The Task Force reviewed the LCB retail operations; explored a number of structural alcohol sales options from government control to privatization; and assessed overall economics, business efficiency, revenue, and distribution of dollars. In forming conclusions the Task Force focused on public health and safety, enforcement and control and community needs.

In addition, public input was solicited throughout the Task Force deliberations, via the project website, press releases, in-store flyers, open public meetings and four public hearings. Of the input received, only 25% advocated for any change to the overall system. Seventy-five percent (75%) actively supported the current system or spoke only to changes they would like to see to the current system. More than two thirds of the unaffiliated citizens support the current system. Additional public input is included in Appendix C.

Based on this review, the Task Force presents the following conclusions and recommendations. The organization of this section is based on the elements of the charge from Governor Locke.

     A. Evaluate the appropriateness of the state’s monopoly over liquor sales and alternatives to the current system, including but not limited to, privatization options; and
     B. Examine the operations and performance of the LCB’s Product and Retail Services Division, based upon generally accepted business    practices and similar operations in other states,
     C. Based on this examination and evaluation, submit recommendations to the Governor for improvements or modifications in the state’s system from the standpoint of business efficiency and economies,  public health and safety, enforcement and control, customer service and convenience, profitability, and other appropriate criteria.

3.A APPROPRIATENESS OF THE STATE’S MONOPOLY OVER LIQUOR SALES AND ALTERNATIVES TO THE CURRENT SYSTEM

The Task Force considered three options in addition to the current system including full privatization of both wholesale and retail sales of alcohol, state wholesale operations with sale of spirits through retail contract vendors, and state wholesale operations with sale of spirits through retail franchises. After discussion of all options, the full privatization and franchise options were removed from consideration. Additional information on these options can be found in Appendix E.

The Task Force is divided on its recommendation regarding the appropriateness of the state’s monopoly over liquor sales with improvements and the alternative of retail sale of spirits exclusively through contract vendors (agency stores). The following are the two positions of the Task Force members. Sixteen of the seventeen members participated in the preference vote on November 29, 2000. Additional information on each of these options can be found in Sections 3.D and 3.E of this report.


1. LCB--State and private retail sales of spirits (current system with improvements) 
By a vote of 11 to 5, a significant majority of the Retail Sales Task Force has concluded that the existing LCB method of selling spirits with improvements best serves the interests of all citizens of our state. We reached this conclusion after many months of discussion, study, expert testimony, public input, and evidence review. We base our conclusion and recommendation on the following:

• The LCB model satisfies criteria that the entire Task Force agreed were the key criteria to use in reaching this decision. 
  
  
• There is no public outcry for ending the existing state monopoly over wholesale and retail sale of spirits.
  
  
• An analysis of costs and benefits strongly favors retention of the existing LCB model.

Public health and safety are served by the existing LCB model that controls availability and access of liquor, particularly to those under 21.

2. Compliance and Enforcement. From the evidence presented to the Task Force, it appears that the LCB has an exemplary record of compliance with and enforcement of state liquor laws. Manuel Espinoza, Acting Director of the California Alcoholic Beverage Control agency volunteered that the LCB has a very good record in the areas of compliance and enforcement. Jim Squeo, Executive Director of NABCA, agreed. 

3. Revenue/Prevention Programs. The dollars available for prevention, treatment and education programs depend in large part on the revenues generated from sales of alcoholic beverages. Washington State ranks first in the country in terms of revenue returned to the state from the sales of spirits. There is no evidence that any alternative system could generate more revenues for the state. 

4. Jobs, Wages, Benefits. The Washington LCB model provides a stable work force, far exceeding the normal retail employee retention rate. The level of pay and benefits for state store employees is generally better than for employees in contract agency stores, and this may contribute to the stability of the work force in LCB stores. A stable workforce means that experienced, well-trained employees staff the LCB stores. This reduces the likelihood of juvenile access to alcohol. It also means good customer service and two recent surveys have indicated that LCB customers are generally satisfied with customer service in the LCB stores. 

It is important to note that the state has greater ability legally to control and direct state employees than it does to control and direct independent contractors, which is what the contract agency owners are. 

5. Product Selection and Price. There is no dispute that the product selection offered by the LCB is superb. Virtually any product that is available in the United States can be purchased through LCB stores. We also note that the system of “bailment inventory” (where the LCB does not pay for the product in inventory until it actually leaves the LCB distribution center) allows the LCB to carry a large and diverse inventory of products. 

