PLCB "buying power" a myth

This is the single most important piece of information I've written about.

The House appropriations committee had the PLCB in for their annual hearing on February 25th, and besides the normal tap-dancing that they do ("Well, sir, it's my personal feeling that we'll meet those goals, yes"), the Chairman of the PLCB let it slip out that the PLCB doesn't really have any buying power.

Ooops! In a response to a question put forth by the Appropriations Committee about where they might be able to find more income, LCB Chair Tim Holden said that because of the current 30% markup structure, the board can't negotiate for the best price. According to Mr. Holden, the manufacturer sets the price they want to sell their product for, and the the PLCB backs down from that through the 30% markup, 18% Johnstown Flood Tax, bottle fees, and whatever other charges they have that they've hidden from you, to come up with a buy price that they will pay. Unlike a real business that tries to get the best possible price and then adds on what it needs to make a profit and cover expenses.

This quote is taken from the Appropriations meeting; you can see it here, at about 2:43 in. Holden says, "People somehow believe that we have the ability to negotiate with the vendors. We have to do it proportionately so we have to have a markup that's consistent. And we believe that the money that can be made by negotiating a better price on different products is where the greatest amount of [increased] money can be achieved."

A little later, Board member Mike Negra backs him up, even more clearly: "The manufacturer sets the MSRP, the manufacturer's suggested retail price, and through the system it's backed down to determine what we pay for that product. Not necessarily your typical retail relationship between us and the manufacturer. We can't really leverage our ability of purchasing, our 'buying power' is not really leveraged in that manner. There are significant dollars, we believe -- it'll take a lot of time, it'll take a real learning experience for our vendors and for our buyers to change that." Remember: Negra is the first Board member in a while to have any actual retail experience!

Now I can understand why the lazy way is taken. It is less work for the PLCB if they don't negotiate every price. But I have yet to find any justification in the Liquor Code for the attitude that they can't negotiate for the lowest price, which is what the board members are saying here. That reasoning seems to go against the what the Code says the Board should be doing already. The Code says the price has to be "proportional," not that it has to be proportional from the MSRP or that it can't be negotiated.

Section  2-207 (b) of The Liquor Code under General powers of board says: "Prices shall be proportional with prices paid by the board to its suppliers and shall reflect any advantage obtained through volume purchases by the board." Isn't that the definition of 'buying power'? If they aren't negotiating prices, which the Chairman says they are not, just how are they leveraging their volume purchases beyond what the vendor says they will give? As Negra admits, they aren't.

I'm going to say this in really big letters so you can't miss it.

There is no volume discount on standard stocked items, because the goal is to sell them at MSRP.

If you are the 2nd or 3rd largest retail buyer of ANYTHING and don't try to get a better price, then the entire organization needs to be replaced, eliminated, done away with for sheer incompetence.

The board not only doesn't want to save you money, they want to take away what money they could save you by negotiating lower prices by using the nebulous "flexible pricing" they want as part of "modernization." Believe this: "flexible pricing" means negotiating a lower price and still charging you the higher "MSRP" they charge now, and keeping the difference. At the PLCB, they don't care about the consumer. All they care about is covering their ever-increasing expenses so they can keep the boondoggle machine running at full speed.

Do we really need this? Privatize and let real businesses try to save you money by being in competition with other businesses, because they're motivated to keep you as a returning customer...rather than knowing that you have to come to them because that's the law.

Honestly? Sometimes you have to wonder how stupid we all are for putting up with kind of crap for eighty years.

Monopolies are bad for consumers. Don't believe me - believe them.

