Why Proposed Privatization Effort In Pennsylvania is a Sham

In the summer of 2010, I appeared on the Fox Business Network to engage PJ Stapleton, Chairman of the Pennsylvania Liquor Control Board in a debate over the installation of wine kiosks in supermarkets in the Keystone State.  I argued that installing wine vending machines was a half-hearted attempt to deliver wines to the public outside of the state-run stores.  And less than a year later, the vending machines were scrapped due, for the most part, to technical issues. In addition to arguing that these machines would not drive demand for one-stop shoppers, I believed that the machine’s inventory had a limited number of choices and consumer’s choice was being restricted.  Restriction of choice seems to be the modus operandi for Pennsylvania’s state controlled liquors system.  However, with the introduction of House Bill 11, lawmakers in PA are taking steps modernize and effectively privatize wine distribution.  Except that this bill might be the most restrictive piece of regulatory legislation to affect Pennsylvania wine consumers yet.

As Stacy Brown writes in the PA Independent writes, “House Republicans set aside plans to privatize all liquor stores in favor of a hybrid blend that would allow some competition for wine sales while maintaining the Pennsylvania Liquor Control Board’s long-time monopoly on liquor.”  Sounds like a fair deal for wine consumers so far.  However, the catch is that the bill will, “allow the state to sell wholesale wine licenses for $100 million each.”  If you aren’t up to date on fee structures for wine licensing, aspiring distributors in New York State pay $5,000 for similar licenses and their counterparts in New Jersey pay a bit more.  That’s right – the same license that can be purchased in New York and New Jersey for the price of a used car will cost distributors in Pennsylvania one… hundred…. million… dollars.

Such a high price tag begs the question, why even offer distributors the opportunity to buy a license as nearly every distributor who is currently selling wine to the Pennsylvania Liquor Control Board wouldn’t be able to afford a new license at the proposed price?  Because the princely sum of $100,000,000 almost guarantees that the state run monopoly system will be replaced by another monopoly – perhaps a national distributor who has deep enough pockets to pay the sum and control the wine distribution system alone as many of their smaller competitors lose the right to sell their wines to the newly “privatized” wine stores.  Perhaps this national distributor, who controls markets – in some instances, say the size of Las Vegas, has enough capital to lobby local, state and even Congress, might in fact be the driving force behind the proposed legislation in Pennsylvania?

As for retail licenses, they would be sold for a more reasonable $50,000 apiece, which is a bargain compared to some of the insanely high prices set across the Delaware River in New Jersey.  That fair of a price for a retail license seems to give plenty of incentive to would-be wine shop owners to open up neighborhood stores in all corners of the state.  After all, the best wine shops, big and small, in New York and New Jersey are family owned and operated stores that serve not only as a place to pick up a great bottle, but also provide a locus of community where friends, family and regulars gather to find new, curious and interesting juice to bring home.  However, what if I proposed that a large, regional discounter was also lobbying lawmakers in Harrisburg to keep the price of retail licenses at a low level in order to buy as many as they could when they become available.  Hypothetically, this regional chain would open up as many as hundred or more big-box stores throughout PA and in doing so, would essentially replace the state run locations with neon signs, ‘discount prices’ and selections provided to them by, you guessed it, the only distributor who could possibly afford the license to do so.  And since this chain would dominate the Pennsylvania retail wine landscape – prices on these products would essentially be fixed – and just as you guessed again correctly, as they are fixed now (at much higher prices than neighboring states, by the way), by the current state run monopoly.

Unless House Bill 11 is amended to include a provision that grandfathers in distributors who are currently doing business in Pennsylvania, this ‘privatization’ effort will amount to nothing more than a sham that will continue the fleecing of the PA wine consumer.  Though the proposed bill claims the jobs currently filled by employees in the state run stores will be preserved, consider the number of jobs that will be lost as distributors who are not able to continue business in PA will be forced to cut back their sales and office staff.  Pennsylvania is a key market for more than a few wine distributors and if their pipeline dries up, in all likelihood they will be forced to make changes to their business plan that will have a negative impact on more than just Pennsylvania, but in other markets as well.

Distribution systems, especially those involving alcohol, can be problematic and imperfect.  However, the most efficient systems are those that give the consumer the ability to purchase what they desire at a price they deem fair.  If they think Cabernet ‘A’ isn’t worth the price at their local store, they can choose that wine at another store that has better pricing.  Or they can try Cabernet ‘B’ to see if it represents a better value than Cabernet ‘A.’  Therein lies the fun of buying wine – finding great values at your local store.  I am afraid that if House Bill 11 passes in its current form, wine consumers in Pennsylvania will not have any more freedom of choice than they have now as politics and big money replace one monopoly with another.

*Schill Alert – I work for a small distributor that sells wine in the New York, New Jersey and Pennsylvania markets.  In no way was I asked by my employer to post this piece.  Like all of my posts, this piece is independent of how I make my living during the day.  All content above is my own and if I were asked to write a piece by my employer, I would politely tell him to write it himself.

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