As revenues shrink, so do state profits from liquor monopoly
Tom Kirby, ABC's acting chief executive officer, said recently that he expects "a more aggressive approach to consolidation" of its stores if the downward sales trend doesn't change.
RICHMOND — As Gov. Abigail Spanberger prepares her first budget, she won’t be able to rely on Virginia’s liquor monopoly to produce as much profit as expected, as alcoholic beverage sales continue to plummet and the state closes stores to cut operating costs.
The Virginia Alcoholic Beverage Control Authority approved a new six-year forecast last week that shows net profits falling sharply in the fiscal year that began on July 1 and declining for the next two years before reversing course in 2030. Profits are expected to fall by 3.6% in the current fiscal year instead of the previous forecast of a 1% decline, followed by an additional 2% drop in the second year of the budget and 1% in the first year of the next two-year spending plan.
The glum forecast, which the authority will submit to the Governor's Advisory Council on Revenue Estimates, contrasts sharply with the five-year forecast that ABC submitted just three years ago at the behest of then-Gov. Glenn Youngkin in a push for lower operating costs and higher profits from the state liquor monopoly. Youngkin told the advisory council then to expect ABC profits to grow by 5% a year, only to face a $110 million projected shortfall less than six months later as sales turned sour.
ABC has been cutting costs and looking for new ways to make money ever since, as liquor sales plummeted after spiking upward during the COVID-19 pandemic and people adopted new habits.
"The one thing we don't have control over as much as we would like are those store sales, and that's where we make our money,"Â said Tom Kirby, who became acting chief executive officer after Spanberger declined this summer to reappoint Dale Farino as CEO. The governor has not named a permanent replacement.
Virginia policymakers don't rely as heavily on ABC profits to help fund the budget as they have in the past. Fifteen years ago, a General Assembly controlled by Republicans refused to even consider a proposal by then-Gov. Bob McDonnell to privatize Virginia's liquor monopoly, primarily because his plan wouldn't replace the profits and tax revenue the state would lose.
Now, ABC profits don't represent as big a piece of the pie that they did then. The two-year budget adopted on June 29 requires a total of $211.7 million from the authority this year and $198.7 million next year, which each represent well under 1% of the revenues collected in the general fund to pay for core services, such as education, healthcare and public safety.
As a result, the General Assembly's money committees appear to be lowering their expectations for ABC revenues, acknowledging national trends in alcohol consumption that are showing up in sales at Virginia-owned liquor outlets.
ABC officials say the new forecast is an unvarnished look at what to expect in revenue not only for the current budget, but also beyond.
"I think what we're trying to do with this forecast is responsible — the Commonwealth depends on that forecast," Kirby told the authority board of directors on Wednesday.
Part of what's happening is a "reset" of alcoholic beverage markets after sales spiked upward during the COVID-19 pandemic, when people generally stayed at home. Consumers also have been feeling the pinch from inflated prices, so they are pulling back on discretionary spending and buying less expensive brands. At the same time, they are drinking less and looking to alternatives, such as ready-to-drink canned cocktails and, in legal markets, cannabis.
"We believe at some time, alcohol sales and consumption will hit a floor," Kirby said last week.
Meanwhile, ABC is looking for a path forward that doesn't rely on cutting its way to profits and still meets its obligation to enforce state alcohol control laws, as it has done since the end of Prohibition 93 years ago. The authority is also resuming new obligations, which the General Assembly adopted this year, to enforce restrictions on liquid nicotine and vape shops, as well as help implement a legal marijuana market due to open next July.
"We're not sitting back and saying, 'Woe is me,'" said David Alfano, chief financial officer at ABC. "We're trying to take deliberate actions to disrupt the trend."
In June, for example, they used their relationships with liquor suppliers to offer deep discounts on alcoholic beverages, including dozens of rare whiskies and tequila, during a three-day event they dubbed "Spirits Palooza."
The experiment had an immediate effect on ABC's bottom line, producing the best month for revenues of the entire fiscal year. The authority generated more than $20 million in net profit in June, or $6.8 million over budget.
The combination of Spirits Palooza and ongoing cost-cutting boosted their net profit to $236.6 million in the fiscal year that ended on June 30, or $11 million more than ABC had expected.
Even so, the authority expects to finish the current fiscal year with $202.1 million in net profits, which it forecasts to fall to $178.9 million in the year that will begin on July 1, the second year of the budget. That would be a drop of almost $58 million in two years. The following year, 2028-2029, profits are expected to fall an additional $16 million, before starting to turn around the next year.
ABC has also had to absorb unexpected operating costs, such as a 3.5% pay increase for employees, higher healthcare premiums and a new paid sick leave policy, all of which come out of gross profits.
The authority has imposed a new sales fee for using credit cards that it expects to save $12 million over two years, but mostly it has relied on increasingly deep cuts in operating costs to offset falling sales. Over three years, it cut more than $30 million in operating expenses, reducing the number of executives and department directors, as well as slashing spending on outside consultants and management services.
"We've right-sized the organization," said Alfano, the CFO. "We were definitely heavy at the top."
In addition to layoffs, the authority also hasn't filled empty positions to save money through workforce attrition.
It also has begun closing stores as leases expire and consolidating stores within communities. In Virginia Beach, ABC consolidated two stores into one "superstore," which has produced more sales and profits than the old stores.
With annual cost savings of $300,000 to $400,000 a year for every store ABC closes, Kirby expects "a more aggressive approach to consolidation" if trends don't change and sales continue to drop.
But Alfano warned that there's a limit to cost-cutting at ABC, and they're approaching it.
"We're a very lean agency," he said. "We just can't continue to cut costs year over year, absent some sort of strategy."
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