How Does a Wine Monopoly Lose Money?

In a report issued today, Pennsylvania Auditor General Jack Wagner says the state liquor control board's wine vending machines, a wonderful illustration of what happens when a government monopoly tries to act more like a business, are operating at a loss, costing taxpayers more than $1 million since they were introduced a year ago. "We think the wine kiosk program has failed," Wagner said at a press conference, "and it needs dramatic, radical changes if the program is going to continue to exist." His report attributes the failure largely to mechanical problems that caused an embarrassing month-long shutdown of the machines right in the middle of last year's Christmas season. "Despite shutting the kiosks down for over a month to repair them after nearly 1,000 errors occurred," the report says, "the Liquor Control Board and the kiosk vendor lost credibility and customer confidence when malfunctions continued after the kiosks reopened." 

When they are working, the kiosks dispense a limited selection of wines at limited locations and times (not on Sunday, of course!) to customers who present ID, look into a camera monitored by a state employee, breathe into a blood-alcohol meter, and swipe a credit card. The Pennsylvania Liquor Control Board (PLCB) originally expected to have 100 kiosks in grocery stores throughout the state, each selling 30 to 50 bottles a day. But only 32 machines were ever up and running at one time, and only 15 manged to hit the bottom end of that sales target. In June the Wegmans supermarket chain withdrew from the kiosk program, bringing the total number of machines down to 22. Here is how the company explained its decision:

Customers want the convenience of purchasing wine in a supermarket, but found the choice too limited in the kiosk. Also, our customers rely upon the knowledgeable, personalized service our employees provide every day, something an automated kiosk just cannot provide. In the end, the kiosks just did not fit well with our store environment.

A week ago Walmart announced that it had decided not to install 23 planned kiosks. Presumably Wegmans and Walmart had second thoughts at least partly because they want shoppers to feel like valued customers instead of suspected criminals forced to take a sobriety test. A July 2008 memo (PDF) from the committee assigned to evaluate bids for the kiosk contract warned:

The proposed process for purchasing products via the kiosk machine is cumbersome and may meet with public criticism for not being "user-friendly." Specific areas of concern include 1) public angst over blood-alcohol level scanning, 2) excessive credit card "hold" amounts and 3) general distrust over having to register with the government to use the kiosk machine.

The committee also worried that the lone bidder, Simple Brands (I shit you not) of Conshohocken, was vague about the fees it might be charging, did not respond to repeated requests for information, and "continued to change its business plan 'on the fly' as the Committee has broached operational issues and concerns." The committee recommended that the PLCB reject the bid. But the PLCB, determined to fend off calls for privatization (which Gov. Tom Corbett and House Majority Leader Mike Turzai support) by showing how businesslike and customer-oriented it can be, hired Simple Brands anyway. The Philadelphia Inuirer reports the PLCB "is currently locked in a nasty legal dispute with the Conshohocken-based contractor, leading to the very real—and very likely—possibility that the kiosk program will end." The PLCB says the company owes the state the money it has lost so far; the company disagrees. Wagner urges the PLCB to "take immediate steps to terminate the kiosk contract unless the kiosk operations can be modified to meet the originally stated objectives of providing greater customer convenience, reaching into underserved areas, minimizing Board costs, and increasing Board profitability." 

Jay Ostrich, director of public affairs for the Commonwealth Foundation, sees the kiosk program, which was supposed to demonstrate that the PLCB can adapt to the demands of consumers, as Exhibit A in the case for privatization:

The taxpayers and consumers of Pennsylvania have rejected a program that the PLCB has been trying to shove down the throats of those parties. This is really a symptom of a much greater illness in that the PLCB has continued to try to mimic private enterprise and has been a complete failure at doing so.

You have to give the PLCB credit for this much: It has shown that, with the aid of modern technology, the government can lose money while selling a highly popular product over which it has a monopoly.

More on Pennsylvania's wine kiosks here. More on liquor privatization here.

[Thanks to Max Minkoff for most of the links.]