Impact of the Highly Regulated Wholesale and
Retail Alcoholic Beverage Markets in Minnesota
prepared for the
Minnesota Grocers Association
by American Economics Group, Inc.
March 2005

Reviewed for the Minnesota Municipal Beverage Association
by David P. Brennan, Ph.D.
Professor of Marketing
Co-director of The Institute for Retailing Excellence
University of St. Thomas

March 12, 2005

Review of the Report
Impact of the Highly Regulated Wholesale and
Retail Alcoholic Beverage Markets in Minnesota

This review of the subject report was requested by Paul Kaspszak, Executive Director of the Minnesota Municipal Beverage Association. It provides an overview of the report, a historical brief on the alcohol in Minnesota, and an analysis of the pricing methodology used, geographic scope and industry structure.

Overview
The report is heavy on rhetoric and light on facts that can be substantiated. For instance, the report frequently uses the term monopoly or near monopoly when referring to Minnesota alcoholic wholesalers and retailers. First and most importantly the report indicates higher average costs are the result of a monopoly. There is no evidence in the report to substantiate there are monopoly or near monopoly conditions in Minnesota than there is in Wisconsin. The entire report is based on a pricing survey described in the Appendix on Methodology. It provides very limited information on how, when and where the pricing data on alcoholic beverages was obtained. Verification and replication is essential element of any survey. This report and the research conducted cannot be verified or replicated.

Second, the report’s focus on Minnesota, but in reality, it is on Wisconsin and Minnesota. More specifically, Wisconsin is one of 33 states that allow grocers to sell wine and spirits in contrast to Minnesota, which is one of 17 states that do not allow grocers to sell wine and spirits. More specifically, it is on Wisconsin being more price competitive on alcoholic beverages than Minnesota. A more accurate and complete assessment would have included Minnesota’s adjacent states of Iowa, North Dakota and South Dakota. Clearly the author(s) of the report attempts to show that Minnesota is less competitive than Wisconsin. The do not want to show that Minnesota may be more competitive than Iowa, North Dakota and South Dakota.

Third, the size and structure of the alcoholic beverage industry reflects a state’s unique culture, politics, taxation, historical development and the spatial distribution of people and urban centers. The alcoholic beverage industry in Minnesota is different from neighboring states and Wisconsin in particular because of the dominance of the Twin Cities; relative few smaller sized metro areas with numerous rural counties.

Alcohol in Minnesota
Minnesota has a long history of wanting to control alcohol distribution. The Midwest was the heartland of the Prohibition movement. The Woman’s Christian Temperance union (WCTU) began in Cleveland, Ohio in 1874 and is now headquartered in Evanston, Illinois. Minnesota chapters began in 1878 and grew in number and size paving the way for Prohibition. The Volstead Act which prohibited the manufacture and distribution of alcoholic beverages of greater the 0.5% was authored by Andrew Volstead of Granite Falls, Minnesota. The Act became law on January 16, 1920 and was repealed by the 21st Amendment to the constitution effective December 5, 1933.

Minnesota enacted conservative laws to control the sale and distribution after the repeal of Prohibition. Some measures included higher taxes on alcoholic beverages, restrictions on days and hours of operation, no serving of wine or spirits on Sunday, only 3.2% beer at non-liquor stores, restricting liquor stores and grocers from selling each other’s products, legislation enabling smaller communities to operate municipal liquor stores and bars and local option as to whether or not to sell liquor or not.

Pricing Survey
First, the report uses data from the Minnesota State Auditors report on Municipal Liquor Store Operations for 2003. The report states that Minnesota imposes two types of special taxes on alcoholic beverages:

“Special excise taxes are imposed on the manufacturers or wholesalers of these products. Taxes are fixed by a dollar amount per unit (per barrel or liter). Tax rates vary by beverage type.

A special higher sales tax rate of 9 percent (2.5 percentage points higher than the regular rate) applies to their retail sales—whether made on-sale (to be consumed in bars or restaurants) or off-sale (in liquor stores or by other sellers). The tax is a percentage of the retail price. It is scheduled to expire on January 1, 2006.

Revenues from both the excise tax and the additional 2.5 percentage point sales tax go into the general fund. Fiscal revenues from the excise taxes were about $67 million and $54 million for the special sales tax.”

Clearly, municipal liquor stores are only a small portion of the alcoholic beverage establishments, and not very representative at that. They number 257 (Minnesota State Auditor’s Report for 2003) out of almost 960 stores statewide (Census of Retail Trade for 1997). They tend to be located in smaller, more isolate communities that provide greater convenience to the local community and generate revenue for the municipality.

Second, the pricing survey outlined on page 12 of the report indicates:
“For this part of the study, data were collected on popular brands of wine and spirits for various locations in Minnesota and Wisconsin. Locations in Minnesota were assigned a code of 1, 2 or 3 depending on the degree of competitiveness reflected by profit margins. Regressions were than calculated as a function of the location in Minnesota or Wisconsin, competitiveness rating, beverage type, bottle size using dummy variables where appropriate.”

