Should PA's Liquor License System be Overhauled?

red-tapeWednesday night I was talking to the owner of a local bar while having a few pints of delicious craft beer with a few friends. He was discussing that his profession was to open restaurants for other people all over the United States. That was his career until he and his father opened their own bar/restaurant in Lancaster City which has rooted them firmly in place for the next several years at least.

During his discussions of opening his business and the trials, tribulations, and triumphs of owning and operating your own bar he gave an estimate for what it cost to secure the liquor license that is the lifeblood of any bar. Without a liquor license a commercial establishment is not allowed to sell alcoholic beverages legally and being caught selling alcohol without a license carries hefty fine. He gave a number that was extremely high when considering opening a new business and was a significant percentage of the original investment of his place. It really made me wonder how liquor licensing works in Pennsylvania.

So I did a little research.

We’ve discussed on the show the absurd restrictions on selling alcohol in general, but specifically beer, in Pennsylvania. From only being able to by 12 beers at a time in a bar to only being able to buy by the case from a distributor, to being unable to offer discounts for “mug clubs” or bulk sales there are restrictions on just about every aspect of buying or selling beer.

Liquor licensing for bar and restaurants is based on the County Quota System. This means that based on the ten-year census numbers there is one retail liquor license available for every 3,000 residents of a county. Doing some quick napkin math if Lancaster County has a population of ~526,000 people and we divide that by 3,000 it means there are approximately 175 liquor licenses for the county. That means of all the bars, restaurants, cafés, bottle shops, pizza joints, or anywhere else you want a to buy a drink only 175 of them can legally sell alcohol in this county. That’s really not a lot when you think about it. Just thinking of all the places that sell alcohol in downtown Lancaster City and a lot of those licenses are used up just within the city limits.

The upside to this licensing scheme is also the downside to this licensing scheme; artificially low supply.

Prior to Prohibition it was common to get a free lunch from a bar if you bought a beer or two. Imaging going to Issac’s sandwich shop and getting a free sandwich provided that you bought two glasses of whatever they had on tap. Seems like a great deal to me. Now, obviously these lunches weren’t free but were subsidized by the markup on the alcohol.

The wide profit margin on alcohol sales are something that have extended into modern times. In restaurants and bar the alcohol is cross-subsidizing the food. Consider the last time you were at a fancy restaurant and the specialty cocktails might have been as expensive as the food you were eating.

Now this is a great business model for a lot of businesses. Those of us with penchant for spirited beverages with a meal are helping business weather a temporary downtown, increase profits, increase tips for wait staff, and hopefully wages overall on employees at restaurants. With the exception of us “sinful” drinkers (who subsidize the price of meals for teetotalers and have our vice taxed twice by the state) it is a great arrangement for everyone on both sides of the business deal.

Yet with Pennsylvania limiting the number of liquor licenses to population this creates a high demand for liquor licenses. The price for a liquor license can quickly become obscene. last year had an article talking about the high price of a liquor license in Philadelphia is becoming an impossible barrier of entry for those looking to open a bar or restaurant in the city. The report that the average liquor license in Philadelphia were in the neighborhood of $70,000 before including legal fees versus approximately $10,000 in the District of Columbia, a price that included legal fees.

The article went on to quote that in less densely populated, suburban counties that prices are even higher with many at over $200,000. Just for the privilege of selling alcohol to people who want to buy it.

The owner I spoke to didn’t pay nearly two hundred grand for his license yet he was still paying significantly more than the dramatically inflated prices of Philadelphia.

The reason for the inflation is that liquor licenses when they become available are auctioned rather than sold. Those interested in securing a license must outbid others interested in the available license. This is great for the state as the income derived from a bidding war between interested parties goes to them but it terrible for those with ambitions of opening a bar. Having to gather enough capital to invest in a business space, inventory, employees, and all other costs of opening a bar might be dwarfed by the costs to secure the license that is required to run your business legally.

This is the current system we have in Pennsylvania and it has been a great boon for the state itself but is it what is best of the citizens of the state? Or is it potentially killing our smaller cities with an artificial and unreasonable barrier of entry for new business that want to sell alcohol to start-up? Does this encourage national chains to open restaurants in small towns over ambitious locals looking to make their own unique bar experience?

Should this system be overhauled? What do you think?