We Regret The Error...

We make mistakes, too. 

On April 25th, we put up a post titled "Proof the PLCB is screwing us - in their own words." It was almost all about how the PLCB said it had gotten cost reductions on "almost seven hundred items" through 'flexible pricing.' We cackled with glee, and noted that Act 39 limited flexible pricing (changing of the mark-up) on only the 150 best selling wines and 150 best-selling spirits: they were either lying, or breaking the law.

Only...we got an email from PLCB Director of Policy & Communications Elizabeth Brassell, who pointed out that Act 85 (signed into law about a month after Act 39) amended that 150 "items" to "brands and product types." So instead of the best-selling Jack Daniel's 750ml as one item, Jack Daniel's would be one brand or product type, so they could negotiate the price (and raise the price to us...) on the 750, the 1.75, the liter, the 375, the 50, and any gift packs. Multiply that by the 300 best selling wine and spirits brands...and you easily have "almost seven hundred items."

We regret the error. Albert wrote the post, Lew edited it, we share the responsibility. We've always said the Almighty Liquor Code is arbitrarily, willfully complex; we got caught by it.

Our apologies to you, our readers (of which Elizabeth Brassell is obviously one). We'll try to do better in the future. In the meantime, we'll remind you that in a proper private system, the main thing affecting the margin would be competition on price for your purchases. You see how that works in other states.

Proof the PLCB is screwing us - in their own words.

Please see the "We regret the error" post of April 30 for clarification.

The last post showed how even the most basic of business math escapes the political appointees that run our anti-consumer, police-enforced, cronyistic, unqualified, graft-tainted, incompetent (I can keep going) monopoly liquor control system. But even basic math — like you learned in 2nd grade — escapes them. Check this out: they can't even count!

No fair! You said there wouldn't be any more math!

This is taken straight from the law that made recent substantial changes to The Almighty Liquor Code, including "flexible pricing" (the law is commonly referred to as ACT 39):

"The board may price its best-selling items and limited purchase items in a manner that maximizes the return on the sale of those items."  

This is the flexible screwing pricing we have been talking about. We added the emphasis, and you'll see why shortly. ACT 39 then further defines what "best selling" means.

"Best-selling items" shall mean the one hundred fifty (150) most sold product identification numbers of wine and the one hundred fifty (150) most sold product identification numbers of liquor as measured by the total number of units sold on a six month basis calculated every January 1 and July 1." (Again, emphasis added.)

So using what you learned in 2nd grade, there are a total of 300 items that can change price, 150 wine and 150 liquor. Everything else is still under the 30% markup rules as before; that hasn't changed. If the price to the PLCB goes up, your price on the shelf goes up; and if a price goes down your price goes down. Pretty simple: 150 wines + 150 spirits = 300 items affected by "flexible pricing...plus the "limited purchase items."

Now let's look at testimony given by the board at a joint legislative hearing about how Act 39 is working out...because the legislators had a lot of questions about "flexible pricing." (You can read the transcript here)

"This rigid markup structure was inefficient, resulting in missed opportunities for the commonwealth to realize additional revenue and for licensees and retail customers of the PLCB to share in cost savings."  

Share in cost savings, eh? That's important. We'll get back to that.

Reading further in the testimony of the board we find this:

"...pricing flexibility has resulted in a reduction of product acquisition costs for almost seven hundred products, retail prices decreases for more than one hundred and twenty products and retail price increases of a hundred twenty-five products." 

Okay. The law states clearly that there the PLCB could change the standard markup on 300 of the best-selling products. Of that 300, prices went up on 125 of them, leaving a maximum of 175 prices that could be reduced or unchanged. Of that 175, approximately 120 went down, leaving about 55 unchanged, or at least in an unknown status. That's all that are allowed to be changed under the law. However, the board said that costs went down for 700 items: 700 minus the 120 items that were lowered in price...means 580 items didn't get reduced.

The Chairman said "Immediately after the effective date of Act 39, we began using the flexibility we were afforded in pricing our limited purchase items, including luxury products sold in our Premium Collection stores, Chairman's Selection, and Chairman's Advantage products, Wine Club items, and products in our e-commerce portfolio. We have always been able to negotiate with our suppliers to obtain great values on these products, but with Act 39, we  have been able to price each item as appropriately based on our supply and anticipated demand and current marketplace conditions."

Math - The PLCB way

Those 580 items that didn't get reduced couldn't be any of the things the Chairman mentioned here, because he said they already had negotiating power over their costs, and ACT 39 didn't change that. What it did change was the mark-up, the price they could charge us on the shelf. Did they charge more? No, only 125 items went up in price. Did they charge less? Not according to their testimony.

Figure it out. By process of elimination, the 580 items that they are now paying less for aren't in the top 150 wine or spirits, and aren't in the group of items that the board said they could already negotiate on. That means they have to be regular items that should fall under the 30% markup rule, which means one of two things. Either the price for the consumer had to go down, which didn't happen according to the testimony, or the Chairman is lying about something. Of course, there is the third option: he has no idea what he's talking about, or he's inflating the numbers to make the system look good in general (which is probably just habitual at the PLCB). Not really all that reassuring either.

Will we ever know? Probably not, since no one on the legislative side of the table seems to want to ask the right questions. Why do we put up with this continued malfeasance that is being perpetrated on the citizens and consumers?

Privatize and end this BS.

The PLCB doesn't know business; just ask them

The PLCB plays at being a business, but they really don't know what they're doing. We've told you that many times. If you don't believe us, you can just listen to them. They'll make it pretty clear.

