Wednesday, July 17, 2024

Controversy stirs N.C. liquor system

Changing the state’s quirky liquor system churns debate, but lucrative transfers to government coffers repel calls for reform.

It’s a sunny Sunday afternoon. Cars cruise the shady streets of the Randolph County village of Seagrove with its pottery shops, some in meticulously preserved late 19th-century houses, with names like McCanless, Humble Mill and Brooke Haven.

Ninety miles up the road in west Durham, a ballgame is on a television above the bar as drinkers sip $10 raspberry coolers and $9 Smirnoff grape-vodka sodas. It’s cozy, the mirrored shelves a kaleidoscope of familiar labels — Dewar’s White Label blended Scotch whisky, Captain Morgan rum and Southern Comfort whiskey.

The two seem worlds apart, but for North Carolina, maybe not so far.

How North Carolinians buy and drink liquor is up for debate again, just as in the early 20th century when Seagrove was known as Jugtown for its whiskey containers supplied to many of the state’s 500-plus distilleries. Anti-alcohol forces shut down the trade by 1909, devastating the jugmaking trade. It took a couple generations for the community to reinvent itself as a leading capital for craft pottery.
A hundred years later, an annoyed regular stalks out of the Durham bar, grousing that it no longer has his brand. Now, rather than temperance crusaders, it’s legislators, bartenders and owners, distillers, and liquor-industry experts who are increasingly critical of the state’s system for selling and distributing $1.4 billion in alcohol a year.

Much immediate criticism focuses on the N.C. ABC Commission’s contract with a private Missouri company that operates the state-owned central warehouse in Raleigh. In a building the size of a shopping center, forklifts shuffle seemingly endless pallets of liquor. All liquor consumed in the state flows through here.

Several years ago, a state auditor gigged the commission for overpaying LB&B Associates more than $11 million over 10 years to manage this warehouse and distribute liquor. Nevertheless, in July, the state renewed its contract and mandated a new, error-free, balky computerized inventory-control program. Some suggest it occurred at the worst possible time, amid the continuing pandemic.

“Product availability and staffing were already strained, creating additional issues for ABC boards, stores and their customers,” spokesman Jeff Strickland says.

Commission Chairman Zander Guy, a Democrat and former mayor of Surf City, was an early casualty. He resigned in September, citing sleepless nights created by outrage over shortages from bars, drinkers, legislators and others. In December, Gov. Roy Cooper appointed beverage-industry veteran Hank Bauer to succeed Guy. Agnes Stevens, a senior administrator for several years, left last summer.

Critics say Guy’s departure reflects deeper, fundamental concerns.

The current glitches have hurt the hospitality industry, which accounts for one in 10 Tar Heel jobs. They could help upend the state’s nearly 100-year system of controlled alcohol sales, renewing a decades-long effort to shift greater control of the billion-dollar enterprise to private companies. The result would likely bring the system into a 21st-century economy of more sophisticated technology marketing, while also shedding the Jugtown roots.

“What we have now is archaic,” says Lynn Minges, CEO of the 20,000-member N.C. Restaurant and Lodging Association. Her industry has an estimated impact of $27.3 billion a year, with more than 500,000 direct and affiliated workers. Because of COVID-19, revenue declined 60% in 2020, including sharply reduced alcohol sales. “Our state laws were put in place 80 years ago, after Prohibition, and now we have this complicated system controlled by 180 different local ABC boards. It badly needs streamlining.”

Minges favors “a modernized, private-licensure model, with the state still controlling the permitting and location of retail establishments.” The argument is gaining traction, based on a dozen interviews with restaurant and hotel owners, politicians and others focused on the issue.

N.C. Rep. Tim Moffitt, a Henderson County Republican who chairs the House ABC Committee, says he’s open to privatization of what has become a major industry. There are 439 stores — double the number of N.C. Walmarts — operated by 171 local ABC boards.

“In private industry you hire people who have a business background, but this is a patronage system,” he says. “This is government-controlled, and I happen to believe the government should have a limited number of responsibilities. If you go outside that scope, you break more things than you fix.”

Chuck McGrady, a Republican state representative from Hendersonville, had led efforts to reform the system for years, but he resigned in 2020 without much success on the issue. Lawmakers weren’t swayed by a fiscal report tied to reform legislation in 2019 suggesting state and local revenue from liquor sales would increase to about $715 million within a few years.

