News Flash! More ethics problems at the PLCB

In the "Hardly Shocking" Department...

On February 21st, an ethics complaint was filed against PLCB Director of Regulatory Affairs Jerry Waters. It is not the position of this blog to say if he is guilty or not but to report that the violation has been filed. The complaint is listed below (without the numerous pages of supporting documents).

This is yet another ethics complaint filed over the past few years on senior PLCB members, like former CEO Joe Conti, Director of Marketing Jim Short, former Board Chairman PJ Stapleton, and others.  We, the public, have been waiting for the Attorney General to release her decision for some time. Requests are met with the standard "We cannot discuss ongoing investigations" statement. There is some backroom chatter that the the violations have been referred to federal authorities; now wouldn't that be sweet?

Ohranj - We got no stinking Ohranj.

I was contacted by a licensee about why there is no Stolichnaya Ohranj Vodka in Lackawanna county.  Being a bit skeptical I looked and saw that the PLCB lists 4 different bottles available. #7188 is a closeout and the system says there are 0 in the county which makes sense. The replacement for #7188 is #3060 which is shown to be in 2/3rds of all the stores in the state....unless you live in Lackawanna county which has 7 bottles listed for the entire county but the licensee says there isn't any. I called one of the stores and sure enough the inventory says they have 2 but the physical check says they don't.

Next up is #9562 which is a 1L size bottle that the PLCB purposely fucks the citizens of the state over by not having it available anywhere but the border stores that are designed to keep people from going out of state for better prices and selection.  Not having a outlet store Lackawanna county doesn't get these so the licensee is out of luck there. Lastly there is the 1.75L size #6906 which is shown to be in 280 stores unless you live in Lackawanna county where there is none. 

Now the PLCB went 158% or $66 million over budget to get this spiffy inventory system in place so orders could be processed better and inventory tracked. They use a socialist system where everything is centrally planned out of Harrisburg and the stores are told what they will be getting so it really isn't the stores fault the product isn't available it is the PLCB's.

I understand that stores run out of product but we are talking about all 13 stores in an entire county.  This would NEVER happen in a private system. Chalk yet another one up under the FAIL column for state control.

Where the PLCB Money Goes: Then and Now

Let's have a look at what the PLCB has done with its money -- our money -- since the new millennium has started.

Fewer stores, more employees: In July 2000 there were 692 stores with 2,869 full time workers and 1,072 part-time workers In December 2013 there are 604 stores with 3,080 full time workers and 1,417 part-time workers. Stores decreased by 14.6% and employees increased by 13.5%.

Higher gross, lower margin: In 2000 the PLCB had record sales of $1,083,330,579 and record operating income of $89,868,893 or 8.30% of sales. In 2013 the PLCB had record sales of $2,171,946,398 and record operating income of $151,877,723 or 6.99% of sales a decrease of 18.6% in operating income for every dollar spent in sales compared to 2000. (Hardly surprising, given the increase in overhead represented by the previous point.)

Cost overruns: In 2000 the Auditor General found the PLCB incurred $408,000 in additional costs due to problems in Its implementation of a new computerized Warehouse Management System. In 2010 the Auditor General reported the PLCB incurred excess costs of $500,000 due to problems with the new inventory system (on top of being over budget). The inventory system was contracted for $25.8 million and as of June 2010 has cost $66.6 million, or 158% over budget.

More for ads, less for education: In 2000 the PLCB contributed 0.76% of gross from sales to drug and alcohol education.  In 2013, the biggest year they ever had, they donated only 0.66%, up from the 0.53% in 2012 (also a "record year").  The PLCB doesn’t release how much they spend on advertising, but what they have released indicates they spend 30-40% more on advertising than education.

More booze, less enforcement: In 2000, the PLCB gave 7.39% of gross from sales to enforcement of the liquor code.  In 2013, the PLCB only did 6.19%, a shortage that works out to over $5 million less for enforcement. So even though the number of licensed establishments increased and the population increased, there was less liquor code enforcement. State stores still aren't checked at all for compliance.

More embarrassment, less arresting? In 1992 the Auditor General reported that: "Policing bootlegging and illegal importation of liquor without payment of Pennsylvania taxes should be the primary mission of the liquor law enforcement personnel."  In 2013 there were 2 reported cases of “bootleggers” caught. It could be that the more support for privatization there is, the less border enforcement takes place...since that would highlight the huge problem of people who purchase out of state. It might have something to do with the $5 million the BLCE doesn’t get since they were no longer funded at year 2000 levels too.

Same lack of relevant experience: In 2000 no member of the Board has had any experience with running an enterprise anywhere near the size of the PLCB.  That hasn’t changed at all in any year since and they still only work 21-22 days a year.

"Multiple weaknesses" in procurement: In 2000, the Auditor General reported that: “Weaknesses exist in the administration of the Pennsylvania Liquor Control Board's warehouse management system consultant contracts.”  In the 2010 Audit the Auditor General reported that: “…multiple weaknesses in the PLCB award process, including lack of documentation. As a result we could not verify the PLCB adhered to proper procurement standards or exercised proper due diligence in awarding the contract.” (Remember that one of the PLCB “modernization” plans is to have less oversight in procurement.)

The PLCB has not changed in the fourteen years since 2000...except to be a larger bureaucracy with less customer service and more problems, that spends less on its very reason for existence: control. The problems are systemic, pervasive, and totally ingrained in the PLCB's processes and workforce. They won’t be fixed until the entire system is replaced with privately-run wholesale and retail operations -- as it is in the majority of other states and countries -- and they are able to fully concentrate on regulation, compliance, and enforcement, and not sales.

Privatization is Modernization – accept nothing less.

