Less than four months after putting in place a new pricing model, Montgomery County’s Department of Liquor Control (DLC) is redoing its prices again in response to a warning from the state comptroller’s office.
Jeffrey Kelly, the chief of the comptroller’s Field Enforcement Division, which regulates the alcohol industry in the state, sent the DLC a bulletin Sept. 12. The bulletin notified the county agency that it might be getting discounts from alcohol producers and suppliers that other distributors in the state aren’t receiving—a violation of state law.
The DLC controls the wholesale distribution of all alcohol and retail sale of liquor in the county—a unique arrangement in the state. Other jurisdictions’ alcohol sales are served by traditional privately run distributors, rather than a county agency. The DLC generates about $30 million in profit for the county that is used to pay off infrastructure bonds and supplement the general fund.
In July, the DLC instituted a new pricing model that removed standard markups on their products—such as 25 percent on all wine—to make sure suppliers and distributors that sold alcohol to the agency didn’t know the prices of their competitors.
The DLC also cut out suppliers and distributors from its computerized pricing system. Previously, suppliers and distributors could access the pricing system to set prices on their own products, according to Robert Dorfman, the DLC’s director.
This meant suppliers and distributors could see the prices their competitors set for their products. Knowing the standard markup, they could price their products to maximize their sales and competitiveness, effectively cutting the DLC out of negotiating for a better price.
After making the changes, the DLC began setting its own prices.
“When we stopped allowing suppliers to get into the cost system, we started getting stronger deals because they couldn’t see what their competitors were doing,” Dorfman said Monday.
The agency also started a new policy in which it raised the discounts an alcohol producer or supplier would need to provide to be featured in the agency’s alcohol ads, which run in publications such as The Washington Post. Dorfman said the DLC required suppliers to provide discounts of at least $18 per case to have their products featured in the ads.
The move to require higher discounts was also a way to cut down on the number of products on sale in the DLC’s 27 retail stores, where about 80 percent of the products were consistently listed for sale. Dorfman said this created a situation where it seemed like everything was for sale and it diluted the impact of the discounts.
However, Dorfman said the agency never asked the alcohol suppliers to give them larger discounts than other distributors in the state.
“Our assumption was whatever you do for us, you’d do for everyone else in the state because that’s the law,” Dorfman said.
However, the comptroller’s officer determined that wasn’t always happening.
“The discount that suppliers were providing to Montgomery County was not compliant with the law because it wasn’t available to everyone,” Joseph Shapiro, a spokesman for the comptroller’s office said Monday.
He said the bulletin sent to the DLC and suppliers was intended to put suppliers on notice that they weren’t complying with the law. He said the discrepancies involved every type of product the DLC sold—beer, wine and liquor.
A representative from the Distilled Spirits Council, the trade association that represents liquor producers in the U.S., did not immediately return a request for comment Monday.
Dorfman said he believes the DLC wasn’t at fault in the situation, but it has created problems at the agency. He noted that the department is working to change prices on “thousands and thousands of items” before the busy holiday season to handle the price changes suppliers are making after altering their discounts.
The state asked the suppliers to correct the problem immediately, which has meant the DLC had to alter prices to make a profit on the products.
Dorfman said he doesn’t expect prices to change significantly for consumers. He noted that while suppliers are reducing their discounts, they’re also reducing the base price they charge for products.
The DLC is asking the comptroller to give the agency until after the winter holidays to complete the pricing changes. Dorfman said the department is scrambling to update ads publicizing holiday specials that will have to be redone to meet the state’s deadline of the end of October.
Dorfman said the agency is drafting a letter for the approximately 1,000 restaurants and privately owned beer and wine stores that buy their alcohol from the department to explain the upcoming pricing changes. The department is waiting to see if the extension is granted before sending the letter, according to Dorfman.
“The biggest thing is that we communicate with everybody, so if they see a change in prices—either up or down—that they know why,” Dorfman said.
Updated – noon, Oct. 25 – On Tuesday evening, Dorfman sent the following letter to DLC licensees notifying them of the possible price changes:
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