Moving at the Speed of Business ... the Division of Liquor Control of the Ohio Department of Commerce is busily modernizing its own business practices while also helping its state create jobs and business opportunities.
Like many state governors during this time of economic downturn, he faces a daunting situation, including an $8 billion budget deficit, the largest in the state's history. And according to the Ohio Department of Job and Family Services, Ohio's unemployment rate, as late as this October, the most recent numbers available, hovers at 9%, about the same as the unemployment rate in the U.S. as a whole.
"When the governor got into office, anything and everything was on the tabic," said David Goodman, whom Governor Kasich appointed as director of the state's Department of Commerce. "Our mission is to invest in jobs creation."
So far, the governor has made two moves that directly involve the state's control agency, the Division of Liquor Control (DLC), which is part of the state's Department of Commerce. One, Kasich has changed where the DLC's revenues from spirit sales go. Before, approximately 60% of the DLC's profits, which totaled a record high of $237 million in fiscal year 2011, went to the state's General Revenue Fund, with the rest directed toward a variety of specific state programs and services, such as the $11.3 million that went to the state's Department of Public Safety last year. Now, however, the DLC's spirits-sale revenue will be directed to a nonprofit organization called JobsOhio, which will use it-via things like grants and low-interest loans--to attract businesses to the state and create jobs. "It is our belief that we need to invest in the state's economic development," said Goodman. "We need to grow our way out of [this economic downturn.] Our object is to invest in the future."
The second change is to continue to improve and modernize the DLC's own business practices. For instance, the DLC has just begun the process of replacing the computer system it uses with its 458 private liquor agencies. "One of the key items we've identified as an opportunity is to improve our ability to communicate with our agents," said Bruce Stevenson, the DLC's superintendent.
The DLC is responsible for controlling the manufacture, distribution and sale of alcoholic beverages in the state of Ohio. It is the sole purchaser and distributor of spirits, which are sold through those 458 private liquor agencies, which are contracted sales agents for the state. The DLC also handles issuing licenses, or permits, to the approximately 23,000 manufacturers, distributors (of beer and wine) and retailers, both off-premise beer and wine retailers and on-premise businesses, such as bars and restaurants, in the state.
The DLC currently employs about 105 people, most of them in licensing. This includes 27 compliance officers, who work from their homes and visit and investigate permit-holders. Enforcement of the state's liquor laws is handled by a group called the Investigative Unit, which is part of the state's Department of Public Safety.
Fourteen employees handle the DLC's wholesale business. Its four bailment warehouses are run by four private companies under contract. The DLC also employs 15 auditors, who work out of their homes and audit and inspect the liquor agencies. These auditors do full audits of each agent twice a year as well as monthly compliance visits.
The DLC has become smaller over time. In the 1990s, the DLC, which, at that point, was its own department and not a division within a department, as it is now, employed over 2,000 people. Back then, the DLC ran its own state stores and handled enforcement. Until 1985, it also included the Ohio Liquor Control Commission, until the commission became its own independent agency that year. [It became a separate agency to avoid any appearance of not being impartial. "When it was part of the division, the division was hearing appeals of its own decisions," said Peter Patitsas, the DLC's legal counsel. "The change removed any question about the Commission being autonomous."]
By the fall of 1997, when the last state store closed, the DLC was down to approximately 160 employees.
SALES & PROFITS KEEP CROWING
Even though the DLC is far smaller than it was in the past, its sales and profits have continued to grow. Fiscal year 2011 was a record breaker. Spirit sales for the DLC reached $770.7 million, an increase of 3.8 percent over 2010. This resulted in a record profit of $237 million. The DLC's total contribution to the state, which includes tax revenue and permit fees, was $313 million for 2011.
The creation of JobsOhio will redirect the DLC's profits on spirit sales toward job and business creation within the state. Goodman, director of the Department of Commerce, stressed that this is not privatization. The DLC's spirit business will be "franchised" to JobsOhio for the next 25 years. JobsOhio will contract the work of running the spirits operation right back to the DLC. As a result, the state's spirits operation "will run as it always has," said Goodman, JobsOhio will not be allowed to change spirits prices, nor will it be involved with licensing and regulation.
In return, JobsOhio will make a one-time payment to the state, probably somewhere in the neighborhood of $500 million, though the exact amount has not yet been set, which will go to the General Revenue Fund to help offset the state's current budget deficit. JobsOhio will also handle the DLC's current debt obligations. JobsOhio, though not fully up-and-running, has already created over 13,000 jobs, saved 27,500 existing jobs and stimulated S2.2 billion in capital investments in the state, according to an interview its president, Mark Kvamme, gave to The Cleveland Plains Dealer back in November. According to Kvamme, the jobs JobsOhio and the state create will add SI57 million to the state's revenue in the next year.
