The Case for Liquor Privatization in Pennsylvania

After nearly a century, the Pennsylvania state government may get out of the booze business.

If Linda Jones McKee wants to sell a bottle of wine from Tamanend Winery at liquor stores in Maryland, she knows just what to do.

Call up a distributor, and make an appointment. Bring in some samples to find out what the distributor likes. If they're interested, negotiate a price and shipment details, and that's it.

"Six weeks after that, if they like your wine, you're in business," she said. "Even less than six weeks if they really want it."

If the distributor doesn't like it? It's an open market.

"You go down the street to the next distributor," Jones McKee said.

In Pennsylvania, it's not that simple.

Here, the Pennsylvania Liquor Control Board is the sole decision-maker behind what gets on the shelves of state-owned liquor stores.

If they don't like it, you're out of luck.

For Pennsylvania-based wineries like Tamanend, located in Lancaster, that means there's just one shot at success.

Gov. Tom Corbett is leading the latest charge to "get out of the business" of selling booze. Critics on both sides of the aisle have come out saying privatization could ignite safety issues, negatively impact rural areas or cause the state to lose money. But polls show voters support privatization.

Corbett's plans could double the amount of wine and spirit stores in the state, offering up to 1,200 wine and spirit retail locations. Grocery store, and big box retailers like Wal-Mart, also could have the option of selling wine. This would put Pennsylvania in step with most other states. A study from the Food Marketing Institute says 33 states and the District of Columbia allow food stores to sell wine.

It would be a new world for alcohol consumers in Pennsylvania, the pros and cons of which lawmakers will inevitably debate.

But it also would mean a new chapter in the Pennsylvania wine industry.

"It would give us a whole new avenue to market our wines," Jones McKee said.

Jones McKee first entered the wine industry in the early 80s, as a co-founder of Lancaster-based Wine East magazine. The magazine, which recently merged with Wines and Vines, covered all things wine east of the Rocky Mountains. She co-authored a book, "Pennsylvania Wines," on the region's winemaking history and the PLCB.

Jones McKee and co-owner Richard Carey started Tamanend Winery about 10 years ago, beginning at their home before purchasing a warehouse-sized facility and tasting room off of Route 741. They also run Vitis Wine Center, offering "wine repair" services, consulting and bottling.

Jones McKee has seen this privatization movie before — and seen it end the same way.

Under state laws, here's how the PLCB product selection works: Applicants have two shots a year to get the Pennsylvania Liquor Control Board to review their products for placement – along with a $150 fee. If the product doesn't make the cut, there goes any shot at distribution. And the PLCB keeps the $150.

Carey, a California-bred vintner and all-around enology expert with about four decades of experience making and selling wine, said he finds the application process more than a little atypical.

"There is not a place in the entire country that I have ever been where we have had to pay the company to sell our product," Carey said.

Carey once took four "bag-in-a-box" wines to the PLCB for consideration. Carey said Tamanend was the first winery in the state to have the equipment to produce the niche product, a popular party option that holds three liters of wine.

PLCB selected one varietal. By nature, Carey said, bag-in-a-box is a "low-profit" product, and he'd need to sell about 70 cases to the state system to make it worth his while. It ended up being 50.

The product ended up being sold at a store down the street from the Lancaster winery's home base. But first, Tamanend had to ship the product north to a Scranton warehouse. All efficiency questions aside, that might not be a problem for a large-scale distributor. But Carey said he could "pour the wine down the drain cheaper than I would drive up there."

Stacy Kriedeman, deputy communications director for PLCB, said there's about 100 Pennsylvania wines in the state system. When PLCB selects a product, store placement decisions are made based on factors like past sales, demographics, marketing strategy and what store managers believe will sell best, she said.

Price is negotiated on a variety of factors, but Pennsylvania wines can't be sold at a higher price in the state store than at the winery, Kriedeman said. And the PLCB has a mandatory 30-percent markup that sellers must consider.

