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.

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.

A Plea for Civility; a plea for truth

First, watch this video. (very sorry; it's no longer available. Glad I took the time to transcribe so much of it!) It's Joe "Da CEO" Conti wrapping up his testimony at last week's Liquor Control Committee hearings (which were, apparently, largely about Conti and Hereditary Union President For Life Wendell W. Young IV speaking for as long as they could...probably because they know that if you talk till lunch, most legislators will leave and not give any time to your opponents) with "a little bit of a challenge for civility to the proponents of the bill (HB11)."

He then quoted legislative press offices and "a think tank" -- which I assume is the Commonwealth Foundation -- making remarks about the PLCB and him that...well, they were things like "The PLCB doesn't care about the consumer; ineptitude, goofy, or systematic malfeasance," and "a state system that is broke, even Joe Conti realizes it," and "a state of perpetual tone-deafness...the PLCB should stop acting like coneheads and communists."

Okay, Joe's feelings are hurt. (Mine are too; he didn't say anything about some of the stuff I've said about the PLCB.) But he's clearly never been the target of a Tony Auth cartoon (looks like a conehead to me). This is the "rough and tumble of public life:" man up. I get hate mail all the time -- really, people actually bother -- and you don't see me crying about it, and certainly not to a legislative committee...oh, right. Conti is a former legislator (who didn't get re-elected because he was completely tone-deaf about the legislative pay increases a few years back), and he's looking for professional courtesy from former colleagues. Nice. If only we could all expect such courtesy.

But he blew it -- for me, at least, and I hope for anyone else with a spot of brain matter -- when he then immediately started spouting the UFCW party line about newspapers. See, the UFCW has seen that almost every newspaper across the state has editorialized in favor of privatization, often scathingly, and they needed a response. Their response: the newspapers are doing it for money, because of all the advertising bucks they'll make off private liquor stores. (Though the PLCB spends big bucks on advertising now, and the Inky runs full-page ads for cross-border liquor stores -- more proof of border bleed, Joe.)

So Conti's pleading for "civility," and the first thing he says after that "challenge" is this: "Now we understand many of the proponents are financiers of print media. I've met with most of them, they're very up-front about it, we get that. We understand that the think tank perhaps receives funding from these financiers..." And then he drops that, and goes off in a completely different direction of how "we welcome" this debate ("relish it," he also said). But he's slyly planted the stinking smear-seed that maybe the Commonwealth Foundation is just doing this for money, at the behest of "financiers" who are just doing it for money. Says that, and doesn't back it up, or have the guts to stick it home. Does he deserve civility?

And then he -- well, I was about to say "he lies," but let's be civil and say he once again clouds the issue by saying "If we disappear, your income tax has to go from 3.07 to 3.21 [percent]. You know that." What's he talking about? He's talking about The Johnstown Flood Emergency Tax and the 6% state sales tax that make up approximately 3/4 of the PLCB's "contribution" to the General Fund. And he's 'clouding the issue' by leaving you with the impression that if the PLCB is no longer the state's booze seller, no booze taxes will be collected, and the state will make up the difference with income tax. That's not lying, but it's the next best (worst?) thing.

He goes on to shamelessly wrap himself in the flag. Better get a kleenex ready. "We must be mindful when you walk by a playground, speak to a Rotary Club or a local Chamber, or when you visit a senior center, those Pennsylvanians are benefiting by the performance of this agency. And we get up every day, and we want to do a better job for the people of Pennsylvania. There's really no reason for the incivility we see." He's made selling vodka into an altruistic mission; amazing.

So right after saying there's no reason for incivility...he makes a threat!* Conti issues a challenge (he's got a whole pocketful, apparently) "Michael [Turzai] and Jonathan [Newman] and Matthew [Brouillette]" to debate the issues. "But let's keep it on point, because I'm warning you: if you get off point...[dramatic pause] I'm for the people of Pennsylvania. And anything that either purposely or inadvertantly diminishes our performance and diminishes our return, hits the pocketbook of the people of Pennsylvania, the innocent folks who may not be as emotionally invested in this as you, as the proponents are."

Conti calls for us all to be civil. Then he smears the intentions of the proponents of privatization, he deliberately misstates the results of privatization, he claims moral high ground (for an agency that performs retail sales?), and dramatically threatens his opponents. I don't owe Joe Conti anything. He's trying to set the terms of this debate to benefit the PLCB and himself. He says "financiers" perhaps fund the privatization proponents? He benefits directly from privatization not happening; he has a $150,000 a year job that will disappear if privatization goes through! Is it uncivil to bring that up?