I have been pushing the fact that monopolies are simply bad for the consumer the entire time I have been on this blog. It's not something I made up. Anybody who has taken any college level Econ course has heard the same thing. Here are some of the giants of Economic theory and their views on the subject of monopolies, and on governments trying to regulate virtue or morality.  If you only read the first one you'll get the basic idea, but the rest are interesting in their own way too. You'll not find a single Nobel Prize winner in Economics who believes that any Government retail of a legal product is good for society

Milton Friedman - University of Chicago: Nobel Prize winner.
“Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government — in pursuit of good intentions — tries to rearrange the economy, legislate morality, or help special interests, the cost comes in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”

"One of the great mistakes is to judge policies and programs by their intentions rather than their results.” 

“A major source of objection to a free economy is precisely that it...gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”

"Governments never learn. Only people learn"

"Less government intervention, not more government intervention, is the most effective way to protection consumers against monopoly power. "


Jean Tirole - Toulouse University in France: Nobel Prize winner.
"Many industries are dominated by a small number of large firms or a single monopoly. Left unregulated, such markets often produce socially undesirable results — prices higher than those motivated by costs, or unproductive firms that survive by blocking the entry of new and more productive ones." (This clearly applies to the beer oligopoly in Pennsylvania as well.)


Murray Rothbard - S.J. Hall Distinguished Professor of Economics, UNLV
"No government enterprise can ever determine prices or costs or allocate factors or funds in a rational, welfare-maximizing manner. No government enterprise can be established on a business basis even if the desire were present. Thus, any government operation injects a point of chaos into the economy, and since all markets are interconnected in the economy, every governmental activity disrupts and distorts pricing, the allocation of factors, consumption/investment ratios, etc."

  
Friedrich August von Hayek - University of Chicago: Nobel Prize winner.

"Freedom granted only when it is known beforehand that its effects will be beneficial is not freedom."

"To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm."

George Stigler - Columbia University: Nobel Prize winner

"The state — the machinery and power of the state — is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries."

Sir Richard Stone -  Cambridge University: Nobel Prize winner

”When the American spirit was in its youth, the language of America was different: Liberty, sir, was the primary object.”

I could do pages upon pages more but let me finish with the man who is credited with starting economic theory.

 Adam Smith - Author of  'The Wealth Of Nations'
"Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience."

So write your legislators, especially those who want to keep our ancient system, and particularly the Governor and ask them why they think they know better then these august and honored economic thinkers. Feel free to copy any of this material; this knowledge is not a monopoly.

We're better off privatized

After four years, I think it is safe to say that the liquor market in Washington state has settled down. Like everything else that is sold, big stores offer more and small stores offer less. People will pay more for convenience and pay less when buying quantity. Not every store is the same, which is a big change from the old state stores; just as it will be here.

How's Washington doing? Since the unions always make this about money, let's look at that. According to The Herald Business Journal total sales volume has increased 21%, and that doesn't count the couple of percent increase in border bleed. Border bleed isn't a product of privatization, Washington has always had it. It's no surprise, they've had higher taxes, and therefore higher prices then the adjoining states of Idaho and Oregon for decades. However, it isn't like the border bleed that Pennsylvania has; the population is smaller and there are no major population centers near the borders. An entire year of Washington border bleed is about a month's worth of what Pennsylvania loses.

How do we know this?  The states bordering Washington tell us that their sales have increased 7% after Washington privatized (and the booze taxes were jacked). For Idaho, that would be about $11.7 million and for Oregon about $34.8 million, or a total of $46.5 million per year being lost out of state after privatization.

In contrast, PA has at the very least $230 million in border bleed in just eight counties, and that was five years ago according to the PLCB itself.  Extrapolating for the entire state using the Pennsylvania Food Merchants Association or the Wine and Spirits Wholesalers of America studies puts it closer to $500 million, or almost eleven times Washington's border bleed.

Sounds pretty bad, right? Let's hope that our politicians get it right and don't raise taxes when the state stores are privatized. Will convenience go up? No doubt. Will selection increase? Overall, yes, though not everywhere; the State Stores won't be charging Philly to have a full wine selection in Potter County. Will border bleed decrease? Certainly: if you make a product easier to buy locally, people will buy more locally. Look at Washington: even though there were 27% in added 'fees,' sales still increased 21%. If PA doesn't raise taxes that number will increase, and even a few percent more as border bleed decreases.

