Maine mulls a new strategy to tap into New Hampshire liquor sales bonanza

Retired liquor executive Gerry Reid, the current head of the Bureau of Alcoholic Beverages and Lottery Operations in Maine, thinks new legislation can get back nearly half of all sales being lost to New Hampshire.
Russ Dillingham | Sun Journal
Retired liquor executive Gerry Reid, the current head of the Bureau of Alcoholic Beverages and Lottery Operations in Maine, thinks new legislation can get back nearly half of all sales being lost to New Hampshire.
By Kathryn Skelton, Sun Journal
Posted April 06, 2013, at 8:14 p.m.

HALLOWELL, Maine — Animated, with thick round glasses, salt-and-pepper hair and a tall, lean frame, Gerry Reid could pass for a professor in the Harry Potter universe.

His last job was in tequila, as managing director at Jose Cuervo International, where he oversaw new product development, sales and marketing, and launched ready-to-drink margaritas.

In his new role as head of Maine’s Bureau of Alcoholic Beverages and Lottery Operations, he doesn’t mince words. Reid points to a recent newspaper ad boasting of “melting prices” at New Hampshire liquor outlets:

Johnnie Walker Red, 1.75 liters, $29.99, sold elsewhere for $46.99.

Jim Beam, 1.75 liters, $20.99, sold elsewhere for $32.99.

“We’re elsewhere. Elsewhere is us,” said Reid, 63. And they routinely undercut Maine prices by an average of $2 to $7 a bottle. When New Hampshire runs sales, the difference on one bottle is as high as $17.

The competition is not unique among bordering states — Washington State is losing alcohol sales to Idaho and Oregon, Pennsylvania to New Jersey — and the problem isn’t new. Ten years ago Maine experts lamented that 8 percent to 10 percent of New Hampshire’s liquor sales were going to Mainers.

It’s still true.

Reid has staked his new job on fixing that in the next year. He’s pledged to return half of those New Hampshire sales to Maine — if the Legislature approves Gov. Paul LePage’s new liquor contract.

“If they were just smarter than us, I would say they deserve it,” Reid said. “This isn’t smart. They’re just being aggressive and we’re not.”

New Hampshire sales

It’s officially against the law for a person to bring more than four quarts of alcohol over the state border.

Yet it happens, a lot.

New Hampshire doesn’t have to share how much liquor is sold to Maine residents, but last November offered a glimpse. A report on the New Hampshire Liquor Commission for that state’s Legislature revealed 50 percent of retail credit and debit card sales were to people in-state, 21 percent to people who live in Massachusetts and 8 percent to people who live in Maine. (Figures didn’t capture cash sales.)

That 8 percent is about $30 million in sales and 200,000 cases of alcohol — no small number.

Maine passed the 1 million case threshold for liquor sales last year. Recapturing half of the losses to New Hampshire would boost sales 10 percent.

It’s unclear who’s buying, but officials acknowledge it’s likely a mix of individuals and businesses illegally picking up more than four quarts at a time. One legislator told Reid during a recent committee hearing how much he saves by going to New Hampshire. Friends tease Reid about their own stops.

“Business owners can make more money and get a better deal if they leave the state,” said Michael Cianchette, LePage’s chief legal counsel. “I’m sure the idea of it … can certainly be tempting.”

On top of that 8 percent is a big unknown: the money lost to Maine tourists.

“I talk to people who own camps. There are people who show up with cases of booze for the week, and they didn’t get it at the Shop ‘n Save down the street,” said Jamie Py, president of the Maine Energy Marketers Association, which lobbies on behalf of convenience stores. “They got it before they got in here.”

The top-selling liquor store in all of New Hampshire is in Hampton, right off the northbound lane of I-95, heading toward Maine.

After a regional lottery meeting in February, Reid stopped at that store and walked the parking lot. It was 2 p.m. on a Friday. He counted 22 Maine license plates.

Once the alcohol is over the state line, there’s nothing identifying a bottle as being from New Hampshire, and liquor enforcement here isn’t what it used to be. During 2002 budget cuts, liquor law enforcement shifted from the Bureau of Alcoholic Beverages and Lottery Operations to the Department of Public Safety, and from 19 sworn officers to five non-sworn ones, according to Johnnie Meehl, the bureau’s manager of liquor operations.

Part of LePage’s proposed budget this spring brings that enforcement back to the bureau. There are two broad categories of enforcement, Reid said. One is underage drinking and substance abuse, the other tax compliance (bringing too much tax-free alcohol over the border).

“We’re very open to some new, better, more effective enforcement strategy,” Reid said.

However, when it comes to border enforcement: “The view we’ve taken is, we’ve created the problem — the problem is us,” he said. “We have a high-priced system. The issue is not to hire a whole bunch more policemen so we can continue over-charging our customers. We think the underlying cause of our problem is a high-cost system and that’s what we ought to fix. If we fix the pricing issue, the compliance issue will diminish.”

So, how to fix it?

Reid’s cagey. On purpose.

Bills and bottles

Partly driving prices on Maine alcohol is the state’s lease agreement with Maine Beverage Co., which includes a nearly 40 percent built-in profit on each bottle of liquor sold.

Ten years ago, to help fill a state budget hole, the state leased its liquor system to Maine Beverage for 10 years in exchange for $125 million upfront and an annual stake in profit sharing. That contract included a 36.8 percent profit guarantee to Maine Beverage.

Reid has the authority to price Maine’s liquor, by law. But he also has to abide by that contract.

