The costs of convenience

Abandoned liquor store

Over at Blue Oregon, politico and former pub owner Jesse Cornett argues against liquor privatization, satisfied with the system the way it is:

Bar and tavern owners obtain their liquor almost the same way that anyone in Oregon does: they buy it from a liquor store. It comes with a small discount and can include delivery. When I called in my order, they would ask when I wanted it. Right away? Sure. See you in 30 minutes. At a certain time? Great, we’ll see you then. Run out of a particular product late in their hours? Just pop by. Call on your way and it’s sitting at the counter waiting for you. The system works exceptionally well for Oregon’s pub, bar and restaurant owners. Obtaining liquor was much more convenient than any other product.

Jesse is absolutely right about this. Oregon’s system makes buying liquor simple. To stock the bar I manage, I make one phone call, receive one delivery, and write one check. Easy! In contrast, our wine buyer deals with more than a dozen distributors, taking separate deliveries and writing individual checks for each of them. Pain in the ass!

So yes, the current system is convenient for bar managers. But that’s a terrible reason to keep it in place. It leaves unaddressed, for starters, the cost to the bars. Licensees in Oregon receive only a very small (about 5%) discount off retail. The set price means we don’t spend time bargaining or making deals, or what is known in less regulated states as “doing your damn job.” It also means we pay more for our liquor, making it harder to put quality spirits in our menu cocktails.

The situation is even worse when we want to bring in relatively esoteric spirits from other states. Oregon distilleries benefit from the fact that the state’s monopoly buyer, the OLCC, gives them de facto favorable treatment. The agency is very likely to “list” their products, meaning it will purchase them in bulk and sell them at a lower price. That’s good for local distillers, but not so good for out-of-state producers and the consumers who want to buy their spirits.

As an example, I requested aquavits made in the Midwest as special order items this year. To the OLCC’s credit, they both eventually arrived, but our system renders the prices exceedingly high. The Gamle Ode Dill Aquavit sells in Oregon for $42.45 a bottle. In its home state of Wisconsin, I see it selling for $29.99. The North Shore Aquavit from Illinois? $47.25 in Oregon, $27.99 at Binny’s in Chicago. Shipping costs account for a portion of the difference, but not nearly all of it.

Advantaging local distillers over out-of-state producers shouldn’t be the goal of our distribution laws. It may even be unconstitutional. I have no doubt that skilled local producers will continue to thrive in a private market, just as they do in the privatized beer and wine system. And if there are some producers who cannot survive without the government buying their product in bulk, then maybe they shouldn’t be in the business.

(As a point of contrast, Matt Yglesias notes at Slate today that Washington, DC’s unique openness to importing spirits is part of what has made the city’s bar scene so fantastic. Oregon would do well to follow its lead.)

If Jesse’s argument were correct, there would be no reason not to extend it to restaurants’ other inputs. If a state monopoly on liquor is so great, why not monopolies on beer and wine too? Or on meat and cheese and fish and bread and vegetables? It would be so much easier on the chefs! But no one would take these ideas seriously, because we’ve long since figured out that essentially free markets are the best way to distribute normal goods. Liquor is a mostly normal good – and to the extent that isn’t because of negative externalities, taxes are a far better way of addressing that than inefficient distribution is.

As I never tire of reminding people when it comes to questions of distribution, markets are for consumers. Not only consumers who want local products, but all consumers – even the ones who just want stuff that’s basic and cheap. They would very much like to pick up a bottle for a few dollars less than they pay now and not have to visit a special store to get it. This is why privatization is likely to happen eventually, regardless of how it affects bar managers and local distilleries. Consumers are tired of dealing with a distribution system designed for the 1930s.

And this is where Jesse has a good point: There are going to be winners and losers with privatization, and distributors and large retailers are going to exert their influence to ensure that they get an advantage. This is one reason that Washington state’s privatization measure bars entry to new, smaller stores. If Oregon privatizes via ballot initiative, as appears increasingly likely, then we may end up with similar problems.

The solution to this is acknowledge that getting privatization right is difficult, but doable, and to demand that the legislature write a bill that learns from Washington’s mistakes and puts consumers first. The alternative is to wait for ballot initiatives written by retailers, one of which will inevitably pass.

[Photo by Joseph Novak used under Creative Commons license.]

[Disclosures: In addition to working as a bartender, I consult for several spirits brands and beverage-related products. I have not worked for retailers or distributors.]

Comments

  1. Paul Jahn says:

    Very interesting. I’m from Minnesota, currently live in Minneapolis, actually do some work with Mike at Gamle Ode, but did live in Washington State for seven years. It’s been 15 years since I lived there, but I vaguely remember local beers and spirits being easily available (I do love local) yet having difficulty finding a quality product produced in the Midwest or other part of the country.

