New PA Wine Laws Explained

New PA Wine Laws Explained

As of August 8th, 2016 how alcohol is bought and sold in Pennsylvania had changed in a dramatic way.  The is not just about semi-privatization and consumer choice. That is not the half of it. The new legislation will affect wineries, breweries, cider makers, distilleries, beer distributors, grocery stores, bottle shops, beer wholesalers, restaurants, and entrepreneurs in profound ways.

Things will not happen right away. August 8th was the first day the PCLB started taking applications for the  newly augmented liquor licenses and various permits detailed below.

In this white paper, I have made a point of including all the essential points of the new law (based on HB1690) and broken them down to the market sectors they will have the greatest impact on.   If you have anything to add or suggest, please post a comment.

This white paper is intended to give an overview of the new law for all interested parties. For an excellent overview of why the law is controversial, please check out Jason Malumed’s piece in BillPenn.

 

PLCB Wine & Spirits Stores

Better Store Hours

A major change is expanded hours for many stores across the state. Stores can now be open longer, as well as be open on Sundays and some holidays.

Consumers tend to spend per capita on Sundays, and this will keep many of them from travelling out of state for their boozy needs. It will also be a boon for the PLCB store employees. More hours will mean more full time employees. Under the new legislation, Wine & Spirits stores will be able to sell lottery tickets, as well. This move will also require more retail staffing.

 

Better Sales

Another major change is a new flexibility in pricing. Wine & Spirits Stores will now be able to offer sales, coupons, and membership programs. These are the three core selling techniques in modern retail wine stores. While the former system allowed  for some discounting, it was a stale attempt that didn’t offer the consumer much.

 

Better Pricing

Another change is that the PLCB no longer is required to proportionally price all wines. There is currently a requirement that the markup on wine and spirits be standardized, which is currently pegged at 30% .

That standard markup is one of the reasons  why wines are more expensive in Pennsylvania than in other states. In wine shops in NJ and DE, high volume wines are priced with much lower margins, sometimes a cent over wholesale.

As it is now stands, the PLCB pricing algorithm has been reverse-engineered. Wine distributors can game the system and insure the shelf price is very close to the winery’s suggested retail price.  Arguably, the new law allows the PLCB more negotiation leeway on wholesale pricing.

Over time, this change will push down the wholesale price of wine, not just for the PLCB but for the forthcoming private wine and beer shops in  Pennsylvania, too; those private shops are  tied to the wholesale pricing the PLCB negotiates.

 Bottomline for the Consumer: Prices for national brand wines could drop significantly over the new few years. Pricing for higher quality wines (and spirits) will be more volatile. In some instances we may see an increase in pricing, especially in spirits and collectible wines.  The introduction of lottery sales will appeal to some consumers, and repel others. 

 

Private Wine & Beer Shops

For the first time since before prohibition, there will be private wine shops permitted in the state of Pennsylvania.  These shops will require savvy sommeliers with an eye for obscure wines and a tolerance for razor thin budgets.

How Much Will Wines Cost?

Pricing for wines at the private wine shops will be variable. It will be up to the individual stores how to price their wines, but it will take a brilliant wine buyer to be able to keep prices down and quality high.

Having private wine shops is a remarkable thing, but the law does not fully privatize wine sales. The PLCB will control both the availability and wholesale price of the wine.  The shops will have an inflated wholesale price, as well: The PLCB will tack on 10% to the wholesale cost, plus the 18% emergency tax (aka Johnstown Flood Tax) will also be incorporated into the wholesale cost.  Plus, private wine shops can only sell 4 bottles of wine at a time.

Bottomline for the Consumer:  The private wine shops will not be able to offer good pricing on popular wines. Due to unnaturally high wholesale costs, those wines will cost more than in surrounding states. It is also very likely that prices will be lower in the PLCB Wine & Spirits stores, as well.  

 

How to Open a Private Wine Shop in PA

The first round of private wine shops will be located at grocery stores, restaurants, bars, hotels and delis that have pre-existing liquor licenses.  If you own a business with a liquor license, you can open up a wine shop. The first step is to upgrade their licenses to take advantage of the new law. The cost will range from $2K (for restaurant and hotels with an R license) to $32K (for bottle shops and grocery stores with an E license).

While $32K may seem like a steep price to pay, you are in effect converting your license to a Bar/Tavern license that allows you to serve wine & liquor. Those licenses are highly valuable commodity: In Center City Philadelphia,  liquor licenses are currently valued at  $185,000 – $205,000, according to Attorney Matthew Goldstein.

In our reading of the law, it seems possible that a  small bottle shop or deli could convert itself into a full scale  bar for a fraction of what it would typically cost. We don’t see any covenants in place that would compel them to convert into a boutique wine & beer shop. Instead, it seems more likely they would opt to become a full scale bar. We may be wrong about this, but it does seem to be a potential  issue.

Holding a coveted R license now allows the holder to sell up to four bottles of wine  per transaction. This is the part of the law that allows private wine shops. Restaurants can embed boutique wine shops into their dining rooms; the corner deli can be transformed into wine and cheese emporiums; the local bottle shop can turn into a haven for booze geeks of all stripes: beer, cider, and wine.

We feel this is one of the more interesting aspects of the new law. However, it does not apply to Philadelphia. The law specifically excludes Philly from this benefit. 

Bottomline for the Wine Trade: To be successful, private wine shops will have to specialize in boutique wines from less well known wine regions that offer high quality for value. 