The existing LCB model also provides uniformity of pricing and product availability, in both state stores and in agency stores, across the State of Washington, from the largest metropolitan areas to the smallest towns. The two recent customer surveys cited in footnote 2 indicate general customer satisfaction with product selection.

The Task Force is aware of some customer complaints about the high price of spirits in Washington. However, it is clear that this is attributable to the high levels of tax imposed on spirits in Washington, and not to any practices of the LCB. Evidence reviewed by the Task Force shows that prices would be even higher with privatization. 

6. Efficiency. The existing LCB model may not be as efficient as private retailers could be in selling spirits because the state is not profit-driven. Its mission is to control availability of and access to alcohol, not to promote it. Despite this limitation, the efficiency of LCB retail operations should be improved (Section 3.B)

7. Conflict of Interest. We see no inherent conflict between the LCB’s selling of alcohol and its regulatory/enforcement mission. The LCB is not profit-driven and one of the key ways it controls and regulates the availability of alcohol is through controlling sales. 

If indeed there is some kind of inherent conflict, as the minority seems to believe, we do not see that it would be eliminated by the state’s selling alcoholic beverages through commissioned agents (the all-agency system) rather than through employees. In either case, the state is selling alcoholic beverages. 

8. Local Input. The existing LCB model can accommodate local input as easily as the all-agency model favored by the minority. There is nothing inherently superior or inferior about either of the two models with respect to local input.

Absence of Public Outcry
There is no public demand or outcry to eliminate the state’s monopoly on wholesale or retail sale of spirits. Although all of the Task Force meetings were open to the public, few if any disinterested members of the public ever attended. See also the two surveys cited in footnote 2, which indicate general satisfaction with the existing system of retail sales, and the public comments, which appear in Appendix C. In short, the LCB model seems to be doing what the public wants and in the way that the public finds satisfactory.

Perhaps this general public satisfaction with the existing system explains why our state legislature has rejected efforts to end the state’s monopoly on spirits and why voters have similarly turned down proposed changes to the existing LCB system.

Cost/Benefit Analysis
Since there appear to be no major deficiencies in the current system that would warrant throwing it out, and no public interest in doing so, we favor improving the LCB model instead of replacing it with the all-agency model recommended by the minority. The cost of replacing the current LCB system with the all-agency system would be high in terms of dollars and people power and the benefits of doing so are, at best, uncertain. There is simply no evidence that the all-agency system would be more effective in controlling availability of alcohol, enforcing liquor laws, generating revenue, providing better jobs with higher wages and benefits, improving customer service or product selection or pricing, or any of the other criteria unanimously adopted by the Task Force. 


2. Retail sales of spirits under the Agency option (no State retail stores) 
Five of sixteen Task Force members preferred the Retail sales of spirits under the Agency option (no State retail stores) for the following reasons:

Conflict of Purpose
The state LCB mission is to control and that should be its primary focus. The Task Force agreed that there is a need for “control”, but was split upon the issue of whether or not the State should be out of the business of directly “selling” alcohol products to its citizens. The Agency option is a preferred retail choice because it would still offer strong State “controls” while more appropriately allowing the State to focus its resources, energy and talents on education/enforcement. Without the burden of considering retail operational issues and reinvestment choices the State could focus more directly on education and enforcement.

The citizens of Washington would be better served by a LCB that remains focused on an advocacy for resources to support improved education, particularly for young school aged children, and strong enforcement of laws pertaining to the sale and consumption of alcohol. Wearing “two” hats places a conflict on the LCB that can be seen by reviewing the most current budget proposal. The LCB’s pursuit of significant investment to improve their retail operations, using a Deloitte Touche study to validate their direction, completely overshadows their focus on education/enforcement issues. 

We believe that privately operated agency stores would remove the conflict of purpose within the current LCB system, i.e. fostering awareness education, controlling access, and performing the licensing/enforcement function while at the same time attempting to provide an optimal retail outlet.

Business principles
State regulation of the industry and competition with the private sector at the same time is a direct violation of business principles. The dual role of selling alcohol and eliminating abuse is conflicting. By the transition to private contract agencies, the LCB focus would be on education, enforcement and licensing. Without the vested interest in market share and revenue, the educational and enforcement roles would become the primary focus. This is the optimal role and purpose for state governments in the business of alcohol is education and enforcement.

