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Oh, SmAlbany!

Daily posts and occasional longer essays about politics, culture, and life in the Capital Region...updated M-F, midmorning

"I write this not as a booster of Albany, which I am, nor an apologist for the city, which I sometimes am, but rather as a person whose imagination has become fused with a single place, and in that place finds all the elements that a man ever needs..." -W. Kennedy, from O Albany!

Liquor Rebates

Somebody call Mark Green: WNYT is reporting today that some local liquor stores are getting illegal rebates from booze distributors and wholesalers, whose practices and pricings are regulated by the state:
Shopping around for your favorite bottle of wine, whiskey or vodka, you may find certain stores sell them at a lower price than others. Attorney John McManus says that's partly because the liquor industry that's supposed to be regulated under state law is running a scam. "What's going on right now in the wine and liquor industry is that it's the Wild West,” McManus said.

Wholesalers and distributors have to file a price list with the state Liquor Authority every month. According to a June 2004 document they listed a 1.75-liter bottle of Absolut Vodka at $38.33 a bottle. But on the next page, the same size of Absolut was listed at $8.45 a bottle. McManus says the lower price is offered to select stores, which he says violates alcohol beverage and control law. "What is going on with the wholesalers not only violates the ABC law, but also violates other provisions of state law and as well as the common law," he said.

McManus filed a lawsuit on behalf of Craig Allen, owner of All Star Wine and Spirits in Latham. Allen says the problem goes even deeper, where big alcohol offers illegal payoffs and trips to store owners to push certain products. "Most smaller retailers can't possibly compete with large retailers in each market who are getting advantages of these kind of savings, of cash, of trips, a lot of perks that come along on being at the in with them," Allen said.
Two points here:

1) All Star Wine and Spirits is not a "small retailer": Actually, based on my own impressions, it's one of the biggest liquor stores in the Capital District! Makes me think the rebates and illegal discounts aren't being given to the large stores, but simply to the well-connected owners, whether small or large. Doesn't change the illegal nature of it, but it does undercut McManus' populist plea that this is hurting small shop owners. Clearly, big stores are just as suceptible if All-Star is losing out.

2) Isn't the real story here the artificial markup on liquor caused by state regulation: Why should we pity the shop owners - isn't this really an issue of consumers taking a bath? It seems there are only two possibilities:

Possibility #1) If it is profitable for the distributors to make a profit by selling a vodka bottle for $8.75 and they are "normally" selling it for 38.33, then that's at least $29.58, or 338%, profit/bottle. If you assume the cheap price has some profit built into it, then the normal price is probably turning a 600% profit. Wow, the distributors have really leveraged their ologopoly of state licencing into a cash bonanza! The cheap bottles turn a windfall profit for the stores and the expensive bottles turn a windfall profit for the distributors!

Possibility #2) Now, it's possible that the cheap bottles aren't turning a profit - the distributors are using them as "loss-leaders" to gain clients. But this just means that the wholesale price of the expensive bottle is being artificially inflated! The distributors make up the shortfall by ripping off the non-rebate stores, with the ultimate result being the same. Wonderful.

Now, I don't have a problem with liquor drawing a large profit margin. What I have a problem with is the liquor distribution industry drawing a large profit in part because state regulation creates a business climate tatamount to oligopoly. In political science, this is something like the practice of rent-seeking. It turns out that a whole host of industries and professions - be it liquor or auto insurance or doctors or attorneys - actually prefer regulation and strict state licencing guidelines because it artificially constrains competition, gives those with the licence state endorsement, and allows them to easily, and legally, engage in some effective collusion. This seems like a classic example. Don't get me wrong, the state needs to regulate a lot of things, and certainly one of them is liquor sales. But it is important to be aware of the negative costs of such regulation, one of which is bottlenecks in competition and higher prices.
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At 9:13 AM , Blogger democracyinalbany said:

If you have ever worked in the liquor distribution industry you probably have found that their is ZERO competition. Liquor distribution businesses are passed down from family member to family. There are many ways to eliminate the competition, especially if you have Budweiser's money helping you.

Keep in mind, when you are sucking down $1 Busch Pints at Pauly's Hotel, they are still making a profit.

Almost makes me want to quit drinking (or at least fire up the still again).    

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