The PLCB -- the actual three member board, plus the so-called "executive director" Charles "Not a CEO, Nope, No Sir" Mooney -- testified in front of a joint meeting of the House Of Representatives Liquor Control Committee and Senate Law and Justice Committee about the effects of Act 39...especially about flexible pricing (you can read the whole transcript here). It's a big deal, these meetings and the change Act 39 brings, and the Board has to be ready for the legislators' questions.

And of course...they weren't. Apparently, they weren't really ready for flexible pricing, either, despite having asked for it for years. 

Let's start with the Chairman. Here's what he told the legislators when they started drilling him about why they hadn't simply negotiated lower prices to begin with; you know, with the huge "buying power" we always heard about. As we told you all along, the "buying power" bullshit was just that: bullshit. They never used it.

Holden: "If we would have sought lower product costs from suppliers, it would have resulted in reduced Commonwealth revenue due to the required application of a flat percentage markup and taxes." On face value, that would seem to make sense. Lower wholesale prices, run to a set mark-up formula to the shelf, means "reduced Commonwealth revenue," sure. Of course, it also means lower prices for us. You know, the citizens. But if it means the revenues are maximized, well, okay. After all, you can't make more money by lowering prices. 

But there ARE real businesses that make a profit doing exactly that. You may have heard of them: Walmart. Target. Aldi. Total Wine & Spirits. All of these real businesses, run by real business people, regularly make tons of money by cutting prices. It's established practice: lower your gross margin, so you make less money on each item; but at the same time the lower prices mean more sales, so you make more money overall. The PLCB doesn't get it; guess it's too much work. ("So many boxes to lift!")

They didn't need "flexible pricing," they could have been doing this all along. It's simple. For every item on the shelf, there is a price that will result in the maximum revenue. Higher, and sales decrease; lower, and total profit decreases. That price point is affected by things like competition, or price-matching, or sales, but the PLCB doesn't do any of those; they certainly don't have any significant legal competition. (And no, the PLCB does not have sales, at least, not in the usual sense: if the producers drop a price, the PLCB passes it through as is, and their slice of the pie remains exactly the same. They never cut prices, except on their ill-advised "clearance sales." Thanks, guys.)

Of course I'm lying. I don't know any of this math stuff.

But here's the thing that boggles the mind. Even under "flexible pricing," where they have to negotiate each price of the top 150 wine and spirits items, they STILL aren't using this business tool. So while they are screwing the suppliers and consumers, it certainly isn't as satisfying as it should be for either of us. 

No, the PLCB wants to really ream us. "...brands that are not within the statutory definition of best selling wines and spirits continue to be governed by the proportional pricing requirement of the liquor code. For a future legislative consideration, we respectfully recommend that the same pricing flexibility be extended on all products sold by the PLCB." 

And there it is. It's not enough that they raise prices on the majority of the best-selling items, they want to do that to everything. Keep in mind that there is no institutional pricing oversight by the legislature (only these hearings where the legislators gets to chide the Board about prices, and the Board gets to say 'oh, yeah, guess so, whatever') and as always, nobody with any experience in the industry is leading this parade of monkeys down the path.

More bumbling ensued as the hearing went on. The Chairman: "We made some mistakes at the initial supplier meetings. We asked suppliers for significant reductions to their product costs to increase our margin. But we failed to take a few things into consideration. We miscalculated the reaction of some of the largest suppliers of our best selling brands, who refused to come to the table at all." Imagine that. You said, 'Hey, we want to pay less for these brands everyone wants,' and companies that deal with sharpened pencils every day said 'That's nice. No.' After all, they sell the same products in neighboring states...that don't have the PLCB.

And once again, we suffer for the mistakes of ignorance, just as we have done for the past 83 years. While the Chairman was being the mouthpiece for this failure, it fully lies on Charlie Mooney. After 40 years in the PLCB, Mooney might know about graft, nepotism, bribes: it's apparently the way the PLCB runs. But it looks like he had no idea how the actual liquor industry (or any industry for that matter) worked.

So after blundering around for nine months, and hiring two specialists to help them figure out how to do this, and -- once again! -- paying an outside consulting firm to gather data, that all eventually led to this statement: "... pricing flexibility has resulted in a reduction of product acquisition costs for almost seven hundred products, retail prices decreases for more than one hundred and twenty products and retail price increases of a hundred twenty-five products."

Let me put that in English for you - they saved money on 580 products and you didn't see a dime of it. They raised prices on more items than they reduced prices, and of the top 10 selling liquor or wine items you saw a reduction on only one: a pint bottle of cheap vodka. Remember those top 10 items are the ones they should have the most leverage on, due to sales volume. They screwed us again. Of course they did.

SENATOR MCILHINNEY: "... the state citizens own this system, and they should be able to get some, any benefit by having a good deal when they go to the liquor store."
MR. HOLDEN: "Absolutely",
Except they aren't. We aren't. Weren't the legislators paying attention? We got NO benefit on 81% of the products that the PLCB paid a lower price for. They said so themselves.

Charlie Mooney also came up with: "Senator, we -- I am confident, without all the data in front of me, that, overall, consumer prices have decreased." Well Charlie, without having all the data in front of me, I call BULLSHIT. Especially after you raised prices on 422 items just because you had crap negotiating skills and didn't get what you wanted.

Maybe they should rename it the PLCB principle.

Remember that the PLCB has over $1.7 BILLION in liabilities, they are a drag on the economy of the state and stifle a free market where large and small businesses do not exist because of their continued presence in the marketplace. They do nothing for the citizens, unless you happen to be one that works there. Even Russia has free market liquor stores. Pennsylvania doesn't.