Best retail management practices
Private entrepreneurs conduct a more effective and efficient retail operation. Agency store operators are entrepreneurs and their accountability for the bottom line motivates the operation of an efficient business. 

While public input did not cry out for change, most citizens could not make a distinction between agency stores and state run stores. There seems to be a general lack of knowledge of any difference between the two. Liquor enforcement officers, law enforcement officers and LCB staff acknowledged the ability of agency stores to effectively control liquor sales. 

If the public was aware that agency stores have the potential to generate between $4 and $8 million in additional revenue, citizen support may endorse liquor sales through an all agency model.

Best management practices would be advanced more effectively in the all-private contract agency option. The private sector has a proven track record in providing good retail customer service. Some task force members believe customer service in retail sales can only be advanced through the private, entrepreneurial model. The current agency system operates more efficiently than the state run stores – agency stores deliver the service for less cost.

Reduce government bureaucracy
The increasing number of citizen initiatives indicates Washington citizen’s discontent with government bureaucracy. A move to reduce the number of government employees and move more work that should be done in the private sector to the private sector would indicate a change in leadership direction.

Retail expertise and experience
Hiring practices, in some instances, seem to stifle the retail operations of the LCB. Manager and assistant manager positions and full time clerk positions are open as an internal promotion only. Applicants must be in a permanent position with the LCB before they can apply for the position. This eliminates many qualified, capable and innovative applicants from entry in the LCB workforce. Outside experience in retail practices would improve the retail service to customers. This experience is already in place in the agency model.

Also, the employment practice of providing benefits to employees working only 8 hours a month exceeds standard employment practices and increases costs. 

Distributors of liquor have found some difficulties in getting LCB store managers to assist or allow them to access stores in a reasonable manner to set displays, distribute customer information and institute general retail marketing practices. Distributors seem to have found agency personnel more interested and accommodating to the same retail marketing practices.

Agency commissions
The task force members offering this alternative option feel it is important to fund agency stores sufficiently to ensure that they provide a quality retail experience and maintain agencies as viable businesses. Commissions need to increase to reflect economic realities. Even with commission increases, overall LCB costs could decline if a transition were made to an all agency model.

Level playing field
With the state in the retail sales business, it has the dual role of regulator and competitor. This two-headed function sets up barriers to effective communication between the private sector and the public sector. Additionally the LCB does not adhere to the same standards it enforces on the private sector. The LCB enforces the 3-tier system that imbeds certain business costs upon the private sector while at the same time enhancing their revenues by avoiding participation in that very system. The LCB sells wine for less than the private sector to maintain its market share. To their advantage, the LCB is competing with private industry by not playing by the same rules. The private sector has to incur a distribution cost in their retail pricing that the LCB avoids.

One task force member stated the following: “Should the state of Washington abide by the same rules and regulations that they impose on the private sector?” or “should the state of Washington be above the rules they impose on the private sector?” By maintaining the current LCB system, the answer is clearly YES.

Yakima citizen input
The mayor of Yakima received weekly taxpayer calls on a talk radio program, with a majority of opinions requesting the State get out of the retail liquor business.

Leadership
The LCB is a system in place for 67 years. There has been positive change in the last two years. The imbedded system is unlikely to change, however, on its own initiative. Leadership is needed now to advance positive change to an agency system. A moderate, 5 to 10 year transition is proposed that would minimize the staffing and personnel displacement. 

The time to act is now.

Note: If the contract agency only option is chosen, the Task Force recommends that the transition to all agency stores occur over a 5 to 10 year period of time and include opportunities for employees to obtain an agency contact. In addition, the state should provide transition re-training and give preference for certain kinds of (new) jobs to current state store employees.

3.B. OPERATIONS AND PERFORMANCE OF THE LCB’S PRODUCT AND RETAIL SERVICES DIVISION

The Task Force considered Liquor Control Board retail sales operations in the context of its mission to minimize the inappropriate use of alcohol while at the same time serve those people who use it appropriately. 

Customer surveys conducted by the Liquor Control Board (1999 WSU study) and the United Food and Commercial Workers Local 1001 (1999 Garner Group Poll) both gave high marks to the customer service provided by Washington State retail liquor stores. 

Control state retail practices in the states of Pennsylvania, Utah, Idaho and Virginia were analyzed. Under the control state mission, performance measurements emphasize productivity of employees (volume measures), availability of the product that the customer came to purchase, and provision of a customer friendly place to shop. 