Moffitt, who succeeded McGrady in the district, has picked up the effort. “We’re beginning to look at some of the solutions being employed in other states,” he says.
Calls for change aren’t new or partisan. Democrat Beverly Perdue, governor from 2009 to 2013, and Republican successor Pat McCrory, who served until 2017, campaigned on selling the ABC system to private businesses. Neither actively pursued the idea while in office.

North Carolina is one of 17 states in which all aspects of liquor are state-controlled. The commission regulates beer and wine sales separately from hard liquor. A 2019 state report noted that North Carolina collects more taxes per gallon of liquor sold than any Southern state and ranks fourth nationally. Liquor prices and ABC profit margins are unusually high, while liquor consumption per capita ranks among the lowest in the U.S.

“I’ve talked to a lot of distillers who provide product to many states, and they say our state is one of the most difficult to deal with,” Moffitt adds.

Neighboring Virginia has a similar system but has reported fewer shortages. South Carolina allows private companies to sell liquor and its stores, including those in border booze bastions such as Charlotte’s neighboring York County, have had limited shortages.

The ABC Commission’s Strickland says the North Carolina system operates in a very different fashion than most states. “Local boards carry out the retail operations and own the ABC stores, while in other states, retail operations and stores are operated at the state level.”

A benefit for retaining government control has been to secure a hefty cut of revenue, which supports the state’s general fund and local causes including public libraries and schools. In the fiscal year ended June 2020, the ABC system sent $393 million to the state, while another $105 million was distributed to local groups.

In short, there’s a half-billion reasons to stay the course. And the 2021 fiscal year results are likely to be stronger because liquor sales increased during the pandemic — a trend that continued late last year even with complaints over shortages.

Still, the current control system is unwieldy and inefficient, according to critics, who cite empty shelves and lack of inventory for bars and restaurants. That’s not just the exotic brands — a Glenmorangie 1967 Scotch whisky that retails for $825 per 0.75 liter or a WhistlePig rye whiskey bottle for $275 — but standards such as Jim Beam and Jack Daniels.

Some Queen City bar owners grouse about getting only half their orders or spending hours driving from ABC store to store because brands out of stock at one are available at another of Mecklenburg’s 30 stores.

“You don’t go a day without hearing about supply-chain problems,” says Meredith McCormack, executive director of the Raleigh-based Distillers Association of North Carolina, which represents most of the state’s 80 locally owned craft distillers.

Some distillers say they can’t get labels and bottles because of pandemic-related problems. Lack of truck drivers is another big concern while others decry the inherent inefficiency of a central warehouse system.

“We order from a Tennessee distiller, put it on a truck, bring it all the way across the state on Interstate 40 to Raleigh, then put it on another truck and send it back to Asheville,” Minges says. Similarly, a Charlottesville, Va., distiller that ships to Raleigh cited trucking issues but detailed other gripes. “This isn’t a trucking issue,” he says. “This is an LB&B Associates issue,” referring to the warehouse operator. He declines to be named, citing what he calls a “silent rule” among distillers who say they fear repercussions from the ABC system.

At Southern Distilling in Statesville, co-founder Pete Barger walked through a plant recently where mash awaits distillation in gleaming stainless-steel vats. Like many distilleries statewide, Southern was prompted by government agencies to change directions in 2020. It soon had orders for more than 100,000 quarts of hand sanitizer, just as bars and restaurants were shuttered.

They flocked to ABC stores with predictable results. Consumers rushed to stock home supplies in the early months of the pandemic, says Keva Walton, CEO of the Mecklenburg County ABC system, the state’s largest with $182 million in 2020 revenue and about 330 employees. Sales soared, but when Gov. Roy Cooper lifted social distancing and many other restrictions this year, business rebounded sharply at many establishments.

“We had extraordinarily high consumption during the pandemic,” says Walton, “but when the governor lifted restrictions, it was like a hockey stick. Our numbers for on-premise and mixed-beverages sales jumped something like 123%, and we couldn’t get them as much as they wanted when they wanted it.”

Strickland says total statewide sales in September, the latest month recently available, totaled $134.5 million, a 42% increase from before the pandemic in September 2019.

Uphill battle

Moffitt and others concede it’s a momentous fight to change a system that dates to the middle 1800s, when counties and towns set their own rules on manufacturing and selling liquor.

