Management & Labor

In Pennsylvania, Re-Thinking the State Liquor Store

Most Pennsylvanians over the age of 40 can remember when buying wine or liquor in their state meant walking into one of several hundred state-owned stores...
by | September 30, 2009
 

Most Pennsylvanians over the age of 40 can remember when buying wine or liquor in their state meant walking into one of several hundred state-owned stores with featureless façades and institutional fluorescent lights, finding a product number from a list and then relaying that number to a window clerk who would fetch the bottle from a stock room. It was the alcoholic-beverage retail equivalent of the post office.

The unpleasantness was intentional. As the "noble experiment" of Prohibition came to a close in 1933, the thinking in Pennsylvania was that alcohol consumption would be tolerated but ought not be encouraged. Governor Gifford Pinchot's solution, designed just before repeal took effect, was to create the Pennsylvania Liquor Control Board as the state's sole wholesaler and retailer of wine and spirits. The LCB stores would be staffed by certified civil servants. The board would regulate all licensing of alcohol-serving establishments. There would be no advertising, no window displays and no Sunday sales. Dozens of states followed suit.

Seventy-five years on, Pennsylvania still runs perhaps the most restrictive of the 18 remaining state alcohol-control regimes. While most states got out of the booze business entirely, or at least licensed out their retail operations, privatization never happened in Pennsylvania and won't happen anytime soon. That's because even with all the red tape, alcohol sales return nearly $500 million annually to the state treasury. It's also because the clerks' union, which is dead set against privatization, is a powerful force.

Recently, however, new leaders at the LCB have begun responding to the complaints, jokes and political cartoons about how difficult Pennsylvania makes it to buy wine and spirits. The state stores have begun stocking shelves with better selections. They're trying to make the stores themselves less dreadful, and perhaps even pleasant, places to shop. The story of their efforts to turn a public lemon into limoncello is a study in how even the most maligned government agency can be made to cater to citizens. But it also demonstrates the limits to how far a retail attitude can go within a public-sector context. "We try to run it like a private business," CEO Joe Conti told me in the board's conference room, its wood-paneled walls garnished with paintings of martini glasses and a Cubist rendering of wine and cheese. "Until we're told we have to do something bureaucratically."

The PLCB's lurch toward customer-friendliness began in 2002. That's when Governor Mark Schweiker appointed Jonathan Newman as chairman of the three-member board. The post typically had been a patronage appointment, a sideline for people who sometimes knew nothing at all about the alcohol business. Newman, by contrast, was a lawyer with a passion for fine wines who had dropped his legal practice to spend three years on the board learning the ropes of the industry. He also understood that an increasingly demanding drinking public had developed a taste for more sophisticated wines and liquors--and he wanted to cultivate Pennsylvanians' palates even further.

Newman's signature move was to create a line of Premium Collection stores, complete with temperature-controlled rooms, to sell more top-shelf products. To stock those top shelves, he created the Chairman's Selection program. Newman used Pennsylvania's leverage as the second-largest wine purchaser in the world (only Ontario's liquor control board buys more) to negotiate good deals on underpublicized vintages. For example, the PLCB was able to sell the Landmark Damaris Reserve Chardonnay 2000, a $40 bottle, for $20. These moves earned Newman Wine Enthusiast magazine's Man of the Year title in 2003. But Newman also wanted to improve the shopping experience for customers who buy a less upscale product. He leased space for 18 state-store outlets within supermarkets. (This applied to wine and spirits only. Under Pennsylvania law, beer can be sold only by the case at licensed distributorships and by the six-pack at bars.)

In 2007, Newman abruptly left the board. Governor Ed Rendell had recommended the creation of a CEO, and the other two board members appointed Conti, a former state senator, to the job at $150,000-a-year--more than twice the chairman's salary. Newman resigned in protest of what he saw as the LCB swinging back to a political mindset, rather than an entrepreneurial one.

But Conti has surprised many of his critics. His biggest push has been in continuing to update the state-store image. To soften the perception of the surly liquor clerk, he stepped up customer-service training for front-line employees. He signed a $3.7 million deal with a national marketing firm to update the interior design and image of the stores themselves. The effort also is expected to include a vastly expanded Web site and online ordering system.

Conti doesn't quite share Newman's enthusiasm for vintage wines. But he's tried to build on what Newman created with the Chairman's Selection program. To guide the choice of which wines to include, the board has assembled a Wine Advisory Council made up of a handful of sommeliers and renowned restaurateurs across the state. And Conti has uncorked plans to open a line of boutique stores in swanky neighborhoods. These shops--to be collaborations with gourmet grocers--will specialize in selling wine alongside cheeses, breads and prepared meats.

"Let's be honest," Conti says. "We're known as a government commissary fulfillment organization. We really want to be known as a specialty retailer. The success of our stores is predicated upon it."

For all the progress the PLCB has made in recent years, the reality of a state government running a 619-outlet retail operation (that's more stores than the Cracker Barrel or Toys "R" Us chains can boast) remains a bit strange. Real estate decisions are particularly tricky. On the one hand, the control system allows Pennsylvania to minimize the number of liquor outlets in distressed areas, as well as prohibit sales of fortified wines. So poor parts of Philadelphia and Pittsburgh don't need to confront the problems associated with having a liquor store on every corner. But the system also demands that the state serve all legal citizens. So there are stores in sparsely populated rural areas and stores in high-rent downtown locations that make only marginal profits.

The PLCB often can't resist responding to local pressure. As P.J. Stapleton, the current board chairman, explains, there are situations in town centers where main streets are decimated by closing businesses and the state liquor store is the last retail operation standing. "The mayor, city council, governor, and state senator all want us to stay there because they're pumping millions of dollars into these downtowns to preserve them," Stapleton says. "The last thing they want us to do is leave and create another hole."

The PLCB also runs into resistance when it tries branching out into new retail models. The plan for boutique stores, for instance, has come under fire from the Pennsylvania Restaurant Association. Restaurant owners such as Jon Myerow, of Philadelphia's Tria, a wine, beer and cheese café, don't think that state government should be competing against them. Wine bars, which have to mark up prices substantially to survive, fear that cafés selling wine at state-store prices will put them out of business. This summer, the state House passed a bill backed by the restaurateurs that would partially stifle the PLCB plan by specifying that the leased boutiques could not share an internal passage with the cafés. The bill is still awaiting Senate debate.

Conti chalks up the restaurant opposition to NIMBYism. "There's 25,000 restaurants in the state," he scoffs. "We've been directed by the board to investigate eight to 12 locations." Still, the episode demonstrates the idiosyncratic constraints Conti has to navigate as the CEO of a company whose shareholders are the taxpayers. It's no longer temperance and ambivalence about alcohol that get in the way of state stores acting like a true retail enterprise. Rather, it's politics and the public scrutiny that follows any government enterprise that turns a profit.

Despite all this, the PLCB has been succeeding by the one measure that matters most to any business. From 2003 to 2008, revenues grew at an annualized rate of nearly 7 percent, outpacing national trends for both distilled spirits and wine. You might argue that it would be difficult for anyone with a monopoly on booze to fail to turn a profit. And state stores have a long way to go to shake the Soviet-era image seared into the minds of many customers. But just in the attempts it is making to improve, Pennsylvania's booze bureaucracy is proving to be its own noble experiment.

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