What do we need to replace financially? $110 million, give or take, which includes State Police funding, Drug and Alcohol education funding, and the average amount turned into the general fund for the past 5 years. Last year the PLCB collected $334.4 million in Johnstown flood tax and $130.2 million in sales tax. A total of  $464.6 million. If sales go up 25% then taxes collected go up 25% too and 25% of $464.6 million is $116.15 million. Done! The PLCB "profit" is replaced!  But there is more.

Every place that has fully privatized has tripled employment in the industry. New owners will be paying business taxes the PLCB doesn't pay, they will be paying license fees the PLCB doesn't pay, and they won't be looking to the taxpayer to address any future shortfall in pension and medical. You won't have as much bureaucracy to pay for, there won't be some unqualified person deciding what the entire state is allowed to buy, there won't be the graft and corruption of state employees, there won't be people who thought kiosks were a good idea, there won't be state stores trying to hide behind 4 different names and there won't be the PLCB as we know it now. Certainly a good thing.

What there will be is NORMAL. Or at least far closer to normal than what we have currently and normal is good. Just ask the majority of the population how much better free enterprise is over state monopoly.

Here We Go Again (Except We Haven't Finished the First Time Yet)

Governor Tom "Hack In Training" Wolf presented his new budget proposal yesterday, in the unique position of not having his budget from last year passed yet. That's right; although parts of the budget have passed, arguably the most important parts — education funding and the tax increases Wolf sought to pay for such increases (and for what he said were structural deficits in Pennsylvania's ongoing budget) — have not. The budget for last year is incomplete.

Angry Tough Talking Governor Tom!
(I know, I know, but...at this point, what's the difference?)

Why is this? Wolf, in a questionable display of hopping up and down and spewing campaign-level bile, has blamed it all on the majority party in the General Assembly, Republicans who failed to "compromise." The Republican leaders in the legislature, who don't actually appear to be leading their caucus at all, blame it all on Wolf, who they say failed to "compromise." Both of them seem to think "compromise" means "shut up and do it my way." (Meanwhile, the Democrats in the GA seem to have gotten off scot-free in this, largely because they are irrelevant except when it comes to sustaining Wolf's veto.)

This is an appalling embarrassment, but that's not the problem we need to talk about here. Here we need to talk about liquor normalization. That's the whole point of this blog, after all. So let's figure the odds that we'll get liquor privatization this year. I'm not a pollster, so don't expect accuracy...ha ha ha, jokes like that crack me up!

Cons: First, and always, there will be concerted, well-organized and well-funded opposition from the unions involved. That includes all the money and staffing they contributed to the Wolf campaign, and they expect payback; they've been getting it so far with plenty of hardheaded stonewalling on liquor privatization, and one outright veto. There's a limit to everything, though, and we may find the union's limits this time around. As an angry union guy once told me, we only have to win once. They have to win every time.

Second, the main problem is compromise. Privatization isn't privatization as long as there is a state-owned monopoly on retail or wholesale wine and liquor sales. There are several ways the Legislature might "compromise" on this. The worst would be one of the "modernization" plans. This would, as we've explained many times, be worse than leaving things as they are now, because the keystone of "modernization" is the innocuous-sounding "flexible pricing," which is free rein to raise prices any time they want. That would be a consumer disaster. They could allow wine sales in supermarkets, much like beer sales are today, but that would require jiggering the current law to such an extent that you have to ask: wouldn't it be simpler to just fix this? Then there's the possibility of privatizing retail but not wholesale, or wine sales but not liquor, or some combination of the two. The first means some group of bureaucrats in Harrisburg still decides what booze we're allowed to buy; the second means that liquor buyers are second-class citizens.