The report does not provide any detail on when, where or how the pricing data were obtained. When is an important consideration? Most Minnesota liquor stores use a high-low pricing promotional strategy. They selectively discount certain beverages to drive traffic and sales. They often have special broader price promotions with deeper and broader discounts by category (beer, wine and spirits) for longer periods during certain times of the year. Wine for instance is heavily discounted and promoted in March, July and October. Clearly, these sales account for a disproportionately large volume of sales. We cannot tell when the survey was taken so the price differences are questionable.

Where the data was collected also affects the result. There is very limited information on the sampling technique used. Normally a sampling frame is established to ensure that the sample is representative. Random, stratified and clustered sampling techniques are used to ensure that the sample is unbiased. The report provides very limited information on which markets and stores were sampled and why. There is no assurance that the sample is is representative and unbiased.

How the data was collected is not described. Was the data collected by observation, phone, mail, etc? We do not know from the report. Were there safeguards used to ensure that the products compared were identical? We don’t know from the report. For instance, spirits in liters vs. fifths are similar in size and some stores, especially small ones, only handle one size. Similarly, the report lists 750-ml. bottles of wine. One brand used in the survey was Mondovi. Which Mondovi wine was it? Was it Fume Blanc, Chardonnay, Pinot Nor, Merlot, Cabernet? Prices vary by variety as well as where the wine was produced. The report provides no specific information on what wine was tracked, and leaves in doubt how systematic and accurate the data collected was.

The market basket of items for which the price comparisons are limited and do not reflect a cross section of alcoholic beverages. The report only lists five 1.5 lt. of spirits and four 750-- ml. brands of wine. This is far too small to be considered a representative sample. A minimum of 20 items for each category (beer, wine and spirits) would be needed to ensure representativeness. In addition, the sample should be broadly representative of the entire market: lower, middle and higher priced products within each category not just the popular brands. The sample is medium to better. It does not include the full range of products and prices.

The Research Department of the Minnesota House of Representatives report of January 2005 sates that:
“Minnesota’s wine and beer excise taxes are average or below average compared to most other states. Minnesota’s tax on distilled spirits (liquor) is among the highest for states with excise taxes. A number of states (including Iowa) have liquor monopolies and a portion of the price is markup is a de facto tax; it is difficult to compare the tax burden with these states. The table compares Minnesota rates with its bordering states. However, only North Dakota imposes an additional sales tax (an additional 2 percentage points). Thus Minnesota alcohol tax burden is higher suggested by simply comparing excise tax burdens.”

Excise Tax Rates (per gallon) Bordering States

	Strong Beer	Table Wine	Liquor
Iowa	$.19	$1.75	N.A.
Minnesota	.15	.30	$5.03
North Dakota	.16	.50	2.50
South Dakota	.27	.93	3.93
Wisconsin	.06	.25	3.25

Source: Federation of Tax Administrators

Clearly, Minnesota uses taxes to increase revenue, especially in light of recent deficits. This is a matter of tax policy and revenue needs rather than price competitiveness at the market and store levels. It also reflects the state’s history and culture in taxing vices like alcohol and tobacco more highly than other states.

Geographic Scope
This report focuses on Minnesota, but is actuality it is about Minnesota and Wisconsin. This raises the question about why Wisconsin and not the other adjacent states of Iowa, North Dakota and South Dakota too. Could be it because Wisconsin allows liquor to be sold in grocery stores and the other states do not?

The spatial demographics of Minnesota and its neighboring states are strikingly different. The table below shows that Wisconsin is the most densely populated sate. It also has more residents residing in Metropolitan Statistical Areas (MSA), but a slightly lower percentage than Minnesota. The latter is the result of the high concentration of the state’s population residents in the Twin Cities compared to Milwaukee: 58.4% vs. 28%. Iowa, North Dakota and South Dakota are much more rural with less than half of their populations in MSAs.

Population Density and MSA Population Concentration

Source: Office of Management and Budget and the Census of Population for 2000

Another way to look at the urban structure is by counties. The table below shows that Wisconsin has more MSAs counties in MSAs. They are also more evenly dispersed throughout the state. This structure suggests the urban structure might yield greater competition where more stores drive prices lower because of increased competition. By extension, more rural residents would have access to these MSAs with more competitive pricing.

MSA Counties Importance in State

Source: Office of Management and Budget and the Census of Population for 2000

Bottom line: urban structure favors higher levels of competition.

Industry Structure
Distribution of alcoholic beverages reflects the historical development of states, liquor laws and regulations, urban structure, etc. Wholesale trade in Wisconsin developed earlier and more widespread than Minnesota. The importance of rivers and Lake Superior resulted in earlier advantages to cities like Winona, Red Wing, Stillwater, Mankato, Duluth and above all Minneapolis and St. Paul in Minnesota. Early advantages as gateways resulted in fewer, but larger wholesalers being more concentrated Minnesota than Wisconsin. Cultural differences resulted in Iowa running liquor as a state owned and operated monopoly. The Dakotas have high concentrations of wholesaling in only four markets: Sioux Falls, Rapid City, Fargo and Grand Forks.

Retail industry structure shows Minnesota with the greatest number of establishments, sales and employees. Wisconsin is a distant second because it permits grocers to sell wine and liquor to selected grocery stores. On the other end of the spectrum is Iowa with the lowest concentration of establishments, sales and employees. This is what happens in a real monopoly; not Minnesota as the author(s) of the report indicates.

Retail Industry Structure