Quota system protects public from proliferation
Pub Date: 12/1/2006
Analysis by Cole Boehler
Tavern Times Editor
The history of social policy has been likened to the swings of a pendulum, moving between extremes on the right and left.
Fortunately, social and political frictions may ultimately reduce the arcs until the pendulum merely moves modestly from time to time in some sort of relative equilibrium.
That could certainly describe the nation's and states' approaches to liquor regulation.
Prior to the enactment of complete Prohibition through the 18th Amendment to the U.S. Constitution in 1919, alcohol beverages were largely unregulated with the exception of various, often contentious, tax schemes.
Prohibiting a commodity with such steadfast demand, despite federal laws, proved impossible and resulted in a society that winked at criminal violations and spawned an entire criminal underworld.
In addition, unregulated manufacture, distribution and retailing spawned "tied houses" and other unsavory business arrangements between producers and retailers that resulted in alcohol beverages being marketed on volume at unreasonably low prices, which contributed to the abuses and social problems that led to Prohibition.
The voters and their representatives, with collective relief, repealed Prohibition in 1933, assuring states exercised the right to regulate alcohol beverages, resulting in regulatory systems as diverse as the 50 states themselves.
Some states have "dry" counties that still prohibit alcohol today. But most states have opted for limited, closely regulated adult beverage markets for manufacturing, distribution, retailing and licensing. Montana is one of these.
One important aspect of the Montana regulatory landscape is the license quota system. Under Montana law, the number of retail licenses issued is based on the population of a community. That came about in response to an ever increasing, rampant proliferation of licensed establishments after alcohol was legalized with repeal of Prohibition.
The framers of that 1947 quota law sought a reasonable middle ground in restricting alcohol availability while simultaneously allowing that access based on grounds of "convenience and necessity."
Mark Staples of the Montana Tavern Association said it boils down to a public policy question.
"In a state and nation that are clamoring for increased alcohol restrictions, it just doesn't make sense to allow a tavern on every street corner or adult beverages to be sold in any and every business by anyone."
At the time the law was passed, which in essence allows one additional license per additional 1,500 city residents, some cities already had a ratio of licenses to population well beyond intended quotas. Butte is the classic example where saloons were prolific as many as 300, it has been said but populations there were declining along with the mines. Legislators couldn't enact a law that would put these "over-quota" small businesses under, so allowed them to be "grandfathered."
Other communities that have seen declining populations have, as a result, also gone "over quota" while in growing at-quota communities, the state periodically issues new licenses to serve the additional population, albeit based on a fairly complex system of formulas and calculations made annually following new census estimates.
A few years ago, to address this inequity, the state allowed licenses from "over quota" communities to "float" or move to cities whose growth had warranted new licenses. So far, 12 licenses have moved from over-quota communities to those entitled to new licenses.
Today, Billings, is at It's quota and Bozeman was, too, until its quota area intersected with neighboring Belgrade. Missoula and Kalispell are still over quota from the days when numerous licenses were grandfathered into the system.
But the fundamental precept, that alcohol availability should be linked to populations, has stood the test of time and is still the basis for the current system of license allocation.
Beginning in the 1970s, a new social consciousness demanded that drunk driving laws be more strictly enforced, thresholds for conviction lowered and penalties ratcheted up. And that's exactly what has occurred over the last three decades, with drunk driving accident and death rates now at new lows in Montana and nationwide.
Along with this powerful social movement to restrict drinking and driving, came a movement to severly restrict youth access to alcohol. The drinking age was raised from 18 to 21 and a host of new laws have been enacted to more heavily punish those who provide alcohol to the underage, and to more certainly achieve convictions and punishment of youth in possession or using alcohol.
Most would agree that more closely regulated access to and use of alcohol, as well as more severe punishment for misuse and violations, has delivered some important social benefits. Few would argue for tossing a strict system of regulation. Yet, there is one small group that is fighting six decades of accumulated social wisdom when it comes to alcohol laws.
These are people who have watched the rising value of liquor licenses, and who want the opportunities that come with possession of a license without paying the market price. Apparently, they also dismiss society's warranted demands that proliferation of alcohol outlets be limited by population growth.
They call Montana's population-based system a "monopoly" far from any fair description of the market, since the system allows about 2,300 licensed retailers to serve an estimated 700,000 people of legal age. That's one on-premise retail business to serve each 300 people a perfect contradiction of the term "monopoly" and a far higher ratio than you will find in other business sectors such as grocery stores, banks, auto dealerships and certainly newspapers.
But the press appears to be adopting the language and notions of the cheap-license dissenters. For example, The Big Sky Business Journal, a Lee Enterprises publication out of Billings, in an Oct. 9 report, called our license regulations "insanity" that gives 2,300 competing small businesses "monopoly status."
This is from a media company that enjoys near monopoly status through control of three out of four of the news and advertising periodicals in the Billings market, as well as in Helena, Butte and Missoula.
They said the population based allocation is "bizarre" even though it mirrors the system in place in many other jurisdictions.
The same report even criticized, as though it was current, Montana's defunct residency requirement statute which was tossed by the courts several years ago. That decision was never appealed and is considered final, even though the Business Journal report said it was "wending its way through a Supreme Court challenge" and even though licenses have been granted to out-of-state individuals and corporations.
The report also credited the Montana Tavern Association for "creating" the current system, a patently false notion. The Legislature, acting at the behest of the citizens, created the system.
As little as two decades ago, an all-beverage license in Missoula might have sold for around $200,000, according to brokers who were on the scene at the time. They may now go for up to four times that much, but so does real property in the city, while prime recreational waterfront real estate in northwestern Montana has actually appreciated in value by a factor of 40 to 100 times.