Third, it's an election year, and the legislators are going to be skittish. They're going to try real hard to get through to November without doing anything major. Which is, of course, exactly what they've done for the past year. I think it would be a good idea to press the Legislature to present the Governor with a finished budget ahead of time, say in early June, and not waste a bunch of time in the Spring, like the always do. But the timing of an election year makes privatization less likely...even though the chances that a vote on privatization will not have much effect on any legislator's reelection.

Pros: There's still the possibility of a Grand Bargain, a higher-level compromise where Wolf gets what he wants, and the Republicans get pension reform and liquor privatization. Unfortunately, what Wolf wants, mainly, is tax increases, and that's going to be a hard, hard sell...in an election year.

Anything else? Yes, increasing pressure from the public. They've learned a lot about the issues in the past year, and expectations are high. They'll put the pressure on; our job is to help. We'll keep finding the stupidest things the PLCB does and stands for, and feed you the ammunition you need to get the job done.

Budget? Does it really matter what Wolf wants? The important question is what he's prepared to give to get it. Cross your fingers.

World Class? The PLCB doesn't even carry the top selling liquor in the world.

Edit: It turns out that the PLCB does carry one brand under the ByeJoe brand name as an SLO (qty 6) and it is listed as "DISTILLED SPIRITS - OTHER (IMPORT)" rather than Baijiu which is the same as listing Jim Beam as Corn Whiskey and not Bourbon. The point of the blog remains true.
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When you are the arbiter of everything liquor you have to be extraordinarily aggressive at supplying the wants and desires of ALL the population. If you're the only source, after all, they have no other recourse, so you need to go out there and get the products the public wants and not what you feel like supplying!

Or you can just be extraordinarily passive and only do the minimum because you don't have to put forth the extra effort. You don't want to keep track of all those things because you have a hard enough time with what you do carry.

We live under the latter here in PA. Case in point. The PLCB doesn't carry the largest-selling liquor in the world.  Nowhere in the entire state: not on the shelf, not SLO, not on the crappy website. If you visit other states, does every private liquor store carry it? Certainly not, but then, they don't have to fill the wants of an entire state, either. Do other states carry this item that the PLCB has deemed not worthy to offer the citizens? You better believe it. I found it in New England, the mid-Atlantic, the South, and the West without too much trouble; in private stores, I might add. The control states like Pennsylvania fared pretty poorly.

You may be wondering how the PLCB can claim to be "world class" in their selection (which they claim often) when they don't have the wold's biggest-selling category of spirits. Simple: they aren't, since there are hundreds of stores in the country that carry more products on the shelf than any state store. The PLCB fudges their numbers claim by counting items you can order from private distributors....just like anyone in the real world of retail can do too. The fact is that the PLCB's on-the-shelf selection is beaten soundly by many stores all over America including many in other control states.

Have you figured it out yet? You may have: the mystery product is Baijiu, the largest-selling liquor in the world not only by volume, but value too. It's acknowledged as the national drink of China. There are seven times as many ethnic Chinese in Pennsylvania as there are ethnic Japanese, but you'd never know that looking at the shelves of the state stores. Perhaps Chinese restaurants, of which there seem to be quite a few around, might want to serve traditional liquor with their meals...just not in Pennsylvania where they have no selection, no choice, no freedom, and no voice in changing things.

Sorry, you'll have to go to Jersey. Again.

Lack of selection and market knowledge is one of the many prices that Pennsylvanians pay for by keeping the PLCB. Another is agility or the ability to spot trends and market forces and react to them. When you are a government agency more interested in how many more years you have to hang on until retirement, keeping up with or leading your competition doesn't enter the picture. You have no competition and don't care if you keep up with the private sector, because your citizen prisoners can only buy what you decide to let them buy anyway.

You'll get what we allow you to get when and if we allow you to get it.

The time has come to rid ourselves of this third-world class mistake and let the free market satisfy the wants and needs of the consumer, like they do for almost everything else you buy.