 

How to Get a (newish) Liquor License

For the first time since prohibition, new liquor licenses will be available annually. These licenses are not actually new, but ones that were revoked or mothballed for various violations. There are hundreds of these licenses, and the PLCB will hold an annual auction to sell 50 of these licenses in every county.

There are currently 625 such licenses available, with an additional 200 estimated to be available in FY 2016–2017. The minimum bid is set at $25,000; the Senate Appropriations Committee estimates that the average selling price will be $75,000.

The effect of these annual auctions will likely be a devaluation of the current high cost of liquor licenses, somewhere between 10 and 25%. If you have a liquor license you want to sell, I would suggest doing so before the the auctions are implemented in 2017.

 

Direct Shipping to PA

Wineries can now ship directly to consumers, up to 36 cases annually. The law does not allow retail wine stores to ship to PA, only wineries. This law puts PA law into line with the standards of wine shipping throughout the US, which has enormous benefits for the wine trade.

For a winery to ship to a customer in PA, they will have to obtain a a direct wine shipper license from the Pennsylvania Liquor Control Board (PLCB), which will cost $25o per year.  There will be two taxes on the wines. First is a gallonage tax of $2.50 per gallon, which will add $0.43 per bottle to the price. Sales tax for PA will also have to be collects. In Philly, that tax is currently 10%.

The 18% Johnstown Flood tax will not be levied for direct shipments of wine.

Bottomline for the Consumer:  Now we can have wine shipped to us, just like everyone else in America.  

 

Wineries

PA wineries can now sell  PA-made spirits and beer. Not just PA-made beer, but any beer legally registered in the state.

This is an interesting change.  A limited winery can now offer a full selection of beers along with PA-made distilled spirits and their own wines. This doesn’t just affect the winery, but also their off-site licenses; wineries are allowed to have five retail wine shops in the state. The caveat is the beer and spirits have to be consumed on-premise.

The changes to the wine shipping laws are a boon for PA wineries. With the modernization of our shipping laws, states like New York will now allow shipments from PA wineries.  This is no small change: direct to consumer shipping, often in the form of a wine club, is critical for a winery’s financial health.

 

Breweries & Brew Pubs

There are several paragraphs  in the law that are beneficial to the beer trade. The brewpub license has been extended. It now allows for serving PA wine (which was already allowed) and PA distilled spirits for on-site consumption.

The law also creates the PA Malt and Brewed Beverages Industry Promotion Board, which will oversee $1 Million dollars in annual grants. This is welcome new funds aimed at promoting local brewing. It will not take long before PR firms jump on this upcoming new revenue stream.

For breweries, there is also a tax credit for capital expenditures, up to $200k annually. The combination of tax credit and the grant are a smart combination that will help build up our vibrant brewing culture.

There is one potential negative in the bill, as it allows beer wholesalers to have up to 5 locations:

Nevertheless, there are provisions in this Bill which significantly benefit beer wholesalers and have a drastic effect on franchise laws in the Commonwealth of Pennsylvania that could lead to the ultimate demise of many small breweries.

For more details, attorney Ted Zeller has written a brief on the subject

Bottomline for the Consumer: Our local beer culture is going to get a shot in the arm. Expect our local beer heros to take it up a notch.  

 

Distilleries

The law normalizes distillery laws, which now mirror the laws for wineries and breweries. They can sell any available wine or beer at their locations (on-site consumption) along with their own products.

The maximum production for a limited distillery is now set at 100K gallons.

 

Cider Makers

The PLCB is getting out of the cider selling business. All cider up to 8.5% alcohol can now be sold at bottle shops and beer distributors. Previously,  only the PLCB could sell ciders above 5.5%.

The market for cider is growing, and moving away from the sweet low alcohol stuff to the more complex (and awesome) ciders from Normandy, France  and Basque Country, Spain. It also opens the door to the many artisanal dry ciders being made around the US, as well.

Now, cider makers can sell all of their products within a single distribution stream, which will mean less headaches for them, and better selections for the rest of us!

Bottomline for the Consumer:  Better selection of ciders will start showing up in bottle shops, beer distributors, and restaurants by 2017. Pricing will probably track lower, as well. 

 

Big New Nasty Fines

Selling wine out of your back door? Running a speakeasy?  It’s time to either go legit or go home. The law sets forth some seriously nasty fines if you get caught selling wine without a proper license.  Along with any legal trouble you will get into, there is also a mandatory fine of $88 dollars a bottle. And that fine isn’t just for the wine you were selling, but for every bottle of wine in the building.

It is an open secret that some restaurants try to cut their costs by purchasing wines out of  state.  The practice is so common that the employees in a large wine shops in Delaware  actually believe it is legal.

Imagine getting hit with an $88 fine for every bottle of wine in the restaurant’s wine cellar, regardless of whether or not it was legally obtained via the PLCB.  The average restaurant has at least 200 bottles of wine on hand at any time. That would  result in a minimum fine of $17,800.

 

Addendum

Tom Wark of The National Association of Wine Retailers sent us the following criticism of the new wine law.

The consequences of Pennsylvania not including out of state wine retailers among those now eligible to obtain a direct wine shipping permit is that PA consumers are banned from having any imported wines shipped to them if they can’t find what they want locally.

Only retailers sell imported wines to consumers in the U.S., not domestic wineries and certainly not foreign wineries. Until PA revises its laws to allow consumers to purchase from out of state wine retailers, all imported wines, nearly all rare and hard to find wines and all wine of the month clubs will be inaccessible to Pennsylvania wine lovers.