SONY DSC
Danya Henninger

Two-buck Chuck? Try $30 vino: Wine expert on where PA’s new law fails (commentary)

People across Pennsylvania are singing the praises of a new law allowing wine sales in grocery stores. Governor Tom Wolf even used the word “historic” when he signed the bill just a day after it came across his desk.

But as a longtime member of the wine industry — and as someone who’s been testifying on the subject in Harrisburg for many years — I can sadly say that the veil is being pulled over their eyes.

This law, as it currently stands, will not benefit anyone. Not wine distributors, who still won’t be able to offer anything close to wholesale pricing like they do in most states. Not holders of restaurant wine-to-go licenses (it’s important to note: not all grocery stores will get to sell wine, just the 300 or so that have those licenses, i.e. the ones that already sell beer), who will now be selling wine at super-high prices and will not be able to move any kind of real volume. Not consumers, who’ll have to choose between cost and convenience. Not regular restaurant licensees, who have still not received the wholesale pricing reform they so desperately need. Not the PLCB, which will have funds used to cover their operating costs cut by a third.

And lastly, not lawmakers on both sides, who have way overestimated the extent to which this will bring us closer to full privatization, and/or way overestimated the amount of money this new law will generate for the state general fund.

Forgiving the need to get into some nitty-gritty math, here’s why:

Wine to-go outlets (i.e. bars and groceries with restaurant liquor-to-go licenses) are still required to purchase the wine they plan to resell at retail price from the PLCB. Although the law attempts to reduce pricing for licensees by lowering the LCB standard markup to 10 percent, down from the normal 30 percent, it also eliminates the 10 percent discount restaurant licensees used to get. All in all, this amounts to a price difference of less than $1 per bottle for licensees. So what will grocery stores then charge the customer? At least 1.5x more than what the LCB currently charges on their shelves. A bottle of wine that sells at Fine Wine & Good Spirits for $9.99 will likely be $15 in a wine to-go outlet. A bottle that is $19.99 will be $30.

That’s a big difference — and studies have shown that a price increase of this size will dampen demand, driving down sales anywhere from 60 to 65 percent from what they would otherwise be.

For regular restaurants and bars, the pricing relief provided by the new law barely ends up making a difference. Because of the way LCB markup and taxes are assessed, a wine I normally sell for $100 per case wholesale in New York and New Jersey is currently priced at $151.24 for licensees in PA. Under the new law? That case is now $147. Yes, that’s only a 31¢-per-bottle difference.

This is absolutely the wrong way to go about pricing reform and demonstrates that the people writing these bills do not have a firm grasp on how the LCB operates.

The current LCB pricing structure adds the following factors to the base cost of wine:

  • 1 percent “early pay” markup
  • 30 percent “markup”
  • LTMF (Logistics, Transportation and Merchandise Factor) fee
  • 18 percent emergency tax
  • sales tax

The first three are used to cover LCB operating costs; they are not returned back to the state general fund. The only revenue actually returned back to the general fund comes from the 18 percent emergency tax and the sales tax. This is important because whatever pricing reform does take effect will need to project that the same amount of money (if not more) will be returned back to the state general fund.

(Quick sidenote that exemplifies how convoluted this all is: What is “early pay”? It’s basically a bogus name for an additional fee added on top of the regular markup. It was instituted to cover a discount given if someone pays early — except the PLCB does not actually offer an early pay discount to licensees. Yeah.)

I have a proposal that would actually make things better for everyone — and result in far more money being returned to the state, while still keeping all the PLCB jobs intact.

Let’s call it “semi-privatization.”

Allow wine distributors to sell direct to licensees (including grocery stores that hold liquor-to-go licenses) without the LCB directly involved in the transaction. Distributors would then be able to offer real wholesale pricing, volume discounts and credit terms, and could deliver direct, without having to use LCB warehouses as a middleman drop-off point. Because the LCB is not physically handling the transaction, the 1 percent, 30 percent, and LTMF fees would not be added to the cost of the wine. The state would still assess the 18 percent emergency tax — and even the local sales tax, if need be (although no other true wholesale relationship charges sales tax).

Under my plan, that $100 case of wine would cost wine-to-go outlets (and regular bars) just $117.56 — the extra $17.56 being tax and tax alone, returned directly back to the general fund. The state would be returning the same amount (on a percentage basis) back to the general fund, but now because prices actually drop dramatically, sales would increase, so we would expect more tax revenue to be generated. Not to mention, LCB employees, who typically have to take time out from their normal schedule to handle and process these licensee orders, would no longer have to do so, and could get back to focusing on consumers in the stores.

The state makes more money, distributors sell more quantity, restaurants are able to get (almost) real wholesale pricing, consumers are able to buy wine from restaurants at competitive prices and wine to-go outlets are able to offer more competitive prices. Everyone is happy.

I have been emailing this argument to everyone that will listen and I hope you will do the same.

So far, Rep. Chris Ross (R-158; 717-783-1574; cross@pahousegop.com) seems to be the most receptive. He is one of the co-chairs of the House Liquor Control Committee, and he has already responded to me saying, “We are still trying for wholesale privatization this month in another bill.”

I would also recommend contacting Rep. Paul Costa (the other HLCC co-chair; D-34; 717-783-1914; pcosta@pahouse.net), Speaker Mike Turzai (who was the main sponsor of the HB 1690, which turned into this new law), and of course Governor Tom Wolf.

×