Meeting of October 17, 2018
Topic: “The Department of Liquor Control”
Speaker: Robert Dorfman, Director, Montgomery County Department of Liquor Control
The Montgomery County Taxpayers League (MCTL) met with the Director of the Department of Liquor Control (DLC), Robert Dorfman and his staff on Oct. 17, 2018. He provided an overview of the DLS’s position on privatization and a video produced at no expense to the taxpayers that introduced DLS’s operations. He also provided a written summary of DLC highlights, and noted a number of key staffing changes in marketing, warehouse operations and retail that he believes are already making a difference in DLS’s performance. His verbal and written responses to MCTL member questions follows:
1. Montgomery County Sales – He and staff indicated that the county was dead last in the state for liquor and beer per capita sales last year partly because our high incomes and demographics are associated with lower consumption. An MCTL comparison of state published sales for FY 2017 show that two comparable jurisdictions in population and incomes (Baltimore County and Anne Arundel County) had double our distilled spirit sales per capita. Mr. Dorfman said the DLC is improving the marketing and attractiveness of its retail locations, but acknowledges it has fewer retail locations down-county than in the rapidly growing up-county. Surveys of customers in DLC stores indicate a high level of satisfaction, but this does not include residents who buy liquor elsewhere. Further, while DLC notes its prices are competitive, MCTL notes that other factors are equally important in drawing more customers to DLC retail sites. These include service, convenience, and product selection.
2. Restaurant Business Service – Service has improved for delivery and special orders according to Mr. Dorfman. He said that restaurants account for only 4% of DLC sales, and questioned if older complaints by restaurants are still valid. MCTL asked if perceived conflicts of interest between DLS’s enforcement and sales activities could contribute to restaurant issues, or have a chilling effect on the level of complaints. Mr. Dorfman and other DLC representatives present didn’t think so and noted that DLS’s enforcement program is a model followed by other counties in the state.
3. Truck Fleet and Warehouse Investments – Mr. Dorfman could not quantify productivity improvements or savings attributable to these recent investments. He indicated that no staffing reductions occurred as a result of these investments. 22 new trucks have replaced older trucks that had been in service for 20 years which have reduced maintenance, temporary lease truck, and service interruption costs. Warehouse improvements have included new methods and procedures and a new automated “Invoice Picking” system to improve inventory controls and flows.
4. Inventory Losses and Financial Performance Drivers – Mr. Dorfman said that last year losses were $363,762. That was .18% of total inventory compared to an industry average of .25%. Better controls over special orders with “flow racks” were noted as one reason. Four years ago MCTL compared DLS’s financial performance to nearby control states of Virginia and Pennsylvania. These indicators have not changed, probably due to economies of scale available to higher volume state level operations. An updated comparison of costs of goods sold as a percentage of sales is still 73%, much higher than Virginia or Pennsylvania (57% and 69%), Net book value of depreciable assets ($45M) also shows DLC is high in comparison to Virginia ($52M) and Pennsylvania ($97) relative to their much higher sales volumes. Slower write-offs of impaired assets, and slower depreciation schedules may also account for this and would boost reported profits. County auditors did not express an opinion on DLS’s financial controls for their FY 2017 financial statements).
5. General Fund Transfers – Transfers dropped last year to $18M from an average annual target of $30M to pay for the investments noted above. Mr. Dorfman indicated that he believes DLC will make its forecast this year for transfers. DLC also collects state sales tax, but doesn’t collect any local sales tax. MCTL has determined that working capital requirements of the business are a factor that limits investments, as do county capital project allocations. DLS’s audited financial statements are included with the County’s audited financial reports (see link below, pgs. 36-39).
6. Excessive Alcohol Abuse by Teens – DLC investigated source of illegally purchased alcohol by a teenager who died last summer following a party in Bethesda, and found DLC stores were not the source. Enforcement and licensing programs are designed to quickly react to and resolve retailing problems.
7. Privatization Arguments – Mr. Dorfman cited the state of Washington as an example where retail outlets ballooned from 300 to 1,600 overnight creating enforcement and control issues. He notes that under the 3-tier systems in our state, distributors and retailers really don’t control prices as much as they do for other products, and that distributors don’t compete for business. He believes DLC has made important changes to be more responsive to its customers and doesn’t feel that private distributors or retailers would do any better.
The MCTL favors privatization because liquor distribution and retail is not an inherently local government function. We are the only county in the state that does this, and the last county in the nation to continue this practice. MCTL believes that competition would improve service, selection, convenience and sales volumes, with two or more private distributors competing within the county for the business of hundreds of more conveniently located retailers. MCTL is concerned about growing legacy and investment costs of the DLC operation and DLS’s inability to achieve sales volumes that would stabilize its business. MCTL projections last done in 2014 showed annual county revenues for possible new distributor franchise fee agreements and sales forecasts could be $60M, higher than currently transferred to the general fund. Also, a one-time revenue boost of $50M would be realized from winding down DLC operations, selling assets, after providing for a generous severance payment to employees. This does not include additional local sales or property tax increases.
Financial Statement Link, see pgs 36-39, first column