City-owned 'munis' take a nearly $3M hit in liquor profits

That all but uniquely Minnesota institution — the city-owned liquor store, splashing its proceeds back into community amenities — just suffered its deepest plunge in profits in decades.

A nearly $3 million falloff was twice as steep as during even the recession-plagued years of the past. And it came mostly at the expense of big, prosperous Twin Cities suburbs such as Edina and Lakeville.

A number of figures in the industry blame what Lake­ville's liquor operations manager Brenda Visnovec calls "the big green monster coming to town": Big-box competitor Total Wine, which continues to expand its footprint, most recently in Eagan.

Total Wine calls Minnesota an overpriced market and the only one of the 20 states in which it does business where some cities operate municipal stores with monopolies within their borders.

"Our research showed it was a place with very high prices, with among the most expensive stores out there for wine and spirits," making it ripe for discounters, said Ed Cooper, a company spokesman based in Maryland.

Ten years ago, the state's legislative auditor found that Minnesota's unusually restrictive liquor sales structure, including hundreds of so-called "munis," likely contributed to beer and wine prices higher than those in Wisconsin, with its more robust competition.

The study found that Minnesotans could "save about $100 million per year for off-sale purchases of alcoholic beverages, if Minnesota laws on retail competition were similar to those in Wisconsin."

Competition since then has heated up, and the resulting drops in city profits have stung. Edina residents learned that in 2015 when City Council Member Bob Stewart drew attention to a midstream budget adjustment that the city felt it had to make to account for plummeting profits.

City staffers had placed an item on the consent agenda, where approve-in-a-batch routine items typically go. Stewart objected, saying "this is an important item for us and our budget."

City Manager Scott Neal then publicly addressed what he called the "enormous impact on our revenue" caused by "major new competition, which is Total Wine," adding: "And, uh, I won't say that name anymore."

Months later, the city's budget documents disclosed that a planned $700,000 transfer of liquor profits for 2016 was "about $1.1 million less than the previous year's budget" and made up a small piece of an upcoming tax hike.

The city appealed to its citizens to volunteer to form an outside-expert task force to probe what was going on.

Others in the beverage industry say the whole competitive landscape has shifted, with competitors such as MGM and Haskell's also factoring in.

"It's not only Total Wine but Trader Joe's, World Market, Whole Foods, Sam's Club. I could go on and on," said Gary Buysse of Rogers, president of the state's Municipal Beverage Association.

The state auditor's office, in its recent release of statewide 2015 financials for municipal liquor stores, stresses that the hit to those operations is centered in relatively few metro-area cities that had enjoyed big proceeds.

Overall, it says, "Minnesota's municipal liquor operations reported a 20th consecutive year of record sales, totaling $337.2 million," with sales up by $1.6 million, or 0.5 percent, over 2014. Lakeville's $13.6 million in sales led all others.

That pace of growth is not on par with the overall liquor business in recent years, according to figures compiled by the Minnesota Department of Revenue.

On- and off-sale liquor sales statewide rose from $2.7 billion to $3.2 billion from 2010 to 2014, the most recent year available, the state reports. Annual growth ranged from 4 to 6 percent.

Leaders in the municipal liquor business say they're sensing a 2016 revival after stores were buffeted in 2015. Said Paul Kaspszak, executive director of the state association:

"These new numbers are from 2015, right after new competition entered the market. People today are making changes, adapting, rebounding from that hit. We needed to be sure our own house was in order, that stores were clean and service was good," Kaspszak said.

"We're also encouraging member cities — which don't always do this, or do it enough — to be honest, to stress that our profits feed back into cities and support them."

Edina took a number of steps: shrinking markup, bringing in mystery shoppers to test the reception customers get, pushing the brand message of "pouring profits into the community."

Stewart said he expects the citizen task force to report next month with more advice.

The city staff's latest financial report to the council shows that sales per customer are down slightly from 2013. But the stores still contribute several hundred thousand dollars a year to support amenities, and Stewart thinks Edina is in it for the long haul.

"We've already made changes that I consider positive," he said. "The difference between liquor and all other aspects of City Hall is that you're really in a competitive business, and you need to behave that way."

David Peterson • 651-925-5039