Jones McKee said the system, however constraining, is something wineries have "learned to live with." Putting aside the bureaucracy of the system, PLCB staff is often helpful and understanding, she said. Past administrator Darryl Stackhouse, she said, "absolutely loved" Pennsylvania wineries.

And as the laws presently read, Pennsylvania wineries do have other options to legally sell their products that may not be allowed in other states with a common "three-tiered" retail system.

Wineries like Tamanend—legally considered "limited wineries" due to the amount of wine they produce — can sell directly out of tasting rooms. They also can operate up to five retail locations, either on their own or in conjunction with other wineries.

Tamanend has two retail locations, one in Lancaster and another on Main Street in nearby Strasburg.

Pennsylvania wineries can sell 365 days a year, if they want. Because the state stores operate on a special schedule that involves closing on federal holidays, and many are closed on Sundays, wineries have a leg up on those days.

Jones McKee said on one Fourth of July, she and Carey had just arrived home from a weekend out of town and decided to put a sign out saying they were open. Business boomed.

"People were so happy to be able to come in and buy a bottle of wine to be able to take to the picnic because the state stores were closed, but we had the ability to be open," she said.

The official trade group representing Pennsylvania wineries hasn't said whether it supports Corbett's privatization proposa. Jennfier Eckinger, executive of the Pennsylvania Winery Association, said the group is reviewing the proposal.

But, as the debate to privatize ramps up in Harrisburg, PLCB and PWA recently announced a new distribution plan for select wineries. It applies to those who are designated "PA Preferred" by the Department of Agriculture. Right now, that's about 75 wineries, and they will be able to place up to 10 of their wine varieties in up to 10 stores.

Eckinger said many wineries don't necessarily have the stock to be able to get into the state stores. The PA Preferred program is a way they can reach out to new audiences, she said.

"This is an opportunity for some of the smaller wineries that may not be large enough to be able to have products placed regionally let alone across the state," she said.

The program also will allow for direct store delivery, which could pare down shipping costs.

The program comes at a time when the wine industry is growing in Pennsylvania and across much of the East Coast.

In 2000, Jones McKee and Carey wrote a book about the state's industry and visited each of the 52 wineries that existed at the time. Now there are more than 150.

Jones McKee said the new preferred program is a very different approach to how Pennsylvania wineries can operate with the PLCB. It could allow for more direct relationships, for example, if a winery wanted to set up an in-store tasting to promote the new products.

"We're hopeful, if we can build relationships with stores that want to sell our wine, that we can overcome this bureaucratic red tape that gets in the way," Jones McKee said.

Carey is an advocate for privatization, as he's sold wine in many other states that have private systems. The new placement program is a step in the right direction, he said.

"If they do privatize it, in my view, that would be just fine," he said. "If they don't privatize it, at least now we have a more realistic possibility of being able to get our product in the system."

Cary Greene is the chief operating officer for Wine America, a wine industry trade group representing 48 states. Greene said that wineries face 50 different sets of rules for selling their products — one for every state.

"Control or private, it's still complex," he said.

He also said that not every winery is interested in large-scale distribution, including in Pennsylvania where they can sell directly from their tasting room. And there's the simple space factor: A store may just not have room on the shelves, "no matter how outstanding your product is," Greene said.

Unique to Pennsylvania is the brand of wine that PLCB produces and markets on its own, called TableLeaf. This "doesn't make much sense," Greene said.

"The state government itself should not be creating a competitive advantage against its own business," Greene said.

But, if the Corbett administration succeeds with its pitch to end the nearly century-old status quo on state-run booze sales, Greene said he hopes the change is done "thoughtfully" and with plenty of legislative input.

In Washington state, the liquor control system was privatized by voter referendum last year. Greene said the industry is still digesting the change, and the inner workings of the system are still getting figured out.

In the end, what matters is a fair system, Greene said.

"What we would like to see as the barometer for success is the consumer deciding what they want or what they don't want," he said. "Whether it's a control system or a private system, our members don't necessary want a leg up. What they want is a fair shot at the market."

This article originally appeared at Watchdog.org