By the early 1900s, when Jugtown’s potters were bustling, temperance forces were gaining muscle. They forced a 1908 referendum in which North Carolinians voted two to one to ban liquor. “The sun will rise tomorrow on a state redeemed from the whisky evil,” boasted the Raleigh News & Observer at the time The state barred liquor sales more than a decade before Congress passed nationwide Prohibition in 1920.

Perception of liquor as a moral concern still underlies the existence of the ABC control system in a state whose historic icons — moonshine-running race driver Junior Johnson and evangelist and anti-alcohol advocate Billy Graham — reflect conflicted thinking.

“Many still see alcohol as an evil that needs to be controlled,” says Jim Galyon, chair of the Greensboro ABC board, which oversees 16 stores and $58 million in revenue last year. He’s a staunch defender of state control, as are most local ABC board chairs and CEOs. “We still hear the old joke about going into the liquor store and hoping and praying you don’t see somebody from your church there.”
With the passage of its own prohibition law and the national one, historians say North Carolina gained a reputation as the nation’s moonshine capital between 1908 and 1933. In the middle of the Great Depression, 38 states — not including North Carolina — ratified the 21st Amendment, ending federal prohibition.

In 1937, state lawmakers created the N.C. ABC Commission that operates in mostly similar ways today.

Three years ago, when Elon University and High Point University polled Tar Heels at the behest of a state legislative watchdog agency exploring privatization, about 52% favored a private system.

“People who were ABC store shoppers, who regularly used them, supported private sales two to one,” says Jason Husser, who heads Elon’s polling. “But the anti-alcohol people who said they never went to an ABC — not sure I believe them — wanted government control.” Avowed nondrinkers favored the state’s prohibition on Sunday liquor sales, though drinkers were split.

The Sunday blue laws are cracking, however. A law that took effect in October allows Tar Heel distillers to sell their own products on Sunday for the first time since Prohibition, while permitting online orders and curbside pickup. Moffitt and Minges say it reflects a needed example of modernization.

The statewide grassroots support for the ABC System, coupled with the influential beer and wine lobby, make strong arguments against privatization. The public needs at least some control over a product that can pose clear danger, they contend.

“We do not think the current system should be dismantled,” says Tim Kent, executive director of the N.C. Beer and Wine Wholesalers Association. Formed in 1936, its members serve more than 18,000 outlets. “It needs to be more efficient and modernized, as events of the last few weeks and months — the shortages and empty liquor shelves — have demonstrated. But the system has still worked pretty doggone well for a long time.”

The potential for alcohol abuse and underage use justifies close government scrutiny, ABC system advocates say. The state commission spent more than $1.4 million last year on programs combating drinking by those under the legal drinking age of 21.

“I don’t want to disparage our neighbors to the south, but South Carolina has greater numbers of alcohol-related deaths than North Carolina, with half the number of people,” Kent says. Federal statistics show South Carolina has 32.6 alcohol-related deaths per 100,000 residents per year, compared with North Carolina’s 28.9, second lowest in the Southeast, to West Virginia.

Kent says new residents, used to buying liquor along with beer and wine at a chain grocery or drugstore, are behind growing calls for a private system. “People move here and wonder why the liquor system isn’t what they were used to in New York, New Jersey or Massachusetts. Then some end up serving in local and state governments and asking questions that frankly are worth asking.”

Money talks

Many say the deciding factor over the future of the ABC system will be a financial decision. State and local boards have seemingly little incentive to change a system that is taking in $500 million annually for public use. “Regardless of whether distilled spirits are controlled or not, we need to take into account the negative impact it might have on the bottom line for the state,” Moffitt says.

A state budget office report concluded that a sale of the system’s stores and other assets would bring in about $700 million. Another report in 2019 by a legislative division suggested “modernization and streamlining” rather than a major shift. Some suggested changes have since been adopted.

Proponents of privatization say taxes and fees on private sellers and distillers would exceed benefits of the current system. Minges cites an estimate that libraries and alcohol-abuse programs would gain an additional $50 million a year, while the state general fund would take in an additional $166 million.

“At some point, North Carolina won’t be a control state,” Moffitt predicts. “I believe the intractability of our control system and how frustrating it is to operate within it will bring about its own end.” ■

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