Wednesday, August 24, 2016

Something to look forward to.

I don't know if you have ever watched a train wreck actually take place in front of you in real time, but it is something that you can't stop looking at. That's what it's like watching the anticipated PLCB profit projections coming from McIlhinney's Mistake, the "epic change" of a liquor bill. The big number is $149 million in increased revenue overall, but with zero dollars, none, nothing coming from the casinos that number is already down to $137 million. Of that, $25 million is going to come from Sunday sales and a whopping $75 million from "flexible pricing."

Now to get that $100 million that would mean, based on FY 2015's profit margin (1) of 5.988%, an increase in sales of about $1.67 BILLION (2). Not gonna happen.  Even if we use the exceptional FY 2014 profit margin (3) of  8.28% it would still be over $1.2 BILLION in increased sales. That ain't gonna happen either. Even if we count the increase in sales from all those places that will be allowed to sell wine it ain't gonna happen. So if the PLCB doesn't decrease expenses -- and when have they ever -- they have to increase sales. A lot.

What this means is that we may have been sold a bill of goods that is not based on any reality. Remember that no increases in staff or payroll are taken into account, at least, not that I've seen. Modernization proponents didn't say if they are or not in their proposals at the time.
PLCB Flexible Pricing model
Now dollar sales do not necessarily HAVE to go hand in hand with an increase in product sales. It follows the same trend, but isn't 1 to 1. With "flexible pricing" the PLCB can charge more for popular items and less for unpopular items in order to move stock. They could, all of a sudden, decide to play hardball and negotiate prices with vendors, which they have chosen not to do so far; see here, here and here. Only now they are going to keep the difference instead of passing it on as they had to do by law before (except they didn't do it, which kept prices higher, which cost you more, and increased sales totals for them).

If they do get lower prices, they can make more money because they will be spending less for product. Well, maybe. In the game of liquor chicken, who will blink first: the major suppliers or the retailer? Think of it this way, who gets the blame when something isn't on the shelf, no matter whose fault it is? The retailer. Who can least afford to aggravate the consumer: the PLCB, or Jim Beam? The PLCB is not dealing from a position of strength: the people want the product, they don't want the PLCB. Having new colors and plants in the store does not make up for having empty shelf space, especially when there is no benefit to the consumer because you want to keep that extra dollar.

Will all  this result in a large increase in sales and a large amount of money saved? Do cows fly? Bailment (not paying for products until they leave the warehouse) was supposed to save $100 million a year too, and that didn't happen. Now I realize that next year, when the financial numbers finally come out, it won't be for a whole year of this new fiasco and I'll have to adjust the totals based on historical values for July and the first two weeks of August, or just look at the second half of the year and extrapolate from there. No matter how you slice up the PLCB pig, you aren't going to find any bacon, only fat.

This is what happens when the PLCB increases sales over 50% in one year
Normal is what we want and there is no rest until we get it.


(1) The PLCB doesn't really make any profit, it just has left over Use Tax money it didn't waste on something. That said, FY 2015 Operating Income of  $111,520,313 divided by Sales Net of Taxes $1,862,269,904 gives you "profit margin" Note that Operating Income is before any required deductions.

(2) $100,000,000 divided by "profit margin" gives you the additional amount required to achieve the desired increase.

(3) Operating Income of $147,959,116, divided by Sales Net of Taxes: $1,786,501,686


james said...

A general question: a lot of the discussion about privatization involves showing that the state would make equal or more revenue from licensing and taxes as they do via the LCB.

But I've read after Washington privatized, they found that prices for the consumer went up on average, in part because of the crazy taxes they imposed as part of the privatization. Are we worried that PA would do the same?

A greater selection because of competition would be awesome, and probably restaurant prices could decrease (although, would they really?) because of wholesale pricing. But we already pay more for booze than everywhere else, it would suck if prices actually went up as a result of privatization. I still think getting the state out of the liquor business makes sense, and is generally desirable in principle, and I would love to get a bottle at 7-11 or Wawa... but the concept of paying yet more for booze is worrying.

Lew Bryson said...

Sorry it took a day to approve your comment; it's been very busy.
Washington went private by referendum. To get the votes, they decided to take the revenue question out of the equation by boosting Washington the highest liquor taxes in the United States. Only...Pennsylvania is already VERY high. Most people don't realize it, and it's not easy to compare because we do tax on booze by price/value, not volume as they do almost everywhere else. Read this to get an idea of just how high those taxes are; pay particular attention to the tables at the bottom.
That's why we pay more for booze here. The State Stores make a skinny little profit for two reasons: first, their operating costs are bloated, but second, to stay even close to competitive to neighboring states with much lower taxes, they have to pare their margins down. If we privatize, and leave the taxes just as they are, with no BS "fees" to make up for the PLCB's nonexistent "profits" (which are completely eaten up by pension expenses), I doubt prices will go down much. I've talked to people in the booze industry who are all but certain that they will go up.
In the interests of fairness to Pennsylvania consumers, if anything, liquor and wine taxes should be LOWERED, and the state's budget adjusted to make up that revenue elsewhere. I doubt that will happen, though.
So...prices will probably stay the same, though they'll probably go up in the interior. Convenience and selection will go up, dramatically. It's a trade-off. I've never hidden this; I consider it a very worthwhile trade-off, and the people of Washington generally agree.

Albert Brooks said...

For last fiscal year in Washington they could have left taxes exactly where they were and still broke even because of increased sales, licenses fees (including importer and wholesale ones) and the increased employment privatization brought.

For the majority of citizens in the metro areas prices will decrease because of competition between places like Total, BevMo, Canal's and ShopRite but will certainly be higher in the convenience outlets like grocery stores. The counties that only have one or two stores now will have more outlets but at higher prices as was mentioned.

james said...

Don't apologize for taking a couple days to approve my post -- as you can see it took me several days to get back and read your answers!

Thanks very much for the info; I don't know why that hadn't occurred to me before. And I hadn't seen that plcbusersgroup site before, that's some good info. Thanks again!