Council Members, Elrich Clash over Claims of Liquor Store Losses
New letter revives debate over county’s alcohol structure
County Executive Marc Elrich
Montgomery County Council members are sounding an alarm about the county’s liquor stores, which they say are losing $5 million a year under a new accounting system.
But the head of the department that oversees the county’s liquor operations said it’s a loss on paper only, connected to a new way of looking at finances.
Bob Dorfman, director of the Alcoholic Beverage Services Department, or ABS, said the agency recently began charging county-owned liquor stores the same alcohol markup fees that apply to private businesses. Under the new financial system, revenue for the county stores appears to have declined significantly over the past several years.
Those markup fees go to the county’s warehouse operation, which now appears to earn more in profits as revenue for the stores declines, Dorfman added.
In other words, the additional markup fees paid to the warehouse balance out the additional payments made by the stores, meaning the county does not actually lose any money under the new system.
Overall, ABS is growing in profitability. This fiscal year, the agency transferred a little more than $28.4 million to the county budget — roughly $3.5 million more than it transferred in fiscal 2018.
But council members see the shift as a sign that county-owned stores can’t compete when they’re treated the same as private retailers.
Five of them — including Council Member Hans Riemer, who sent out a separate press release on the purported losses — are pressing County Executive Marc Elrich to give a “detailed analysis” of why the stores are unprofitable and how he plans to address the issue.
The move is causing friction with Elrich, who views the letter as a political tactic that ignores the financial reality of the situation.
“I guess their objections are more important than the facts,” Elrich said in an interview last week. “They’ve already gotten a full briefing about what’s going on.”
Dorfman also questioned the request, sent in a letter earlier this month. Council Members Riemer, Sidney Katz, Evan Glass, Tom Hucker, and Craig Rice all signed the Oct. 3 message to Elrich, requesting a response by the end of the year.
The impetus for the letter, council members explained, was an April 12 budget review with the County Council’s Public Safety Committee, in which they learned that ABS changed its internal reporting practices for the retail stores.
That change, included in recent profit and loss statements for the stores, revealed that retail operations were losing more than $5 million a year, council members wrote in the letter.
But county-owned liquor stores do not lose more than $5 million a year in a literal sense, and council members had been briefed on the changes to the agency’s income statements well before they sent their letter to the county executive, Dorfman said.
The exchange marks the latest conflict between the council and the executive branch, often at odds over what some council members characterize as unsteady leadership and poor communication.
Since the executive administration changed in December, council members have demanded — and sometimes failed to receive — answers from Elrich on issues such as as two-year budgeting cycles, the ongoing police chief search, and site selection for much-needed emergency communications towers.
Executive employees have questioned the motives behind criticism directed at Elrich and departments under his control. Dorfman said he was surprised to see the Oct. 3 letter given his previous exchanges with the committee and what he felt was clear communication on the part of ABS.
“To me, it was more political than it was financial,” he said in a phone interview last week. “I probably haven’t had a conversation with Hans [Riemer] in two years. So, I have no answer as to why this memo came out when it did, but I am not unnerved at all. I’m proud to tell you what we’re doing to make this county more money.”
Understanding the basis of the letter requires understanding how the county’s liquor operations function. Montgomery County is known as a “control state,” meaning liquor sales and distribution are controlled through ABS. Private licensees can only sell beer and wine purchased through a county-operated warehouse or county-owned stores.
County stores, which can sell liquor, also purchase products through the warehouse.
Before Dorfman took over the agency almost three years ago, the county’s stores were treated as extensions of the warehouse, he said. The agency didn’t keep profit-and-loss statements for its retail operations. County-owned stores were not required to pay markups on liquor — an added cost the county charges to privately operated licensees.
Because both the stores and the warehouse were owned and operated by the government, the stores didn’t pay an extra fee for alcohol the county already purchased. But after Dorfman, a former Marriott executive, was hired as the new director, he directed ABS to charge county stores the same markup as private licensees.
“We need to put our stores against any other independent retailer,” he said. “We need to be able to compare ourselves to them.”
Charging the extra markup fee, he added, was a way to learn how the county’s stores fared compared to private licensees and find further ways to cut operational costs.
When charged an added markup fee, county-owned liquor stores appear unprofitable. Income statements from fiscal year 2019, under the newer accounting, show that only six of the 25 stores operated at a profit. During that period, operating expenses, on average, exceeded revenues by $5.1 million — the number council members cited in their letter.
“The council was aware that some of the stores might lose money, but we were never informed that a lot of them lose a lot of money,” Riemer said, explaining the letter to Elrich. “A $5 million loss is not something you just take up with the department. It’s a CEO-level issue.”
But Dorfman said the agency briefed the Public Safety Committee on its change in accounting practices during a work session for fiscal year 2019. The issue briefly came up again during an April 12 meeting on the agency’s fiscal 2020 budget.
The losses cited by the council are based entirely on internal record-keeping, he added.
“We told them that the stores would look worse and the warehouse would look better,” Dorfman said. “At this point, I’ve already sat before the County Council and explained all of this and gone through all of the things we’re putting in place.”
Some of the council’s current scrutiny of the agency can be traced to a slew of embarrassing incidents, which exacerbated long-held frustrations with the county’s liquor monopoly.
After taking over the agency, Dorfman said he found a slew of operational inefficiencies, including rampant overtime expenses caused by poor scheduling in retail stores. Over the past two years, leaders with the often-criticized agency have laid out plans to run operations more efficiently and significantly reduce costs.
During the April 12 meeting, ABS submitted a budget overview that listed several changes, including planned renovations to several stores and a new bottle fee for private retailers that’s expected to raise an additional $2.5 million a year. Both Riemer and Katz acknowledged that the agency already reduced operating costs at retail locations, bringing total “losses” — when stores are charged a markup fee — from $7 million to $5 million.
“But it sounds like you’re buying into this,” Riemer said in a phone interview last week. “This is a $5 million gap. It’s a lot of money. We’re trying to turn up the heat and say, ‘Hey, this is a problem.’”
“To me, it’s a fair question,” Katz added. “To ask why the county’s retail stores cannot stay competitive when compared to independent retailers.”
If the county’s stores can’t become profitable while being charged a markup fee, they should be closed, Riemer added. He believes that private stores would move in to replace them, contributing revenue through markup fees without the operations cost.
Dorfman disagrees. He equated the agency to Amazon, a company that famously lost money during its first several years of operations before turning huge profits.
ABS has closed two of its least successful stores, in Rockville and Germantown, and Dorfman believes the agency’s continued changes will allow remaining retail locations to become profitable within the next few years — even with markup fees.
In fiscal year 2019, the agency took in roughly $89.5 million in liquor sales, he added.
“To me, that’s such a defeatist attitude,” Dorfman said about calls to close county stores. “If you got rid of the retail, you would lose all of the profits we get from our customers.”