Municipal liquor stores: Minnesota cities don't belong in this business

Shannon Lisowski is swabbing down the bar at the municipal liquor store in West Concord, Minn., as she tends to the three patrons at the end. It's dusk on a chilly November evening in a small town that has no grocery store, no gas station, no sit-down dinner restaurant, and whose only gathering place just now is the one Lisowski's working at. There is a bowling alley — but it's open only in the winter.

Even so, the bar is often empty and is losing money at such a clip that the town recently let the staff go. Lisowski is actually a librarian, working at the small but well-stocked library tucked into a corner of City Hall, a few doors down. But about five weeks ago, she said, "I got tagged to help out here. They found out I had bartending experience and, well, in a small town you do what you have to do."

Recently, the city of 786 dug deep to send $25,000 of West Concord taxpayers' money to the ailing liquor business — enough to wipe out its $8,000 in losses and provide a little operating capital.

In 2014, some 34 Minnesota cities, all outstate, lost a total of $480,000 on their liquor outlets — money they had to backfill from their own coffers. Another 60 outstate cities saw sales drop from the previous year.

On the other end of the spectrum are a handful of very profitable metro municipal stores like Edina Liquor, one of the most successful munis in the state, which often rakes in $1 million or more in profits that, as the store slogan says, are "poured back into the community." It is, in fact, the metro area's 19 municipal stores that make the system look so good. Together they churn out 36 percent of muni sales statewide and pull in nearly a third of all net profits. That money, by the way, remains exclusively in those communities, so Lakeville can keep the $1.4 million in profit generated by its nearly $15 million in sales, while Prior Lake and Rosemount, which lack munis, have to raise their revenue the old-fashioned way — through taxes. Across the state, 200 Minnesota cities operate 233 liquor stores — a figure that has been dropping steadily.

Since the Legislature first opted to allow communities under 10,000 to have city-run liquor stores that could operate as monopolies, the system has evolved into a bit of a lottery. Cities that saw big population gains or emerged as tourist meccas have benefited hugely from their monopolies. Bemidji, pop. 14,376, posted $5.5 million in sales last year. Meanwhile, Winton (pop. 168) closed its liquor store after posting a $56,000 loss.

Both ends of this spectrum raise questions about the proper role of government, as well as the influence wielded by munis to help block popular proposals that would make it possible to buy a bottle of wine on a Sunday or grab a six-pack of beer at the grocery store.

More important, as even private brick-and-mortar stores struggle for their place in an increasingly digital economy, Minnesota should find a way to shed an anachronistic system that either loses sales to more competitive private enterprise or relies on its monopoly powers to hold off competition and bring in outsized profits that are little more than implicit taxes. Once Amazon drones start dropping shipments of cold beer on the doorstep, a government monopoly on any product will be nearly impossible.

Economist Tim Taylor, managing editor of the Journal of Economic Perspectives at Macalester College, says the basic problem with a government monopoly is that it runs counter to the principle that says governments "should steer, but not row." Whether municipal liquor stores are making money or not, he said, "profit made by city-run monopoly is not the same as a profit made by a private enterprise."

A municipal store that is losing money, he said, can tap taxpayers to make up the difference, an option not open to private enterprise. "But if you've got a local monopoly making $1 million profit, that's a problem, too," Taylor said, "because monopolies generally make money in two ways: charging higher prices and offering less service — without fear of competition."

However, increasingly there is no escaping competition in this economy. Even more isolated cities like West Concord, which says its liquor store provides convenience for locals, finds that most of its residents are willing to drive to Rochester or Owatonna for their liquor purchases. A hearing last week seeking comment on whether the bar should remain open drew only 18 residents.

Meanwhile, metro munis are embroiled in cutthroat liquor wars as mega-retailers like Total Wine muscle in. Edina Liquor has responded as vigorously as any private competitor. The city budgeted more than $300,000 to renovate and upgrade its three outlets. State liquor laws enabled Edina to order Total Wine's popular private labels to sell in its stores if it chooses. When Total Wine sold Stolichnaya vodka for $24.99, Edina cut its price on the label from $32.99 to $23.99.

Still, sales at Edina stores dropped 15 percent a week after Total Wine opened. Last month, Edina Mayor Jim Hovland proposed a property tax increase in part to offset the drop in liquor profits.

"I know some people think we shouldn't be in that business," Hovland said. "But it's been really beneficial for our town. We're good at it and we're going to stay in it."

Edina is a good example of how competition changes a local economy. In its earlier zeal to control liquor, the city prohibited the sale of alcohol in restaurants into the 1990s. "People wanted to know why there were no decent restaurants in Edina," Hovland said. Then the council lifted the ban. "Now of course it's a total nonissue," Hovland said. Edina's restaurant scene is now booming with trendy, upscale eateries that feature alcohol. Unwilling to be left behind by the mushrooming craft brew business, Edina has also decided to allow brewpubs and taprooms.

So increased competition has brought Edina a bevy of restaurants, soon brewpubs, lower prices, better selection at municipal stores and — as a result of increased competition — lower profits for the city.

It's clear that if Edina got out of the liquor business and instead sought permission to institute a city liquor tax, the suburb's consumers would continue to have many choices.

Rural Minnesota presents a different dilemma.

To cut costs, West Concord City Administrator Kay Hanson now doubles as the bar manager. The bar has tried meat raffles and 50-cent beers, and it already has a banner up touting its daylong Christmas celebration next month. It has some regulars, like the "Golden Girls" group of older women that meets there monthly. But residents are getting increasingly grumpy about backfilling the bar's losses out of the city's meager budget. With little commercial base, unexpected expense blips often show up directly in West Concord property tax bills.

"We've had a deficit two out of the last three years running," Hanson acknowledged. "But we have a small town, and every business is important to a small town. We don't have a lot of other opportunities for people to sit around the table. It's a valuable amenity to the community."

The bowling alley is licensed to sell 3.2 beer, which has a lower alcohol content. It's not too hard to imagine that a full liquor license might bring in enough business to let it stay open year-round. There's an American Legion down the street, but it's dry. Not much fun for veterans to tell their stories sitting with their Cokes, one resident said. Omar's restaurant is across the street from the muni, but it's closed for dinner.

In a recent report on municipal liquor stores, State Auditor Rebecca Otto noted that, as a group, munis have posted record profits, but she says that's driven in large measure by metro stores and a handful of outstate stores in tourist areas. She takes no position on whether a municipal liquor monopoly is good or bad; she says she just wants their dealings to be transparent. Policy, she said, is for the Legislature to decide.

Annette Meeks, head of the conservative think tank Freedom Foundation of Minnesota, said change is unlikely. The munis, she said, "lobby like nothing I've ever seen. They're out for blood. They will not give an inch." And, she said, their coalition now includes Republican legislators. "They don't want to talk about supporting a government-run monopoly liquor store, so they hide behind 'local control,' " Meeks said. "They're not about to be responsible for their city losing a profit center."

Meeks, who formerly sat on the Metropolitan Council, said she does not oppose local control, "but when you can cross-subsidize using other city funds, that's not fair. If you can run a municipal liquor store and compete with private stores, do it. But you shouldn't need a monopoly."

Minnesota's system of municipal liquor stores is not its biggest problem. But it clashes with a culture that prizes private enterprise and that should take seriously government's role as regulator. "I want government to be the watchdog," Taylor said. "When the city runs the store, I don't think the watchdog function works as well."

Patricia Lopez is at plopez@startribune.com.