Tom McLaughlin, a partner in Missoula's Paradise Falls, a pub, restaurant and casino on south Brooks, notes he bought a lot and built a home in Missoula in 1989 for $85,000. That property would probably fetch $300,000 in today's Missoula market, he says. That reflects property appreciation in Missoula that is in line with the appreciation seen for liquor licenses.
He says nearly $1 million was originally invested in the Paradise Falls operation. It is a nice, comfortable and modern facility that was built on the fringe of the town's business district, but which is now in the heart of the business strip that boomed in the 1980s and '90s. The building and ground it sits on have appreciated substantially. So has the license, McLaughlin acknowledges.
But what has really added value to the business and its assets, he says, is that it has been worked hard and aggressively every day, and if the business is now worth three times the initial investment, that is easily justified and is what drives entrepreneurs to take risks.
"The license value is a reflection of the success of the business," McLaughlin says. "And there are still plenty of failures in this business, still plenty of risk."
Business brokers in both Missoula and Billings told the Montana Tavern Times that licenses are indeed available in those cities as long as a buyer is willing to meet a market-driven seller's price.
The corporation that owns the Olive Garden restaurant chain may be an example of a company not willing to pay market price. Recently, it has been reported, it walked away from the Missoula market once again because it is unwilling to pay the price licensed businesses command.
Missoula's Bill Seitz, who has owned several saloon and restaurant businesses around the city, became a business broker specializing in licensed properties there about 30 years ago. He says he has worked with Olive Garden through three or four attempts spanning a couple of decades to acquire a license there.
"When they first approached me, I told them I could find a license for them for $300,000," Seitz recalls. "They said no, that was too much. Awhile later they were back and ready to pay that price, but by then values had gone up to $400,000 and they said they wouldn't pay that. When they were ready to pay $400,000, values were even higher and they backed out again."
Bob Pulley is a real estate agent with Diamond Realtors in Billings who has owned and operated licensed businesses and now sells them. He echoes Seitz, but also points to the large out-of-state corporations with tremendous resources behind them as a factor in driving up values.
"When these guys come into a market needing a license, they have the resources to pay far more than the little guy," and that drives prices up, Pulley says. And when the value of all-beverage licenses goes up, so do beer and wine license prices.
And while Pulley acknowledges that the gambling privileges attached to an all-beverage and some beer and wine licenses has contributed to the demand and, hence, value, he points out that increasing license numbers simply cuts the collective customer pie into smaller pieces with marginal businesses forced out. "This is not economic development," he says.
Pulley agrees with Seitz, that licenses are available. "It can be done if the money is right," he says. "But sellers want to sell a business, not simply a license so buyers may have to acquire real estate and inventory, too."
But he goes further than Seitz, too: "This is what I think is driving these license values: profit potential. If you really know how to run a bar/restaurant/casino, and you're able, willing and ready to work it hard, every day for years, you can do nicely. And that's why the big chains are here driving up demand and prices."
Kevin Head and his business partner Brad Martens got into on-premise retailing with a "song and a prayer" 19 years ago on the corner of Ryman and Front in Missoula when they opened the Rhinoceros, a going establishment now reputed to operate more tap handles than any other in the state.
To get into the business, Head recalls "borrowing and scraping together $35,000 $20,000 of which went to make the down payment on a license then even having to borrow stools to get the business open." After being there and actively working in the business nearly every day for 18 years, Head finally took a vacation last year.
"We were both the swampers and we worked 12-hour days six days a week," Head says. "We did everything. We literally stood outside on the corner talking to passers by, asking them to come in and have a beer. I remember in 1987 having $1.50 in our bank account. We took $400 a month salary each plus tips.
"We're doing well now' I can't complain," Head says. "But's its nice to know that everything we've worked for the value we've built in the business and license could someday help us retire. We've worked for it. we've played by the rules.
"Do we really need more licenses? Too much competition promotes cheap alcohol and excessive drinking, and we don't want our customers drinking too much."
And he and Martens had rolled the dice on another venture, the Blue Heron, in the interim. That one failed, fully illustrating the risks even seasoned, successful operators face.
Harold "Hal" Fraser is the senior credit officer at Missoula's First Security Bank, which finances numerous "hospitality" business ventures, so he's seen the issue from the sellers' and buyers' perspectives.
He says he's seen license values appreciate "just like housing" in Missoula, where "a house valued at $62,000 three decades ago could sell for $400,000 today. What's the difference? Why shouldn't they keep the appreciation? Licensees have built and maintained and invested in their businesses and their industry and deserve to be treated fairly."
Fraser said he's not necessarily opposed to issuing new licenses, but would be opposed if they were issued below current market values.
He also concurs with Pulley, noting the pressure to create cheap licenses is coming from large out-of-state corporate chains. "Why would we damage our own people, who've been building their businesses and paying taxes for 10, 20 or 30 years, to get an Olive Garden or Red Lobster? I don't feel sorry for the (chains), Montanans shouldn't feel sorry for them.
"I'm for fairness and equity," Fraser said. "In my opinion, the people who want to make changes talk about fairness, but I don't think they're addressing that. They don't want to play in the market like the folks who've already jumped in."
Sure, banks are concerned, Fraser said, since they've collateralized loans on these businesses and their assets at current market values. "we've got exposure, absolutely, but We're not the only ones in the state.
"I have a lot of concerns" regarding safeguarding license values, Fraser says, "but there is one over-riding thing: fairness."
Editor's note: The Tavern Times was unsuccessful in repeated attempts to reach alcohol reform groups to take measue of their positions on proliferation of alcohol outlets, and potentially increased retail competition, which some say could lead to lower prices, more drink specials, happy hours, increased consumption and so on. We may continue to pursue this angle and, if successful, will offer a follow-up report.
Source: The Montana Tavern Times, Dec., 2006, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.