February 26th, 2016 Letter to PLCB Chief Counsel Rod Diaz
Dear Mr. Diaz,
On Feburary 25th the House held an Appropriations Committee meeting with the PLCB. In that meeting the Chairman of the PLCB Tim Holden said that they do not negotiate with suppliers because, and this is an exact quote: "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." Later Board Member Michael Negra reiterated with "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."
Now looking at Title 47 Ch. 1. Art 2 Section 2-207 (b) General Powers of the Board, I can find nowhere that says prices can't be negotiated nor that they have to use the MSRP. In fact, the wording of the stated section, "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.". would seem to indicate that they should be negotiating to gain an advantage through volume purchases.
Given the language of the law, I'd like to know what the Board's reasoning (legal reasons, decisions, laws, opinions or whatever else pertains) is used to justify not negotiating and simply using the MSRP to determine pricing.
April 6th, 2016 -- The reply came not from Chief Counsel Diaz but from Elizabeth Brassell the Director of Communications for the PLCB. It turns out there is no legal reason after all. (The emphasis in bold is added.)
I apologize for the delay in getting back to you, but on behalf of the PLCB and Chief Counsel Rod Diaz, I’m happy to address your February 26 email regarding the PLCB’s ability to negotiate prices with suppliers of wines and spirits under the proportional pricing mandate of the Liquor Code.
You are correct that the Liquor Code does not indicate that prices can’t be negotiated or that the PLCB has any obligation to use manufacturers’ suggested retail prices. In fact, as you suggest, the PLCB’s buying power, as well as its discretion to list and delist products, allows for some price negotiation with vendors. However, any advantages obtained through volume purchases are directly reflected in the shelf price.
Because of the proportionality requirement, the mark-up applied to wine and spirits must generally be uniform across the state and across various product classes and brands. Suppliers know that, and when they present products and prices for PLCB regular listing consideration, they often start at or above the retail price at which they want their product offered on our shelves, then reverse engineer the tax and mark-up formula to get to the price at which they’ll sell to the PLCB.
It is this general listing process that Board Chairman Tim Holden and Member Mike Negra were referring to in discussing price negotiation in recent appropriations hearings before the legislature.
While the proportional pricing requirement was intended to promote flexibility when it was enacted in 2007, in reality it simply limits the PLCB’s ability to consider any factors in setting a shelf price other than what we pay vendors. Suppliers are aware of these constraints and use it to their business advantage.
We do, however, actively negotiate lower prices on one-time buys, which is how we procure products for our Chairman’s Selection and Chairman’s Advantage programs, as well as many luxury products. We believe price negotiations are a key reason one-time buys are the fastest growing part of our business.
The PLCB is charged both with offering consumers quality products at reasonable prices and maintaining and growing tax revenues and profitability for the General Fund.
In seeking a legislative amendment to Section 207 of the Liquor Code, we’d like to have a clear mandate to consider other factors in determining shelf prices, such as product class, the sales history of the product, surrounding sates’ competitive prices, national market pricing and the marketing support suppliers put behind their products. This would allow us to lower some prices and increase other prices as the market allows, thereby applying the benefit of flexible pricing as increased PLCB contributions to the General Fund.
Thank you for your questions and the opportunity to respond. Having read your blog posts and social media commentary over the years, we’d also like to invite you to visit PLCB headquarters and meet with leadership staff here. We’re always striving to improve our operations, and we welcome a productive dialogue that could help us advance. Let me know if you’re interested.
Elizabeth Brassell | Director of CommunicationsPennsylvania Liquor Control Board 604 Northwest Office Building | Harrisburg, PA 17124
|Who do you believe?|
April 7th, 2016 -- My reply, pretty much saying that if you wanted to do better...you could.
Dear Ms. Brassell,
Thank you for the reply. I really do understand that negotiation is a give and take between two parties, each with their own idea of the value of what is being bought or sold. That said, I have serious doubts that the PLCB has ever done any analysis to see if the sales increase from lower pricing would more than offset the amount collected at the current higher price thus collecting more for the state. Since increasing sales IS one of the primary goals of the PLCB, this option should be taken far more seriously than it is.
As in my example with Oregon for a 750ml of Jack Daniel's, there certainly is room in the pricing structure, since Oregon also works on a set markup, and yet the math says they have to be paying a lower price even though Pennsylvania buys more than 5 times as much. 2,422,647 units for PA Vs. 433,506 * units for Oregon.
While I realize negotiation is not possible across all the items that the PLCB stocks, certainly the top 100 sellers should be scrutinized using Sales Price Variance Analysis to decide what cost is most beneficial to the state and consumer, it isn't that difficult to do.
I appreciate your offer of a meeting but my goal is not to make the PLCB better, they have had 82 years to work on that themselves, my goal is to eliminate the state store system and have it replaced with what most of the country considers normal. A free market system that is regulated by the state. Since our goals are non-congruent with each other a meeting will not further my wants and won't shed any more light on your problems than the reading of the blog which you say you already do.
Sincerely,So there you have it. Why they say they can't or won't try to get better prices for the consumer and why I say they aren't trying. The question now is...who do you believe?