PLCB Advertising Controversy Goes to the Heart of the Stupidity of the State Monopoly

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Via Kari Andren, here comes the latest in a genre of controversy I don’t really understand:

Although state Liquor Control Board chief executive Joe Conti claimed his agency channeled no resources to promote its eight controversial in-house brands of wine and spirits, records obtained by the Tribune-Review tell a different story.

The LCB spent nearly a half-million dollars last fiscal year, about 10 percent of its advertising budget, to promote five of its own private-label brands — TableLeaf, Dialed In, LA MERIKA, Hayes Valley and Las Parcelas, records show. No money was spent on two other wine brands, Zita and Vinestone, or Copper Sun vodka.

Even though Conti said he was “99 percent sure” no LCB money was spent to promote or develop the brands, ads placed by his agency for its in-house products appeared in high-profile, hard-to-miss locations in newspapers and magazines, on billboards, public transit vehicles in Pittsburgh and Philadelphia, radio shows and the Internet radio service Pandora, as well as in online sponsorships, records show […]

The move has been viewed unfavorably by wine industry experts and government watchdogs, some saying it is improper for a government agency to market its own items to compete with the private entities whose products it is charged with regulating and selling.

When you go to the grocery store to buy some peanut butter, it’s common to see a cheaper generic store brand alongside your pricier Skippys and Peter Pans, and it’s the same thing for most of the other packaged goods. This is a pretty unremarkable strategy that all supermarket chains employ to increase their profits. And it’s not just supermarkets – Trader Joe’s has lots of its own wine brands too.

The PLCB has a fiduciary responsibility to the taxpayers to maximize profits, and they evidently calculated that manufacturing and selling their own store brands would make good business sense. Politicians and PLCB apologists are always saying they want the PLCB to act “more like a business” and so that’s what they’re doing. They thought they could make some money offering in-house brands, and they invested in marketing to boost sales of those brands. Nothing wrong with that.

But take a step back, and it’s immediately obvious what’s wrong with that. You have a government agency making their own alcohol! And not only that but advertising their own alcohol, trying to get people to drink more of it.

The problem here isn’t that the PLCB is being mismanaged. It’s that there is no way to manage it well under the utterly insane framework that Harrisburg politicians have created for it. The PLCB has two mandates that are in direct contradiction – maximizing profits from alcohol, and reducing alcohol’s public health harms. If you’ve got a problem with this, then you’ve got a problem with state sale of alcohol in general. Nobody should be surprised to see the organization flailing trying to achieve the nonsensical goals state politicians have given it.

The economics of the alcohol market revolves around what’s known as the 80/20 ratio – 80% of the profits on alcohol come from about 20% of drinkers. Alcohol sellers make the vast bulk of their money from a hard core of alcoholics. Everything about their business model, from the pricing to the advertising, is targeted at maximizing sales to people who have lost control over their drinking habit.

A public agency that is trying in earnest to maximize alcohol profits has little choice but to adopt the 80/20 strategy. And that is exactly what we see from the PLCB. By taxing value instead of gallonage, the cheap bottom shelf brands that alcoholics buy end up being cheaper in PA than in other states.

The fact that PLCB advertises alcohol at all, let alone its own in-house brands, is a major scandal. According a recent NBER study, heavy drinkers are more receptive to advertising than prices. Here’s Suzy Khimm at the Washington Post with the summary:

Instead, researchers find that “heavy drinkers are more responsive to cues such as alcohol advertising and alcohol references in programming on TV and less responsive to price.” The study explains why: heavy drinkers have less ability to self-regulate, so the psychological cues that prompt them to drink in the first place (e.g. ads glorifying alcohol) are more important than the reward, or lack thereof, at the end. By contrast, “higher excise taxes on alcohol reduce consumption by moderate drinkers.”

The implication for PA alcohol policy should be clear – there is no way for the PLCB to fulfill its mandate to maximize alcohol profits without doing serious injury to its other goal of reducing alcohol-related harms to public health.