    Because of whatever laws or public/versus private sales, I do know that a common spirit (think Bacardi or Stoli) costs slightly more in Washington or Oregon than it does here, which is fine. It surprises me that products such as GO or North Shore aquavit seem to have such a higher markup. Is it because they’re harder for the state to get?

    You and Mike know more about this, but it sounds like you’ve all had to go through extra hoops to get GO at the bar you manage. I’d love it if it was easier and less expensive for you and to pass the savings. I suppose that part is out of our hands.

    My 2 cents.

    • Jacob Grier says:

      Mike has more details from dealing with the OLCC than I do, but from what I understand it comes from the hefty mark-up the state puts on special order items. For out-of-state producers, selling to Oregon involves either accepting a very low price for yourself or a very high price for consumers..

  2. Hi Jacob, I enjoy the posting and discussion, however if I was to point to the #1 reason for the price differential it wouldn’t be public vs private delivery system, it would be ordinary economies of scale.

    Why does a bottle of GO cost more, because it is part of a shipment containing only 12 bottles into OR and therefore the pricing of each bottle bears 1/12 of all the shipping and handling burden. Right now I have no other GO products nor even my producer 45th Parallel that the OKCC is bringing in whereby we could bundle a pallet together with a more cases of GO and some cases of 45th Parallel Vodka, Border Bourbon, New Richmond Rye Whiskey etc to spread the shipping out over even say 20-30 cases of craft liquors.

    Same works in reverse for House Spirits Krogstad Aquavit locally in MN. MN is a private distribution state, but I’ve never seen their aged aquavits here at all and the one botle of their regular star anise flavored aquavit I found and bought for about $36 two years ago. I have to imagine they faced the same challenge of how to get enough aquavit into MN to bring the cost down; but then would risk them sitting dusty on the shelves without someone local actively nudging the customers into giving it a try.

    Contrast that with the big liquor companies, I’ll just pick Bacardi, where even if they create for example a special limited run craft rum, it can be bundled with all the other Bacardi products that are going out of that warehouse heading to OR, maybe on a Bacardi truck instead of even a common carrier or shipper like UPS/FedEx.

    Same with any of the other established national/international entities. It is just one of the many economies of scale disparities faced by any craft distillery getting their product produced and trying to increase market share.

    That’s why a big market craft product can generally be priced less than even a local craft product; the big company buys in bulk, produces in bulk, is already established in more markets, and can place even their special product easier while piggybacking on the already massive economies of scale the rest of the brand portfolio operates.

    At least until the campaign runs out and suddenly a favorite niche product disappears…even with the piggyback advantage sometimes sales disappoint the executive expectations. That type of thinking is ultimately why the big companies kept trimming brands and flavor options from their portfolios until circa 1980 where stores could display all their booze options in a room the size of a closet.

    Thus, the whole motivation for the craft movement. Therefore, what it does though, is it challenges us as buyers and customers, to determine our sense of value beyond mere purchase price or number of units moved. What products will we support even though they are doomed to cost more or sell less…because–
    1–they are trying to distinguish their brand from the mass market options with unique flavors that reach beyond the norm;
    2–they are use local and fresh ingredients instead of chemical flavorings;
    3–they are avoiding artificial flavorings and colors; and
    4–they are keeping the money in American communities.

    45th and I are trying our best to produce good quality and consistent within an acceptable range of flavor. But we are working with fresh dill grown locally, infused into grain alcohol produced at 45th from their own mash made from grains grown on local farms, all subject to all the strains of nature’s growing season. And in small batches, not in railcar/tanker truck batches. We’re not measuring gallons of chemical flavoring into bulk containers of regionally processed ethanol.

    If people only want best bargain and ordinary flavor options–if those are going to be held forth as the ultimate goals for our liquor options–
    –then we are going back to 1980 America and throwing away the futures of all the craft distilleries and breweries and jobs that they are bringing to our communities; and
    –then we are back to being owned by multi-national corporations mostly owned overseas.

    My hope and it might seem counter-productive, but I hope people at least for awhile while new distilleries and brewers are getting their products and processes figured out and nailed down–people should not demand the best bargain for our buck on our purchase. For my booze bucks in this economy—I worry supporting businesses that are bringing good options into the market and local investment into communities more than I worry about low price.

    Feel free to shot holes in my understanding of the market. I freely admit my limited understanding. However I’m an idealist though and know I’m tilting at the windmill…it’s the best I got going right now.
    Many thanks and best wishes to you and your readers–Mike

Trackbacks

  1. [...] of the 3-tier system (2:00); Brandon on homebrewing (0:44). Here’s Jacob discussing the Oregon system at his cocktails-and-policy blog Liquidity Preference, and here’s Brandon on [...]

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