it creates “good union jobs,” because the monopoly’s part-time clerks earn poverty-level wages that are some of the lowest in county government.

The 80 Cent Fee

In the private sector, ordering by case is customary. But private wholesalers will deliver individual bottles in return for payment of “case break fees” to reimburse them for the cost of processing small orders.

MoCo’s monopoly does not break cases on deliveries, but licensees have the option of buying individual bottles at the monopoly’s retail stores. Last spring, the monopoly complained about licensees allegedly using its stores as “mini warehouses” and imposed an 80-cent-per-bottle fee for spirits and wine to protect the stores’ financial results. (The fee is structured differently for beer.)

The fee itself is not unusual; private wholesalers charge individual bottle fees, too. The difference is that private wholesalers deliver the individual bottles in return for the fee while the monopoly expects MoCo licensees to pick up the bottles at its stores.

In essence, licensees are now subsidizing the monopoly’s stores — with which some of them compete! — and bearing the costs of the monopoly’s inventory challenges. One licensee told Bethesda Beat, “Do the job correctly and build more space. … If you can’t do it, then privatize it.”

Preventing Competition in Spirits Sales

In 2017, then-Del. Charles Barkley sponsored a bill that became a state law allowing the monopoly to contract with private retail licensees as “agency stores” to sell spirits.

This would have had the effect of eroding the monopoly’s total control of retail spirits sales, but it would have helped private retailers who wanted to sell spirits and the monopoly would have kept its wholesale profits. The law was in part a response to findings that the county was dramatically underserved by spirits outlets.

But Barkley made a major mistake — he allowed the monopoly to control the process of designating agency stores. Two years later, no agency stores exist in the county.

The monopoly’s stated logic for this is twofold.

First, if one private store was allowed to sell spirits and its nearby competitors were not, that store would have a huge competitive advantage. The monopoly would in essence be picking winners.

Second, if all the stores were allowed to sell spirits, then the monopoly might say there would be “a liquor store on every corner.” (Forget about the fact that the county’s Board of License Commissioners can limit liquor licenses regardless of the monopoly’s operations.)

So by the monopoly’s logic, no agency stores are possible. Those who believe that the monopoly can incrementally reform itself should pay attention.

The net effect of this decision by the monopoly is to protect its ironclad control over retail spirits sales. If the monopoly’s retail stores are losing money despite having that advantage, how much money would they lose without it?

Threatening Minimum Case Orders

On Aug. 15, the monopoly stated the following in an email to its licensees:

ABS is asking for your cooperation when it comes to the number of cases ordered per delivery. To avoid having a delivery case minimum in the future, we are suggesting that licensees order a 6-case minimum of beer (any combination of stock and/or special) or a 4-case minimum of wine and spirits (any combination of stock and/or specials). This will allow ABS to keep delivery costs reasonable as it is not financially feasible to routinely deliver extremely small orders (e.g., one case orders).

Once again, the monopoly is threatening to make its licensees bear the costs of its inventory and delivery challenges. Large licensees might have no problem making case order minimums.

But small licensees would have a tough choice. Either they could find a way to acquire enough inventory space to meet the minimums or they could buy products at the retail stores and pay the 80-cent-per-bottle fee instituted last spring.

Either way, the monopoly wins and under the latter option, its retail stores would earn more money.

So if the county liquor stores are not profitable, why not just get rid of them? Well, it’s complicated.

Right now, licensees use the stores as a backup for the monopoly’s wholesale delivery system. If something goes wrong on a delivery or licensees want to buy less than a case, they can buy products at the stores.

Without the stores, they would either have to drive to the monopoly warehouse in Gaithersburg or wait until the next weekly delivery.

In other words, if the stores shut down now with no alternative in place, licensees would actually be worse off than they are today. They would have to be given the option to contract with private wholesalers who would break cases and deliver, which former Del. Bill Frick’s 2016 bill would have allowed with voter approval. But every county elected official opposed that bill except for then-Council Member Roger Berliner.

While council members are right to be concerned about the county stores, here is an awful truth: They have absolutely no power over the monopoly.

The council is told each year by its own staff that “policy decisions of the DLC [liquor monopoly] Director are subject to exclusive authority of the County Executive.” In stating that view, council staff relies on a 1997 opinion of the Maryland attorney general noting that the monopoly was created under state law, which preempts all county charters. The opinion states, “… Whatever might be the ordinary allocation of decision making authority between the County Council and the County Executive under the Montgomery County Charter, in this instance the exclusive authority to approve the exercise of the DLC’s powers rests with the County Executive.”

The council staff interprets this opinion to extend to the monopoly’s budget, saying “the Council traditionally provides general commends on the DLC budget (Working Capital Plan) rather than recommending increases, decreases, or deferral of particular line items.”

In other words, none of the council’s legislative or budgetary powers apply to the liquor monopoly. Only the executive or the state may direct its activities.

And so the reason why Montgomery County still has county liquor stores primarily boils down to one word: politics.

Safe from any action by the council, licensees or consumers, the stores are in no serious danger at the moment. If the monopoly chooses to answer the council’s letter, it will promise improvement, as it has done countless times in the past.

But let’s get down to brass tacks. The executive has given the monopoly a mandate: Make more money. And since the county employee union will never accept the loss of more than 200 retail store jobs and the executive owes his election to the union, there is only one way to make the stores more profitable: by squeezing licensees and their customers even harder than the measures outlined above.

The council can’t stop it.

The only alternative is to end the monopoly.

Adam Pagnucco is a writer, researcher and consultant who is a former chief of staff at the County Council. He has worked in the labor movement and has had clients in labor, business and politics.