The only way to fix this problem is for the legislature to sell off the PLCB’s retail sales business to the private sector, and task the agency with a single mission to minimize public health harms. We don’t need a Rube Goldberg machine like the PLCB to combat alcohol-related harms, we just need a ban on alcohol advertising and high excise taxes.

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10 Responses to PLCB Advertising Controversy Goes to the Heart of the Stupidity of the State Monopoly

  1. Ed H. says:

    I think this is the only time I’ve read an anti-PLCB post in this blog and agreed with it. I have problems with the Commonwealth making its own brands of wine and spirits. Past that, I want to see the PLCB stay in place as the public seller of wine and spirits in the state. Too many good paying jobs would be lost in the state, the loss of revenues would be next to impossible to replace and the public safety issues can’t be addressed as well by privately owned liquor stores. And under served areas get service that otherwise would never see a privately owned store move into some of the rural areas in the state.

    • Jon says:

      I think the public safety argument doesn’t really make sense. The two most effective policies to combat problem drinking are banning advertising, and high taxes on low value brands that alcoholics buy. The PLCB itself advertises liquor, and the state taxes value instaed of gallonage, which undertaxes the cheap stuff. State policy is making things worse than in states with private sales.

      I also don’t understand the point about rural areas. What is the value to the state in subsidizing liquor sales in rural areas with too little population to support a market? Providing alcohol is not a public service. That is terrible public health policy. If you want to talk about raising revenue, ending subsidies for money-losing rural liquor stores seems like a great place to start.

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  3. Doug Frost says:

    Kari – at the heart of your argument is a false statement: that “Alcohol sellers make the vast bulk of their money from a hard core of alcoholics.” That is not true, nor do you make any attempt to verify it. While the larger issue of whether or not a state government should be selling alcohol is one worthy of discussion, please check your facts before weighing in.

    • Jon says:

      The 80/20 ratio is well-established fact. The alcohol industry does not care at all about the people who drink a glass of wine a day or six-pack of beer or two a week.

  4. Doug Frost says:

    Jon – care to site a source? The wine industry sells to restaurants nearly as much as it sells to stores. The beer industry sells to, let me guess, people you know. Are you calling the majority of them alcoholics? Most drinkers are responsible adults; perhaps you don’t believe that. But your hyperbole obscures an important policy discussion: should the state be involved in more than a regulatory role? Probably not, but alcohol beverage privatization, in a market that has been state controlled, carries its own levels of risks and unknowns.

    Doug

    • Jon says:

      Here’s a study from the Wine Marketing Research Group. The “Pareto Effect” (80/20) describes the wine and spirits markets well, and less so for beer, although the study omits light beer.

      http://academyofwinebusiness.com/wp-content/uploads/2010/05/File-014.pdf

    • Jon says:

      The whole point is that “the majority” of people are not alcoholics. It’s a small minority who are alcoholics, but they account for most of the sales. It is what it is, but it means that the government needs to temper the industry’s ability to aggravate that trend through bans on advertising and using taxes to increase the price of the low-end swill alcoholics buy.

  5. Doug Frost says:

    Jon – I’m sorry but I believe that you have misread this report. A “heavy user” in this report is not an alcoholic unless you think people who drink once a day are alcoholics. If you think that, that’s your right but it’s not an accepted international standard. But again, the more important issue is whether or not a government charged with regulatory responsibilities can also be a government with sales and promotion responsibilities. I would argue that the hyperbole surrounding alcohol (e.g., that daily drinkers are somehow alcoholics) is part of the mindset that leads to excessive state involvement in alcohol beverage, when it would seem that the state’s abiding concern should be regulatory.

    • Jon says:

      The report confirms that 80% of the sales come from 20% of the users. That doesn’t mean everybody in the 20% is an alcoholic, but we’re talking about an unusual level of consumption.