Cities in the bottle business

ed11nwliquor-2

by Ethan Groothuis, Mike Hanks, Andrew Wig and Sean Miner

For some Minnesota cities, liquor is still big business.

A report from State Auditor Rebecca Otto found that in 2015, Minnesota’s municipal liquor operations reported a 20th consecutive year of record sales, totaling $337.2 million.

It revealed a tale of two liquor operations – generally large and more profitable in the metro compared to greater Minnesota.
Of the 34 Minnesota cities reporting a net loss in 2015, all were located in greater Minnesota.

When considering sales by volume in 2015, Lakeville achieved the most, followed by Edina, Eden Prairie and Richfield. Worth noting is that Eden Prairie’s population is greater than that of the other three cities in the top four.

Interestingly, despite selling some $2.5 million less than Lakeville and around $1.1 million less than Edina, Eden Prairie reported the greatest net profit out of the metro area municipal liquor stores in 2015. According to the report, those net profits totaled $954,238 for the year, followed by Lakeville ($762,908), Edina ($653,384) and Richfield ($638,404).

In general, the report found that metro area stores reported considerably higher profits compared to greater Minnesota stores, despite accounting for just less than 10 percent of the cities operating municipal liquor stores.

Though only 19 of the 193 stores are within the metro area, they “represent 34.9 percent of total sales and 27.3 percent of the net profits of municipal liquor operations,” according to the report. It goes on to note that metro-area sales “averaged $3.0 million in 2015, compared to average sales of $1.2 million for all Greater Minnesota operations.”

The report attributes to “primarily two factors: higher sales volume at metro area operations and the accompanying efficiencies in regards to purchasing power, staffing and fixed asset costs in larger operations.”

History of municipal liquor

So, how did Minnesota cities get in the liquor business?

The municipal liquor store concept followed the end of the Prohibition era in the 1930s, according to Paul Kaspszak, executive director of the Minnesota Municipal Beverage Association.

The purpose of municipal liquor stores was to control the sale of alcohol in the community, often as a reflection of community standards or attitudes. Today municipal liquor stores frequently serve a dual purpose, Kaspszak noted. “It can also be a money-maker,” he said.
Controlling the sale of alcohol is different than responsible service, Kaspszak said. All alcohol retailers should sell responsibly by not selling to minors and not selling to intoxicated individuals. Controlling alcohol sales means making business decisions that reflect community values. Some of those decisions are significant, others may not be noticeable by liquor store customers, Kaspszak explained.

In Edina, for example, the city decided that the sale of beer in kegs resulted in underage consumption. Statistics can argue the point either way, but Edina chose not to sell kegs in its stores as a result of its concern, according to Kaspszak. Kegs are not illegal in Edina, and customers may purchase them in neighboring cities, but the city chose to accept the financial consequences of its decision in order to exercise its right of control, he said.

Municipal liquor stores, sometimes in conjunction with an on-sale business such as a bar, may also generate revenue for a city – revenue that may be used to offset general fund expenditures of the city. Cities are not immune to competition from liquor retailers in neighboring cities, and cities in the liquor business discuss operational issues and best practices in an effort to maintain the profitability of their operations, according to Kaspszak.

Cities occasionally exit the liquor business, such as Shorewood, which sold its liquor stores to the private sector several years ago. Cities typically exit the business because of poor management, an evaporating customer base – particularly in small, outstate cities – or philosophical opposition to running a business that could be left to the private sector, Kaspszak said.

There are 210 cities that have municipal liquor stores, and those cities operate 242 facilities. The state auditor’s 2015 report tallied sales by those cities at $337 million, with a net profit of $24.9 million, Kaspszak noted.

But for cities without, competition is just like any other business model.

For some, that meant responding to the age-old question of, “How can I get even cheaper alcohol?” with the free-market answer of Total Wine and More.

Total Wine has opened in cities such as Bloomington – who is out of the municipal liquor game – including a location mere feet outside of Edina.

When Total Wine entered the Twin Cities, it shook up the market, according to Kaspszak.

The business strategy of Total Wine is different than Twin Cities liquor retailers had seen, Kaspszak said.

Total Wine drives customers to its stores through its low prices on name-brand products and promotes its proprietary labels, primarily wine, in the store. And those proprietary products have a higher markup, according to Kaspszak. “That’s how they make their money,” he said.

In Minnesota liquor stores, however, the products must come through wholesale distributors and must be available to all liquor store operators. Therefore, liquor stores throughout the state can carry products that appear to be exclusive to Total Wine, and those stores can undercut Total Wine’s pricing, Kaspszak explained. And in some cases, liquor stores are doing exactly that, he noted.

“People need to look at their businesses and make changes as necessary,” he explained. “Our members are doing that.”

Richfield thrives despite competition

Proportionate to its population size, Richfield’s four municipal liquor stores, which fund the city’s parks and recreation department, generate more sales than the municipal liquor operations in considerably larger Eden Prairie and Edina. Richfield stores made $10.9 million in sales in 2015, compared to Eden Prairie’s $11.3 million, and Edina’s $12.5 million.