To show how that’s reflected in the price, Meehl offered the example of a bottle of alcohol that costs $8.74 wholesale. It’s $15.99 by the time it gets on a Maine shelf to the consumer.

In that $7.25 gap: $1.60 goes to the liquor store agent and $5.65 goes to Maine, a 39.28 percent state profit that includes Maine Beverage’s 36.8 percent guarantee.

Maine is one of 18 “control states” where government controls the sale and price of alcohol. In most open states, wholesale operators often see a 25 to 30 percent profit, Reid said.

At 31 percent, with $1.26 to the liquor store agent, the state could charge $13.99 for that same bottle of alcohol it’s now getting $15.99 for.

At 26 percent, with $1.17 to the agent, the state could charge $12.99 — what New Hampshire asks for that same bottle.

Last year the Granite State sold more than 2.2 million cases of spirits, more than double Maine’s sales, according to the National Alcohol Beverage Control Association.

“New Hampshire is just cleaning our clock, to be blunt, as well as surrounding states,” Reid said. “Is there a consumer affinity for Captain Morgan rum in New Hampshire that’s 10 times ours? We don’t think so.”

Reid: From $189 million to $515 million

Reid, originally from Philadelphia, came out of retirement to take the new job as Maine’s top liquor official in February 2012 knowing that one of his responsibilities was moving the state into a new liquor contract. The deal with Maine Beverage ends next year.

Two plans are competing to replace it, one backed by the governor and Reid, the other by state Sen. Seth Goodall, D-Richmond.

Goodall’s bill looks for the successful bidder to make a $200 million payment to the state over either one or two years, and asks bidders to submit a minimum guaranteed profit margin. He believes the latter will be below the 36.8 percent in the current contract.

Ten years ago, the business was more of an unknown, Goodall said.

Under his proposal, “The bidders would also specify a guaranteed payment [to the state] over each year of the contract, which would increase over the years, along with a profit-sharing agreement, so there’s incentives in there as well,” Goodall said. Over the course of 10 years, “It’s much more than $200 million.”

The upfront payment in his bill would allow for settling the state’s longstanding hospital debt by Sept. 30.

The governor’s bill calls for a contract to run the state’s liquor operation with no upfront payment to the state and no guaranteed profit margin. It would also trigger a $184 million bond to pay the hospitals, which hasn’t been without controversy.

Reid estimates a new contract bid to run the liquor operation may cost the state $8 million to $12 million a year. But after paying that fee, the state would see gross income of about $48 million that first year. That number is before capturing any of the New Hampshire sales.

He’s forecast the gross income over 10 years to be $514.7 million, a number, Reid said, that supposes a 2 percent annual increase for inflation, not a spike in sales — far more than the $189 million the state anticipates making over 10 years from the current contract with Maine Beverage.

He has proposed using $16 million the first year for marketing, price drops and a higher cut to agency liquor stores.

To get those New Hampshire buyers back, Reid would take 500 of the roughly 2,600 active liquor retail SKUs in the system and experiment. Some would drop to the same price as New Hampshire. For others, he would “compress the premium” — make it not quite as cheap as New Hampshire’s, but no longer worth the trip.

Prices would not change on 50-millileter, 100-millileter, 200-millileter or 375-millileter bottles — nips, shots and flasks — or on spirits already considered low-priced.

Beyond that, Reid is mum on specifics.

A new price strategy

“I don’t want to tell my competitors what our new price strategy is,” he said. “We’re not going to tell anybody precisely,” which has bothered some legislators, he said.

Goodall is skeptical. There’s no proof that the New Hampshire buyers would come back, he said, and he questions the return on investment for that $16 million.

He believes New Hampshire gets better prices from manufacturers because of its volume. That price, he said, is behind the cost difference between Maine and New Hampshire more than the current contract’s 36.8 percent margin.

“New Hampshire has built their model over 40 years on through traffic,” Goodall said. “We have a much different model and a much bigger state.”

Cianchette said he doesn’t worry about New Hampshire further lowering its prices to undermine any new Maine marketing strategy.

“They’re pretty close to the margin,” he said. “They’re not going to lose money just to stick it to us.”

Though Reid maintains that his cost-cutting plan is not a matter of encouraging Maine people to drink more — just buy it in Maine, he reasons — there has been some concern.

“The reason the state has a monopoly is because we’re a control state and we believe there are problems associated with drinking,” said state Rep. Mike Carey, D-Lewiston. “Currently, the state does not have any money associated with enforcement and there’s very little money associated with substance abuse. The only thing that’s being done is just jacking up the prices.”

Carey sits on the Legislature’s Appropriations Committee, where both bills are headed Monday in a joint session with the Veterans and Legal Affairs Committee.

“I think both [proposals] have some problems; I’m glad they’re both focused on paying off the hospitals,” Carey said. “Right now the Legislature needs to be focused on doing the policy right and not making a mistake like we, in hindsight, realized we did 10 years ago.”

Reid said he understands a compromise between the two bills may be in the works.

If the governor’s bill is passed, and Reid’s proposal to punch back at New Hampshire goes ahead, he’ll watch sales figures for that state’s top brands, which it does release, to see if they take a hit.

“I’ll stake my job on getting half this bogey back within 12 months,” Reid said.

http://bangordailynews.com/2013/04/06/politics/maine-mulls-a-new-strategy-to-tap-into-new-hampshire-liquor-sales-bonanza/ printed on July 22, 2014