June 19, 2012 |
Matthew Mann
There's been a lot of buzz in the alcoholic beverage industry this year about privatization; the movement of the sale and distribution of wine, beer and distilled spirits, in varying combinations, from the ownership of the state government to the hands of private enterprise. The buzz started last November when Washington state voters passed an initiative to privatize the state's monopoly on the sale of spirits through state-owned stores to private ownership. It effectively removed the last vestiges of the state’s participation in the sale and distribution of spirits, although state ownership or not, alcohol will continue to be a heavily regulated, and taxed, product in the Evergreen state.
Complete or Partial Control
With the transition of Washington state, there are currently 18 states exercising some form of state "control". As is the entire system of alcohol distribution in this country, these "control" states are a product of the 21st Amendment, wherein the state regulatory agency is an active participant in the wholesale and/or retail tiers for the sale and distribution of alcohol. The degree of control can vary from total control over both tiers and all classes of alcohol to partial control over a single tier or select classes.
States such as Pennsylvania, New Hampshire, and Utah are examples of states exercising complete control of distribution of all forms of alcohol. Oregon, Virginia, and Idaho are just a few of the states exercising partial control, controlling only certain classes of alcohol such as spirits, or only certain segments of the market such as retail sales.
The “Control” Conversation
Regardless of the amount of control exercised, the results of the Washington election caused significant conversation in many of the control states about the future of state control:
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Is it an appropriate exercise of state power in a capitalist society,
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Would privatizing the system benefit the state and the public, and
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Revenue, tax and public health implications.
Champions of the Washington initiative, including private distributors and retailers, argue it will bring more variety, accessibility, and ultimately, lower prices through competition and market efficiencies. Proponents in Pennsylvania and other states will likely make similar arguments. In the past six months Pennsylvania, one of the largest consumption states as well as one of the most tightly controlled, has been debating a bill for the privatization of their system. This follows long-held complaints about state inefficiency and disregard for the demands of the buying public. Furthermore, attempts by the state to modernize and make the system more responsive have shown only mixed success. The governor supports the privatization effort but the prospects for passage remain uncertain, as powerful opponents of privatization work to stymie the bill.
Opponents in Pennsylvania express the belief the state is the best vehicle to control distribution for public health and revenue reasons by combating alcohol abuse, preventing access by minors and profit from state sales. They point out the state derives substantial revenue from the sale of alcohol and are concerned about its loss in tight budgetary times (the state website cites revenue of over $1.9 billion in FY 2010-11). Finally, they are worried about the loss of thousands of state worker's jobs, pushed no doubt by the state employees groups seeking to protect their ranks. The arguments were similar in Washington and probably will be heard in most control states debating the issue.
What will be the result of this conversation about privatization?
Time will tell as the competitive nature of market dynamics takes place over the next few years. As with any private industry, some areas will benefit and others will not. Variety can be squeezed by supplier's market clout, accessibility will in large part be determined by location, with high population-density having greater access, while low population areas could be left without access at all if no private company chooses to service the area. Prices, well, they can be driven by supply and demand, but also by taxes, which remains under the control of the state. As part of the privatization push, Washington state taxes and surtaxes amount to about 30% of the price, so don't expect prices to come down soon.
Privatization is the current buzz, but it seems unlikely to me that it will sweep the nation. Alcohol control is an emotionally-charged, highly localized issue that defies national trends. Still, it is a conversation that needs to take place. A system not predicated on a dynamic market is subject to becoming stale, entrenched and moribund. Many of the current complaints about state control claim the system is locked in the past, non-responsive to cultural and technological changes that have transformed the country since the end of Prohibition. Whether the choice is to privatize or continue state control, the conversation forces the state to re-examine its practices, and respond to the needs of the consumer or face diminishing support from its constituency. It's hard to see the downside in that.
It never ceases to amaze me that this subject continues to be a huge blind spot for the wine industry. Now that there is tangible evidence that 
Reality Check 1: Ecommerce sales conversion rates around 1% and 2% are fairly common.
Jun 28, 2012 at 9:59 PM
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