“We have pretty huge customer counts. I think it’s – people are shopping local,” said Bill Fillmore, Richfield’s municipal liquor operations director. “We still have a mature audience, senior citizens that have been here for years. I don’t know how far they want to travel.”

Richfield has an advantage over Edina, at least, thanks to a wider geographical buffer from competition like Total Wine.
“It has affected our sales, but I don’t know if it has affected us as dramatically as some other communities,” Fillmore said, observing that his customers “may not be as willing to travel to a busy shopping center like that and find a place to park in the winter time just to make a small purchase.”

But Richfield’s city-owned liquor stores don’t rely on geography to stay competitive. Two of the city’s liquor stores have been remodeled in recent years to keep customers coming through the doors. Plus, Richfield’s four outlets focus on personal attention, Fillmore said.
“We do a lot of carry-outs for customers and a lot of individual service,” Fillmore said.

The personal touch extends to Richfield’s schedule for some of the special limited releases that have captured the imagination of craft beer aficionados. For example, the Richfield operation delayed selling its share of Goose Island’s much-coveted Bourbon County Stout in November.

Beer drinkers normally line up for the whiskey-barrel-aged delicacy when it is released the day after Thanksgiving, causing it to quickly sell out across the metro area. But Fillmore held on to his stores’ allotment until the second week of December, releasing it in conjunction with the grand re-opening of his remodeled Cedar Avenue location.

Fillmore believes that by waiting on the special release, Richfield liquor stores created a more personal connection with customers. Bourbon County zealots normally go store to store on Black Friday as they stockpile the beverage, but “you don’t make any long-term relationships” that way, Fillmore said.

The cohort of today’s discerning beer drinkers represent a departure from the buying habits of their predecessors.
“I’d see for years a customer come in and you knew he was gonna pick up a case of Miller Lite,” Fillmore recounted. Craft beer drinkers aren’t as brand loyal, he said.

Richfield liquor stores employ a coterie of what Fillmore calls “beer geeks,” who keep up on trends that bring in the drinkers who have also become beer experts.

“The consumers are right on their tail,” Fillmore said.

Edina looks to restructure operation

The city of Edina was enjoying a steadily increasing windfall from liquor operations, with money going to fund arts and parks enterprises and paying down capital typically passed on to taxpayers – what could possibly go wrong?

At its peak in 2012, there was almost $1.5 million in profit from liquor operations. Budgets were formed with the assumption that the same – if not additional – sales would stay, when the entrance of additional competition, like the Total Wine just over the border in
Bloomington, decreased profits dramatically.

By 2015, profits had fallen to just over $600,000.

The council voted in late 2015 to create the Edina Liquor Task Force to confront its new reality, but months of work was needed to form solutions.

Still profitable in the grand scheme, and compared to the metro area, Edina ranked second in overall sales in 2015 at nearly $12.5 million, but assumed profits still caused issues for the city’s budget.

“In 2015, we had a big problem where we had a deficit we had to fill of just over a million dollars,” Assistant City Manager Lisa Schaefer explained during the Dec. 20 city council meeting where she delivered both a post-mortem on declining sales – but also a vision for the future.

One effort going forward is to better explain the connection between the liquor profit contributions to other enterprises in Edina.
Schaefer explained that city-operated ventures such as Centennial Lakes, Braemar Arena and Edinborough Park all benefit from the profits made from Edina Liquor and the Edina Aquatic Center.

City Manager Scott Neal believes that the connection to community benefits is an important piece in increasing profits.
“They should care because the better we do in terms of producing profit through our liquor operations, the more that we can spend in our recreation enterprises,” Neal said. “We can make them better, or we can reduce the cost [for residents.]”

He added that the more profits generated by liquor is put into capital spending without having to raise taxes.

With the creation of the Edina Liquor Task Force, the city moved into the band aid-ripping phase of looking at their liquor operations.
“One idea I occasionally hear is, ‘Well, the city shouldn’t be in the business of selling liquor anyway’ – we are not at a stage where that is something we should be wrestling with,” Councilmember Bob Stewart said. “That question was decided years ago. An exit … is a terrible strategy for the city. We are in the business, and we should be as competitive as we can while we are in the business.”

The task force met several times throughout the year and presented a series of strategies for success, including investing in different marketing, improving service to customers and improving convenience.

Some of those efforts include implementing loyalty shareholder’s programs, introducing clubs and specials and even the potential for an initiative to order online and delivery.

“Our online strategy has not been fully formed,” Schaefer said. “We are looking at vendors to partner with for software and delivery. The process will happen over the next couple of months.”

The goal for 2017 is to hit a profit of $1 million.

“We decided to look at a very aggressive goal, which we think is doable,” Schaefer said.

Josh Furbish, the new general manager of liquor operations, just started his new role in the middle of December and is one of the components to a potentially thriving municipal liquor future in Edina.

“I am looking forward to not only getting back to a respectable revenue level … but exceeding those extraordinary high-water marks in the past,” Furbish said.