Modernization wouldn't do what the consumer wants -- Part II

Today we are going to look at some other parts of so called “modernization;” increasing the licensee discount from 10 to 18% and variable pricing.  Notice that there is nothing mentioned for the consumer, even though they spend 2.8 times as much as licensees. Why?  Because licensees contribute larger sums than regular people, and since they don’t complain too much, you don’t have to pay as much attention as you do to what the citizens want. Pretty much saying, “to hell with standard practice, no case discounts for you!”

Based on last year’s PLCB sales numbers to licensees, an additional 8% discount would come to around $24,250,000. Where does that money come from?  It isn’t taxes since they are added in before the discount. Everything else stays the same since the discount doesn’t affect inventory or salaries or other costs...so it has to come from what the PLCB calls "profit" (what we know to be taxes that they just hadn’t happened to spend yet). Let’s look how that $24 million ties into the big scheme of things. To do that we have to do some math.

The PLCB had “profits” of $128,356,057.00 after the transfer to the PA State Police, but before the General Fund transfer. I'll be rounding the numbers from here on so they may not match exactly.
According to the PLCB talking heads “modernization” will increase this amount by $75-125 million depending on who you listen to.  Since there is a 66% difference between those two numbers, I’m not sure how accurate their guesswork is. In any case, let's use $100 million and add to that the $24 million that has to be made up from the proposed additional discount for the licensees to bring it to almost as much as they make now. The new total for operating income after PSP transfer is $252.4 million. Add to that number $387.6 million in operating expenses and you get $640 million in gross revenue from sales needed if this happened this year. 

But it didn’t happen this year so let us estimate what next year might look like.  I’ll say that sales will increase 5% to $2.28 billion which means that Sales Tax and Local Taxes will be about $135.8 million leaving $2.14 billion.  From that the 18% liquor tax ($327.2 million) will come out giving us $1.82 billion as sales net of taxes.  Historically cost of goods sold is about 69.5% so I’ll use that. COGS would be $1.26 billion leaving us with $554 4 million

However we needed $640 million leaving us $85.6 million short and I’m being generous since I didn’t put in any increase for expenses. Now the PLCB just can’t raise prices of X number of products by $85 million and call it even.  They have to raise prices enough so that after all expenses and taxes come out they have $85 million extra left over. Remember they had to sell almost $2.2 billion last year to get $128 million, so working off of that, they need to sell $3.8 billion worth of product to get to $252 million and we know that isn’t going to happen. They could raise the markup 65% or they could reduce costs by closing 25% of the stores and I don’t see that happening either. So they have to get the money from somewhere and “Variable Pricing” is one of the places they say it will come from. Not all of it but certainly a large portion.

Just what is the PLCB version of variable pricing?  Unlike a pure model the PLCB has to keep the prices the same state wide instead of regionally, by neighborhood or even by store. Also, unlike other variable pricing models of commodities, the consumer has no negotiating power other than to drive to New Jersey (which they probably should have done to begin with). Think Airline tickets if you need another example of variable pricing.  The price changes by demand, time of day, competition and other factors so while you may pay $200 for that round trip to Orlando, the next person could pay more or less.  

Now I don’t give the PLCB credit for being able to change pricing in real time as the airlines do.  They don’t have a good history with computerized things. The intent is the same though.  Lower prices on slow moving items to get them out or move a specific volume of items, and stores may strategically raise prices on more popular or high demand items when possible to increase profits.  A good overview is here. Something the PLCB should pay attention to: “When variable pricing can be tied to differences in costs of doing business, different prices can be justified; otherwise, brands run the risk of being seen to be opportunistic and unfair, likely damaging their reputations.”

I don't have any idea how many or how much prices will have to go up to get near that magical $85 million extra (and I don't think Senator Ferlo really does either), but it isn’t a small amount, considering that the PLCB only clears an average of 92 cents per bottle and it would have to go up to $1.80 per bottle if applied evenly and we know it isn't going to be applied evenly. Maybe some other things will reduce that or maybe not.  I’ll look further into some other “modernization” statements in another installment.

Privatization IS Modernization, accept nothing less.

Let’s talk Turkey

Turkey -- 98% Muslim, a religion that forbids alcohol consumption. By far the lowest per capita alcohol consumption in the EU (Turkey is currently an EU candidate) at 2.7 liters per person aged 15 or older per year. The current population is 74 million people. There are over 200,000 places to buy alcohol beverages (according to Turkey's major newspaper, Hürriyet Daily News), but we'll round that DOWN to 200,000. That gives this relatively abstemious Muslim country a retail outlet for alcohol beverages for every 370 people.

Pennsylvania -- Generally considered Christian in religion; 42% do not claim to belong to any major church. Roman Catholics are the largest religious group, just under 4 million, but there are significant numbers of Protestants who belong to churches that frown on drinking, and some that outright forbid it. Per capita consumption is just under 4 times that of Turkey at 8.2 liters person aged 14 or older per year. The current population is 12.76 million people. There are 600 State Stores, about 1200 beer distributors, and 17,735 active liquor licenses (restaurants, delis, clubs, resorts, hotels, etc., according to the PLCB's own online database), or a total of 19,535. We'll round that up to 20,000, even though many liquor licensees do not exercise the option sell takeout (most restaurants, for example); we also have to recognize that the great majority of these are allowed to sell takeout beer only. That gives this modern, progressive, Western state a retail outlet for alcohol beverages for every 614 people. That's about half as many as in the Muslim country of Turkey (where ALL the stores are privately owned). Makes you wonder how and why Turkey has a lower alcohol death rate and lower DUI rate than PA with all those places to buy alcohol.