The state of Ohio employs other tools to attract businesses. For example, the state government's Common Sense Initiative looks for agency rules and regulations that impede or discourage small businesses. Run bv Lieutenant Governor Mary Taylor, the Common Sense Initiative actively solicits suggestions from small-business owners.
Some of the changes made so far have involved the DLC. In July, for example, regulations were changed to allow non-licensed companies that use alcohol products to manufacture their goods, such as using them as flavoring in food products, including ice cream and jam, to buy them at the wholesale price and in larger sizes. "Under the old rules," said Goodman, "they used to have to buy their spirits at a liquor agent at full price."
Another change allows more microdistilleries to sell their own products on their premises. Under the old rules, this was allowed only in counties with a population of more than 800,000, of which there are three in the state.
"There has been dramatic growth in the number of microdistilleries [defined as a distillery that produces less than 10,000 gallons per year] in Ohio," said Bruce Stevenson, the DLC's superintendent. In the last year, according to a recent article in the Akron Beacon Journal, the number of spirits distilleries went from eight to 14.
The DLC itself is looking at how to handle special orders, which are currently not allowed. "As part of the Common Sense Initiative, we are looking at a way to allow restaurants to obtain artisan-type products, perhaps by allowing a limited distribution of those products to a handful of our agencies," said Stevenson.
The biggest change afoot at the DLC is the move to replace the computer system it uses to gather sales information from its liquor agents and process it. "It's fair to say it's antiquated," said Tom Kappa, chief of agency operations. "It dates from the mid '80s, it uses DOS, a language developed in the '60s. And it uses dial-up modems to communicate sales from the agencies. No business uses dial-up anymore. We have incredible employees but we haven't provided them with modern technology."
Currently, a consulting firm is "on the ground," said Kappa, looking at the old system and at the operation of the DLC to make recommendations. Kappa hopes to have those recommendations in hand in the next month or so.
A more modern system could provide the DLC with better information, allowing it to better analyze agency performance and geographic distribution of sales, helping the division to make better decisions. "This modernization is a great opportunity' for us to improve our on-going ability to communicate," said Goodman.
Another advantage of a more modern system would be real-time inventory control. "It's what you'd expect any business to have. Wal-Mart has it,' said Goodman. "We plan to be investing [in this new system] within a year."
The DLC current lists about 1,500 spirit items. Not every agent carries every item. Smaller agents earn7 about 500 to 600 items; the largest carry 800. "It's imperative we get [this product mix] right," said Kappa. "We on t want to pay inventory costs on product that is just sitting there."
Even before the new technology is in place, the DLC has been making improvements. The vast majority of the products it lists are represented in the state by brokers. "We are very fortunate that we have terrific relationships with the brokers," said Tom. "We meet quite often, sometimes even weekly," In its strategic planning sessions with these brokers, the DLC used to work on plans 60 to 90 days out. "Now, we're working over six months ahead of time," said Kappa. "Our goal is to work on what displays and how many cases of each product will be in each agency, with our auditors confirming it is there." None of the state's liquor agents sell only spirits. About 25% of them are large supermarkets, such as Kroger's, Giant Eagle and Acme Fresh Market. The rest are smaller shops that also sell wine, beer and convenience items. All are run by retail businesspeople who understand the value of marketing and merchandising. Walk into any of them, Kappa said, and you'll see the beer or wine being merchandised much more often than the liquor. The DLC wants to work even more closely with its agents and brokers to get liquor products up-to-speed when it comes to merchandising. "Liquor is a terrific opportunity," said Kappa.
The DLC is also revamping its website (http://com.ohio.gov/liqr/) to make it more business-and consumer-friendly. New features will include online permit applications and renewals and the ability for a consumer to look up products and sec at which liquor agency they are available. "Right now, the website contains a lot of static information," said Stevenson. "We want to make it into more of a marketing tool." Goodman added that, in the future, "we may be able to allow a customer to order a product online and pick it up at the agency nearest to them."
Though it constantly strives to improve itself, the DLC is doing a pretty good job now, as evidenced by its record sales and profits. When it comes to sales, "all of our categories are up," said Kappa. Stevenson pointed out, "Imported flavored vodkas are up by over 35%."
One trend the DLC sees is that people are buying more expensive products. "Our dollar sales continue to outpace our gallon sales," said Stevenson.
The DLC also sees other indications that the economy is improving, in its own sales trends. Not only are customers "trading up," buying more expensive brands, but the DLC's wholesale sales, to bars and restaurants, have begun, once again, to grow. In an economic downturn, alcohol sales will shift toward more off-premise purchases, as people begin to entertain at home, rather than go out, to save money. But if the DLC's wholesale trends are any indication - wholesale sales are up by over 4.5% year-to-date compared to growing by less than 1.0% the year before - then Ohio's hospitality industry may be reviving.
In other words, the economy may be looking up. "And that's what we're here for," concluded Commerce Director Goodman.