Seven Things to Know about the County’s Plan to Partially Privatize Liquor Distribution

Seven Things to Know about the County’s Plan to Partially Privatize Liquor Distribution

The small step would allow private distributors to sell certain craft beers and fine wines in the county

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Wine and liquor products stacked inside the Department of Liquor Control's Gaithersburg warehouse

Andrew Metcalf

1. This is the first time since Prohibition that Montgomery County may significantly alter the Department of Liquor Control’s (DLC) distribution monopoly – The DLC has had complete control over the distribution of alcohol in the county since Prohibition. This is the first time the DLC will have to give up some of that control, which could result in a loss of about one-sixth of the department’s sales revenue.

If approved by the General Assembly, the resolution passed Tuesday by the County Council will allow private distributors to sell “special order” beer and wine products directly to bars, restaurants and independent beer and wine stores in the county.

The “special order” products are typically fine wines and craft beers that aren’t mass produced. The items make up about 20 percent of the department’s total sales revenue and generate about $5 million of the department’s annual profit of about $30 million, which is transferred to the county’s general fund.

The DLC will determine  which wine and beer products can be sold by private distributors. The department will also continue to distribute the products for distributors that would prefer not to deliver directly to consumers.

Council member Hans Riemer said in an interview Wednesday that he’s “very happy” with the resolution. Riemer chairs the council’s ad hoc liquor control committee, which has been looking into problems with the DLC and approved the resolution.

“I think we have been able to generate a consensus that’s been politically unachievable for generations,” Riemer said.

Throughout the council’s review, more than a dozen restaurant and small store owners testified that dealing with special order products gave them the biggest headaches. They described problems such as unpredictable delivery schedules, incomplete deliveries, a lack of variety and expensive prices.

2. The resolution is designed to be “revenue neutral” – The resolution also calls for the General Assembly to enable the county to set a fee or charge private wholesalers for the privilege of direct delivery. The county hasn’t decided what that fee would be or how it will be collected, but the plan is to make it significant enough to replace the approximately $5 million in annual profit that special order products generated for the county.

Riemer said Tuesday the fee proposal could create a backlash at the state level from private distributors, noting that larger distributors in the state sent letters to the council opposing the fee.

3. Political and fiscal realities prevented full privatization – Many county residents argued during the ad hoc committee’s review that the county should get out of the alcohol distribution business. The county is the only jurisdiction in the nation that controls both the wholesale distribution of alcohol as well as serving as the exclusive retailer of all liquor products.

However, two council members on the ad hoc committee, George Leventhal and Marc Elrich, scaled back talks about full privatization, pointing out that the DLC’s estimated $30 million in annual profits is spent on other county priorities. The loss of that revenue would be noticeable, especially because the county is facing the possibility of a property tax hike in order to raise enough funds to pass the fiscal year 2017 budget.

Instead of full privatization, Elrich said during committee meetings he’d like to see improvements in DLC operations that would result in significantly more revenue.

“We’re in no position to give up revenue,” Elrich said Tuesday. “I thought it would have been a severe mistake to take a major revenue generator and jettison it on general principle. I think that would have handicapped us even more than we are already handicapped as we go forward. I think this a reasonable approach.”

The department also employs more than 300 union employees who work in the retail stores and wholesale operations. UFCW (United Food and Commercial Workers) Local 1994 MCGEO President Gino Renne has said the employees will lose their jobs and benefits if the department is privatized. Local 1994 MCGEO represents about 8,000 county government employees.

However, those arguments didn’t sway every council member. Roger Berliner said Tuesday he’d like the partial privatization step to be the first in a phased exit strategy out of the liquor business.

 

4. The General Assembly must approve the legislation for it go into effect – Because the County Council lacks the authority to change the DLC’s operations, local state lawmakers must submit legislation to the General Assembly when it reconvenes for the 2016 session. The legislation then must be passed and not vetoed by the governor before it goes into effect. This probably won’t happen until at least June 2016.

 

5. More beer and wine options likely at local bars, restaurants and privately owned stores – If the change is made at the state level, it will create a niche market for distributors to deliver new beer and wine products to restaurants, bars and stores. If private distributors enter that market, customers are likely to see more limited-production wines and beers at local watering holes and stores.

Throughout the reform process, local restaurant and store owners said they’ve been plagued by delivery problems and a lack of selection in dealing with the DLC. Many said they believe this measure—allowing private distribution of special order products—will solve those problems.

6. Craft distilled spirits may be added to the General Assembly legislation – Riemer said Wednesday the council may consider requesting that craft spirits also be added to the products private distributors can sell. He said council members plan to discuss this issue as they work on the legislation that local lawmakers will submit to the General Assembly.

That move could enable a greater variety of small-batch bourbon and other spirts that aren’t mass produced to be sold in the county. Craft spirits are undergoing a resurgence as more small distillers enter the business in the U.S.

In May, The Baltimore Sun reported about an explosion of craft distilleries in Maryland that are making spirits ranging from whiskey and gin to rum and vodka.

7. The Department of Liquor Control is in the midst of many operational changes – In addition to tackling issues with special order, members of the council’s liquor control committee also criticized the DLC’s warehouse operations, customer service and retail stores.

Licensees said the department has been unable to fill orders, frequently makes incorrect deliveries and has shirked responsibility when confronted about the problems.

Mike Jones, the operating partner at American Tap Room in Bethesda, described the department’s customer service as a “shadow of a person” during a committee meeting in March. He said that when he calls the department about problems with the restaurant’s orders, he mostly talks to an answering machine.

Council President George Leventhal called the department’s customer service “unacceptable” shortly before the council passed the resolution.

The department has written a lengthy action plan to improve multiple aspects of its operations, including the retail stores, delivery processes and warehouse operations.

Council members have also asked the department to consider adding more stores, including possible superstores that carry a wide variety of products. Other proposed improvements to the stores include adding more selection, updating their appearance and adding refrigerators to provide cold beer.

Leventhal said the ad hoc committee will continue to review the DLC as it implements its action plan.

“I think that plan is too slow to take effect,” Leventhal said Tuesday. “We keep hearing from the department about the changes it is going to make, while we hear the pleas of small businesses to fix things right now. I think there are still very, very serious problems with customer service.”

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