Updated – 12:05 p.m. – The Department of Liquor Control (DLC) is increasing the markup of certain special order fine wines by 10 percent as part of administrative changes that its customers were informed about only five days before the changes go into effect Wednesday.
Several licensees say the price increase would reduce the selection of fine wines at restaurants and retail stores as well as make the local businesses less competitive with neighboring jurisdictions. They were also angry about being notified only days before the significant change.
"No one in the county informed us about this, we had to learn about it from one of our vendors," Alaine Roussel, owner of La Ferme restaurant in Chevy Chase, said. "We are at the end of the spectrum—the licensees directly affected by this—and [the DLC] hasn’t communicated anything about this."
Other changes include reducing the markup of “stock” wines by 10 percent and delivering stock items 24 hours after a customer orders them—changes licensees said would be positive. The DLC’s customers are the county’s 799 licensees, which are restaurants and privately owned beer and wine stores. Stock items are products ordered in large volumes by the DLC, while special-order items are ordered in smaller volumes by licensees and then delivered by the DLC to the licensees.
The DLC controls the wholesale distribution of alcohol in the county as well as the retail sale of all liquor. The department operates 25 retail stores, which sell the department’s stock beer and wine as well as some special-order wine products. Those stores compete with the privately owned beer and wine retail stores in the county, many of which tend to sell special-order wines and beer to differentiate themselves from the county stores. Under the new plan, beer prices will not be affected. The DLC generates about $30 million in profit annually for the county.
Previously the department charged licensees a 35 percent markup for stock wine products, a 25 percent markup for special-order wines that cost less than $18 per bottle and a 15 percent markup for special-order wines that cost more than $18 per bottle. Under the new plan, all wine distributed by the department will be marked up by 25 percent, whether it is special order or stock. After the DLC delivers products, retail stores then apply their own markups. County stores apply a standard 28 percent retail markup after the products are delivered.
For example under the new plan, a bottle of wine that costs the DLC $50 from a supplier would be marked up by the department to $62.50 and then sold to restaurants and privately-owned retail stores who would apply their own markup. Under the 15 percent markup, the bottle would cost retailers $57.50—while that’s only a difference of $5, retailers often buy hundreds of 12-bottle cases of wine, so the costs can add up.
John Zeltner, who was hired last year as the DLC’s new chief of wholesale operations, detailed the changes during a series of meetings with licensees Wednesday, one of which was attended by Bethesda Beat.
Zeltner made the case that licensees will save money over the long term because the increase in the special order fine wines would be offset by the 10 percent decrease in stock wines. Over time, he said, more fine wines could be categorized as stock items, which tend to cost less for the DLC to handle and deliver therefore reducing the department's costs.
Frank Shull, a partner in the Robert Wiedmaier Restaurant Group, which operates restaurants such as Mussel Bar, Villain & Saint and Wildwood Kitchen in Bethesda as well as others in Potomac and Gaithersburg, said Thursday the change would save his restaurants in the county money.
"I hate to say it, it's actually a positive move on their part," Shull said.
Zeltner said the proposal will cost the department $1.5 million next year, because 62 percent of the wine distributed by the DLC is considered stock, while only 3 percent of the wine distributed is the $18 or more special-order product. The other 35 percent of wine distributed by the department is bottles that cost less than $18, but are considered special order because the department doesn’t sell enough volume of the products.
Zeltner said the department had studied the effects the changes would have on its licensees and determined that 98 percent of the licensees—792 out of 799—would experience an “incremental profit” under the plan.
However, some licensees are skeptical of the proposal. They said the changes would lead to a higher cost for fine wines that will make prices in the county less competitive with surrounding jurisdictions.
Justin McInerny of Capital Beer and Wine in Bethesda distributed an email Wednesday saying the markup “is a huge, costly and burdensome increase for those of us who focus on small production, family owned and operated vineyards.”
Arash Tafakor, who owns Downtown Crown Wine & Beer in Gaithersburg, said the change will have a chilling effect on the availability of fine wine in the county.
“It’s going to be harder to sell wine that costs more than $20,” Tafakor said. “It’s going to be substantially more expensive than Virginia, D.C. and the rest of Maryland. In turn, because those wines are going to be more expensive, selection at stores and restaurants in the county is going to change to more inexpensive wines.”
Tafakor said Thursday county officials don’t seem to understand they could make more money by charging lower markups on more expensive wine. For example, he said, it costs the county the same amount to deliver a case filled with $5 bottles of wine as it does to deliver a case filled with $100 bottles of wine. Since there’s 12 bottles in a case, the county would make a $15 profit delivering the $5 bottle case, and $300 delivering the $100 bottle case, under the 25 percent markup plan. Therefore it makes more sense to charge a lower markup on more expensive wines to increase the volume sold, he said.
Jeff Heineman, owner of Grapeseed restaurant in Bethesda, said Wednesday he depends on a fine wine list that can differentiate his restaurant from his competitors—90 percent of his restaurant’s list is special-order wines that cost more than $18 per bottle. He said the change would likely negatively impact his restaurant by either hurting his bottom line or by causing an increase in price to customers.
Del. Bill Frick (D-Bethesda), who spearheaded an effort to end the county’s monopoly on the wholesale distribution of alcohol, criticized the county for notifying licensees just five days before the changes are scheduled to go into effect.
“I think it’s outrageous and offensive and only possible because they have a monopoly,” Frick said. “This is just one more insult the DLC is levying towards its customers and consumers. It seems like for a lot of restaurants in my district, it’s going to make life much more difficult for them, result in less margins for them and more headaches. The system has to go.”
Patrick Lacefield, a spokesman for County Executive Ike Leggett, said “it’s a fair question” when asked about the short notification process, but added, “I’m not sure, absent a monopoly, the distributors would give any more notice to people.”
Zeltner, in an interview with Bethesda Beat after the meeting Wednesday, said the change will allow the department to categorize more special-order wines as stock, which the department is much more efficient at delivering. He said under the previous pricing structure it was difficult to move popular fine wines to stock because doing so would result in a 20 percent increase in price for licensees. Under the new plan, moving items from special order to stock will result in no price change for licensees.
He also said the county’s retail store prices for wines will not change.
During the meeting, Zeltner cited DLC delivery statistics that showed the department delivered stock orders at a 99 percent accuracy rate, compared to an 86 percent accuracy rate for special orders. He said the discrepancy is partially due to smaller distributors canceling low-volume orders with the department before they can satisfy a customer’s order.
“I want to move the special orders to stock,” Zeltner said.
Documents provided by the DLC during licensee meetings Wednesday (pen marks by reporter)