What's civil in political discourse? No one's brought anyone's personal life into this (with the necessary exception of the husband-wife relationship between the winner of the PLCB's 'courtesy contract' and his wife, the PLCB regional manager), no one's made any personal threats, no one -- to the best of my knowledge -- has engaged in anything beyond a bit of name-calling. Does Conti ever watch Fox News or MSNBC (or Olbermann, wherever the hell he is now)? There is no need for excess civility; it's clearly an attempt to hobble the debate in favor of the PLCB and the status quo.

Meanwhile, Conti has other problems. It appears that earlier in the hearing he lied -- sorry, Stacey Witalec says Conti "misspoke," whatever -- about the PLCB's committee looking at the wine kiosks. That's in the Tribune-Review today. "In response to a question about that recommendation, Conti told the House Liquor Control Committee the report did not recommend against the LCB's plan." Oops, turns out not to be the case: "A review by LCB Chief Counsel Faith Diehl found the final report "recommends against going forward and does contain the word deficient," Witalec wrote in an e-mail.

Where's the civility in lying -- sorry, misspeaking, I keep getting that wrong -- to a state legislative committee made up of your former colleagues? 

*He also makes an amazingly inappropriate Blazing Saddles reference, but you'll have to watch the video, words don't do it justice. And remember the actual line that Conti bowdlerizes...amazing.

Privatization as the 800 pound gorilla

The Morning Call's John Micek posted in his Capitol Ideas blog today about the PLCB's annual budget presentation to the Legislature, and noted that "...more than one lawmaker on the panel said they didn’t want to dwell on the potential privatization of the 70-year-old agency. But here’s the thing about 800-pound gorillas: They’re awfully hard to ignore."

Seems that the legislators said they didn't want to dwell on it, and then did just that, including this beautiful sentiment:

“I hear you saying that you want to be more like a private business. That begs the question of why not just privatize like 31 other states,” Appropriations Committee Chairman Jake Corman, R-Centre, told agency officials as they wrapped up their appearance.

Kinda reminds you of the PLCB's argument that their wine kiosks are soooo convenient...until you compare them to just picking a bottle off the shelf at the grocery store and putting in in the cart with your pork chops and eggplant.

Then came the "we'd be great if you'd just give us the freedom to really swing" plea from PJ Stapleton:

The board’s chairman, Patrick J. Stapleton, told lawmakers that the agency is seeking legislative remedies that would give it greater flexibility on pricing and hiring practices.
Right now, the agency is constrained in the discounts it can offer on certain products and civil service rules have hamstrung its ability to “put the right person in the right job,” Stapleton told legislators. [Of course, those civil service rules are mostly in place to prevent rampant patronage; why's the PLCB so hot to circumvent them?]
“We’ve endeavored to create a world-class business operation,” he said. “Unfortunately, we’re limited in certain respects by [state law].”

Call me crazy, but I have a strong feeling that it would be much easier to simply do away with The State Store System than to tweak hell out of The Almighty Liquor Code to allow "a world-class business operation." But if you don't believe me, here's the PLCB's 'secret plan' to fix things so we'll never ever see privatization rear its ugly head again. Please note the bond issue, which would borrow against the next 20 years of PLCB "profits" to blow a chunk of bucks into the state's budget now...effectively guaranteeing that no legislator would bring up privatization for 20 years, because then they'd have to pay off the bond: brilliant!

Why is the State Store System so resilient, why does it still hang on? 

• The unionized staff comes out en masse against privatization, always has (and brags about it), and is joined by their union brothers and sisters. They're just getting warmed up this time around.
• The personally offensive state monopoly (you're not allowed to buy booze anywhere else and bring it into PA) is a lot easier to maintain with a state system.
• It brings in a buncha bucks, because the state's Leaning Tower of Booze Taxes is so much more oppressive than in other states (tip of the hat to PLCB Users Group creator Nathan Lutchansky for pointing that out (not, of course, in the form of a "diatribe," like I do here) and actually doing a better job than I did: turns out I missed some charges), and the PLCB and the union have done a fantastic job in convincing you that they bring in all that money, when it's really the state's tax laws that bring in most of it...and would continue to do so in a private system.
• People (voters) still believe that it's actually effective in making the state safer, despite evidence to the contrary; hell, the PLCB's own bi-annual report admits that PA is not really that different from other states in negative drinking issues. 

This is our best shot in years. Don't blow it. This is not about Wisconsin, this is not union-busting, this is not about Republicans vs. Democrats. This is about a patronizing system of state control, a Stalinist system of government-owned retail that never should have started, and should have died a relatively natural death decades ago. It's a zombie, and it's long past time to shoot it in the head.

Video on the Hearings

In case you missed it (I did, and I'm in the damned thing!), Stephen Metzger put together a video report on the hearings, including the kick-ass moment when Representative John Taylor shouted down Major Lutz of the State Police. Check it out here.