Both the business plan developed by the Liquor Control Board and the 1999 analysis performed by Deloitte & Touche found that the information systems, processes and procedures that have supported the retail sales operations for many years are in need of significant improvement. The LCB is at a decision point as it faces the requirements to modernize its retail operations. Major investments are proposed to the Board’s information systems as well as major process changes. 

Recommendations
The Task Force, through its own retail working group, a review of the Deloitte & Touche business plan analysis, and discussions with the Liquor Control Board, believes that improvements should be made to retail liquor sales operations. These improvements are in the areas of customer convenience, store and agency practices and procedures, performance standards and accountability, wine sales, wholesale operations, information technology, funding and governance.
Customer Convenience
In 1971 there were 275 LCB outlets for spirits. By 1981 the number had increased to 368 outlets, equally divided between state operated and contract agency stores. By 1999 this number had declined by 15% to 315. During the period 1981 – 1999 consumption of spirits decreased by 18%, while the adult population increased by 40%. 
In order to assure that retail spirits outlets are convenient and accessible to customers, the Task Force recommends that the LCB should:

• Define store placement and development policies
  
• Add retail outlets to keep pace with growing population
  
• Consider expanded use of contract agents

Governance and Implementation
The Task Force discussed the need for effective implementation of the improvements recommended to the retail system. The members stressed the importance of effective LCB policy making and execution in making the improvements a reality.

The Task Force recommends that the Governor and the Liquor Control Board conduct a formal review within eighteen months to assess progress on implementation of the recommendations.



3.C. RECOMMENDATIONS FOR OTHER IMPROVEMENTS OR MODIFICATIONS IN THE STATE’S RETAIL LIQUOR SALES SYSTEM

The Task Force developed a set of considerations for evaluation of options for the sale of liquor in Washington. These considerations are used here as a framework to document the Task Force’s additional conclusions and recommendations. The considerations or criteria address availability, compliance, revenue, prevention, employees, products, efficiency, fairness, conflict of interests, community, impact and implementation.

1) Effective in controlling liquor abuse/misuse at point of sale (Availability)
The objective of this consideration is to minimize the opportunities for alcohol abuse/misuse by providing effective controls at the point of sale. This includes density of outlets for the sale of alcoholic beverages, and availability to persons under 21 in age or under the influence. Understanding and accepting the basic alcohol availability theory is critical. “Where access to alcohol is greater, consumption is greater. When consumption rates are high, problems related to alcohol increase dramatically.” Another way of looking at this is that increase in alcohol availability leads to increase in consumption leads to increase in alcohol-related problems (abuse/misuse).

In Washington State there are approximately 315 outlets for off-premise sale of spirits, and 5,500 for off-premises sale of wine and/or beer. There are at least 1,500 outlets for on-premise sale of spirits, wine and/or beer. The state retail sales operation consists of the 315 outlets primarily focused on controlled sale of spirits. The remaining are private retail outlets.

There is no written restriction on the number of state retail outlets for spirits. The policy of the LCB is to add outlets where needed based on population growth and customer convenience. However, the primary limitation on the addition of state retail outlets appears to be the ability to obtain budget appropriations to staff new stores.

While there is a broad statewide limit on liquor by the drink establishments (Spirits, Beer and Wine Restaurants) not to exceed one license for each 1,500 population (RCW 66.24.420), there are no specific density or jurisdictional limits to the number of other private retail outlets, i.e. off-premise beer/wine and on-premise spirits/wine/beer. 

There is nothing in WAC or RCW that restricts the number of grocery store or specialty wine and beer stores, i.e. off-premises beer and wine sales.

WAC 314-16-050 limits hours of sale to 6 AM to 2 AM, making no distinction between spirits, wine and beer – on-premise or off-premise. Off-premise spirits sales are not allowed on Sunday (RCW 66.16.080). State liquor stores limit hours of sale based on customer convenience and staff availability. Local governments may establish later opening or earlier closing hours; however, the hours established must apply to all licensed premises within the jurisdiction.

The retail options considered by the Task Force deal primarily with the current state retail sales and, under each option, limits can be placed on the number of spirits outlets. The limit used in the comparative analysis was based on the current number of outlets (315). 

