by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
In 1908, North Carolina voters passed statewide prohibition in 1908, making North Carolina the first Southern state to institute prohibition. The 18th Amendment didn’t usher in Prohibition nationwide until 1919.
After the 21st Amendment was ratified (without North Carolina’s help) in 1933 to abolish Prohibition, North Carolina sought to maintain tight government control over liquor sales. The Alcohol Beverage Control Act of 1937 was based on the notion that government control would be better than private retailers enticing patrons to consume more and more. Its passage officially ended Prohibition in North Carolina and established North Carolina as a control state (one of just 17 in the nation) — but the only state with local government control of retail sales.
The state determines which liquor products from which distilleries may be sold at which prices, owns the central liquor warehouse, and contracts out the management of the warehouse, but local government boards own and operate the only stores where retail sales of liquor are allowed by law. As of this writing, 168 local ABC boards are operating 430 stores across North Carolina.
North Carolina may have gotten into controlling liquor out of concern for moral turpitude or the evils of demon rum, but a monopoly gets to charge monopoly prices. This unintended consequence has created tension between the founding rationale for the ABC system and the one they’d like for it to be.
Liquor sales are big business for the state of North Carolina, after all. It’s another indication of changing preferences here regarding alcohol over the 72 years since the ABC system was established and ABC sales were exclusively for home consumption. The Brown-Bagging Act of 1967 let people bring their own liquor to social venues such as private clubs and restaurants. Liquor-by-the-drink legislation was passed in 1978 after several years of attempts. The “Brunch Bill” of 2017 let localities approve retailers and restaurants selling alcohol beginning at 10 a.m. (brunch) on Sundays instead of after noon (once churches let out).
North Carolinians can now get mixed drinks in restaurants, bars, taverns, and other privately run enterprises. Beer and wine are available in grocery stores, convenience marts, specialty shops, restaurants, taverns, bars, etc., and at competitive prices. North Carolina has a growing number of wineries, is seeing a flourishing of craft breweries, and is now enjoying the return of its distillery industry.
In 2008, the Program Evaluation Division (PED) of the North Carolina General Assembly issued a report on modernizing the ABC system. Many of its recommendations were aimed at increasing system profits. The report focused on the profitability of local ABC boards and identified reasons why some had low profit margins, while many other boards enjoyed profit margins in excess of 10 percent. Reasons identified included: declining population, too many local boards with too many stores nearby, and the system’s origin rooted in control and regulation of alcoholic beverages rather than being able to mandate the boards meet performance and profitability standards.
Even though North Carolinians’ tastes and preferences were changing, the PED report found the control rationale of the system’s origin still held. North Carolina’s ABC laws, as written, implied that local boards’ “mission is to control the sale of liquor” while “no statue or rule identified revenue generation as a mission for local boards.” For their part, the boards tended to rank controlling access to alcohol sales as their top purpose.
PED found that the system’s least profitable boards (margins of 2 percent or less) resisted the idea of closing stores because they considered they were providing a service to their communities. One board even told PED that “too much emphasis was placed on profitability.”
The report chided them: “Focusing on providing a service to the community allows unprofitable boards to justify inefficient operations and maintain stores in unprofitable locations.”
In 2017, the ABC Commission reported a systemwide profit margin of 11.2 percent. That’s a very large margin for such a business. In license states, where private enterprises compete, profit margins are a lot tighter. After all, a high profit margin for a business in an area means someone else can open a competing business nearby and also profit.
In 2017, the profit margin of private beer, wine, and liquor stores hovered around 2.4 percent. Meanwhile, in North Carolina, only 19 of the 428 government-controlled liquor stores fell below that 2.4 percent profit margin seen in a competitive market.
The ABC Commission’s preliminary annual report for 2018 boasted of its “3rd consecutive record-setting year for ten-digit sales” and “all-time high transfer of monies into the General Fund.” They even credited themselves with “stimulating the state economy,” which is nonsense.
But with its control rationale so clearly outdated, the ABC system would try to use its government monopoly status to pivot toward government revenue generation. The fact remains the ABC Commission was not set up as an economic development engine, but to control alcohol sales.
And private enterprise is still not a suitable role for government.