In a major change, Montgomery County’s Department of Liquor Control is shifting from its long-held formula-based markup approach for wholesale alcohol products to setting prices itself on specific products.
DLC Director Robert Dorfman said Wednesday that the change will make the department run more like a privately run business than an arm of the county government.
“We’re trying to make this a competitive, viable customer service-oriented business,” Dorfman said. “The way [pricing] was structured was out of convenience—to apply the same markup across the board makes zero sense.”
The pricing change will take place July 1.
The move will end the DLC’s standard markups on wholesale items, which have long been in place at the county-run department that controls the wholesale distribution of alcohol and retail sale of liquor in the county. Under the formula system, the DLC sells beer to licensees—the privately owned beer and wine stores and restaurants in the county—at about a 28 percent markup, wine at a 25 percent markup and most spirits at about a 28 percent markup.
The change will also stop alcohol producers and other distributors from being able to set their own prices for their products in the DLC’s iStore inventory system. Currently, companies that sell alcohol products to the DLC for wholesale distribution can access the DLC’s online inventory management system at the beginning of each month and change the prices for their products. Dorfman said this resulted in some suppliers, who knew how much the DLC would mark up their products, being able to set prices to maximize their profits and cut the DLC out of negotiating for lower prices.
The pricing change will allow the department to operate like other private alcohol distributors, according to the officials.
“Certain suppliers may be upset about it because they had the option,” Dorfman said. “But we need to protect the integrity of our pricing system for our customers. [Suppliers] could theoretically go in there and double the price. That had to go.”
Dorfman said the change should “absolutely” decrease costs for customers and licensees. He also believes the change will increase profits by reducing the department’s purchasing costs. The DLC generates about $30 million in profits for the county each year.
John Zeltner, a former president at Premium Distributors in Virginia who oversees the DLC’s warehouse operations, and Dorfman, a former Marriott hospitality executive, both said they had never seen a pricing system like the one used by the DLC. The two men have been tasked with improving the operations at the department after a string of controversies over the past two years led to the resignation of its longtime director and complaints from beer and wine shop and restaurant owners. Some local elected officials and business leaders have also called for the county to privatize the department and use the three-tier system used elsewhere in the state of private alcohol producers selling to wholesale distributors that then deal directly with alcohol stores and restaurants.
Neither Zeltner nor Dorfman knew why the formula system was put in place at the department, but Dorfman said it was possibly done out convenience because the DLC didn’t have a pricing department.
That is changing. Zeltner said the DLC hired pricing and buying managers after he reorganized the warehouse in July 2016. Next month, distributors will have to submit any changes in their prices to the DLC and then the DLC will decide how much to mark up the price before selling the product to licensees or in its retail stores.
In an email the DLC sent to alcohol producers and distributors last month, the department noted, “The county will set pricing based upon reviewing suggested retail pricing, margin, profitability and competitive pricing in surrounding markets.”