Recommendations:

The Task Force recommends the following regarding state store and/or contract agency placement, development, and selection criteria for retail sale of alcohol:

• Include a significant element of local control with input from communities about renewal of contracts based on regulatory compliance
  
• Limit the number of outlets. This should include a population-based scale and allow for proximity limits and "alcohol-free zones"
  
• Limit hours of operation
  
• Minimize access to underage persons through use of separate merchandise areas and/or entrances. Agency stores with other merchandise may be more of a target of opportunity for youth, especially in metropolitan areas
  
• Specify limits to sale of other merchandise
  
• Incorporate enough profit into the contract agency sales structure to maintain high standards of business, recognizing that business costs will vary by area
  
• Specify standards for advertising in contract agency stores as well as state stores (e.g. institutional is OK; price and item is not OK)

3) Maintains or improves revenue generated for the state, cities and counties (Revenue)
The Task Force used the current Liquor Control Board revenue from sale of alcohol and the distribution of funds to state, counties and cities as a baseline. Comparative analysis of the Task Force options indicated that the agency option (as well as a franchise option also explored) can be structured to maintain and potentially increase revenue to the state and local governments. Attachments 1 and 2 of this Section provide a broad comparison of these options.

Conclusion:
Based on the above, the Task Force concluded that revenue considerations were not significant factors in choosing an option for retail sales of spirits.

4) Maintains or increases current level of revenue support for education, prevention and treatment on affects of alcohol (Prevention)
A recent study sponsored by the Department of Social and Health Services (DSHS) Division of Alcohol and Substance Abuse (DASA) was presented to the Task Force. The study estimated the total economic costs of alcohol and drug abuse in Washington State at $2.54 billion in 1996. This represents approximately $531 for every non-institutionalized resident in the state.

Among the study’s key findings were:

Conclusion:
Significant impact on current employees would occur with the implementation of the contract agency-only retail option. A recommendation on implementation is included in Section 3.A.
6) Maximizes product choice/selection at a fair market price (Products)
The current state retail system makes available the same products at the same prices through all of their retail outlets. There is an emphasis placed on the use of special ordering to meet customer needs. 

Although the price of spirits in Washington is among the highest in the country, the sale of spirits in Washington does not appear to be greatly affected by the current price levels. There is a point, however, where increasing prices may lead to increased cross border sales, reduction in state revenues and illegal operations.

Conclusion:
In the options being considered, the state remains the sole wholesale outlet for spirits and the retail price of spirits will be the same at all retail outlets in the state. The special order process would be continued.

7) Encourages efficient retail operations (Efficiency)
Conclusion:
Either option should be designed to encourage investment of dollars into best management practices. The recommendations for improvement to current operations are included in Section 3.B above. Additional Task Force material is included in Appendix J.

8) Is fair to all participants in retail wine operations (Fairness)

Conclusion:
The Task Force discussions on this issue are summarized in Section 3.A and in the more detailed discussion in Appendix J.

9) Minimizes conflict of interests – profit vs. control (Interests)

Conclusion:
Some members of the Task Force felt that the current system under which the state sells, regulates and enforces the sale of alcohol creates an inherent conflict of interests (or purpose). Others felt that there is a conflict between sales and control under either the state or private system; and others felt that the state system minimizes the conflict as the state isn’t driven by profits. The Liquor Control Board believes that the sale of spirits is a means of exercising control and no conflict exists. This is an age-old tension that has existed since prohibition. These differences in perspective made this a difficult consideration for the Task Force to use in its evaluation of options.

However, when dealing with allocation of scarce resources, the LCB must make decisions on whether to allocate scarce resources to favor education, prevention, and enforcement or favor sales of product. The Task Force recommends that the priority be given to education, prevention and enforcement.

10) Provides for local control and community accountability (Community)

This consideration includes maintaining high standards of quality in the community, safe working conditions for employees, and allows for local control and accountability.  Local communities are a part of the licensing process for on- and off-premise sale of alcohol.  The LCB will take into consideration the concerns of the community in approving licenses for retail sales outlets and spirits, beer and wine restaurants.  This will continue to be the case under either of the Task Force options.

Local communities have a voice in the transfer of licenses.  The key to success is heightened community involvement in prevention.  Communities are getting involved, primarily through zoning regulations, in the early economic development planning, e.g. malls, retail businesses, to keep health and safety in the forefront.

Recommendation:
The Task Force recommends that more opportunity be provided for local input in retail sales outlet placement and contract/license renewal. As many communities are not aware of their ability to influence outlet placement and license renewal, the LCB should initiate efforts to build community awareness. 

Communities should also be encouraged to be actively involved in prevention-based activities.

For more information, please contact Tricia Currier.