LCB Data Proves Bad Year, Raises More Questions

OCEAN CITY — The Liquor
Control Board for Worcester County (LCB) admits it made many mistakes, but it
adamantly claims recent financial reports prove there was no wrongdoing that should
necessitate abolishment.

Board member Larry
Wilkinson stresses that the quasi- governmental monopoly just had a bad year.

As licensees and
politicians continue to dissect the county liquor dispensary’s 2010 financial
reports, LCB Executive Director Brian Sturgeon puffed out his chest in
vindication this week in an email to licensees.

“Overall it seems that
this summer has been a pretty good one for business. Now that the audits are
over no one can doubt that the LCB did everything possible to respond to the
recession by lowering prices last year as much as possible and probably more
than was wise,” said Sturgeon in his email. “It will also serve to clear up
some of the misinformation that had been spread around. Salaries were not
raised by over $200,000. They were actually cut by over $150,000. There were no
$30,000 bonuses paid, and the audit shows the last time bonuses were paid was
December 2008; the same time the rest of the county paid them.”

Sturgeon’s email seems
to mirror what proponents of the LCB have been saying throughout the months of
allegations from the licensees and the wholesalers that led to state
investigation into the dispensary’s alleged illegal business practices: The LCB
lost money because of some bad management decisions, not because they were
breaking the law.

Yet, although it is true
the LCB cut salaries by almost $150,000 from their bottom line this year, the
administrative and board members’ salaries actually rose a bit (less than
$1,000), and the brunt of the savings came from laying off lower level
employees like store clerks and drivers.

The $200,000 raise in
salaries that was claimed by the licensees was actually pointed toward last
year’s official audited financial reports, which cited both the aforementioned
salary raises and the $30,000 bonuses.

“We never said they took
pay raises this year,” said Worcester County License Beverage Association
President Doug Buxbaum. “We just think that it was unacceptable that they did
it last year when their revenues went down another $300,000 from 2008. And to
boot, their revenues went down another $300,000 in 2010 to $110,000.”

Wilkinson said that the
reports released were not meant to earn the LCB vindication of any sort, but he
merely wants the truth to come out, and the finger pointing to stop.

“Our intent has always
been to get the real story of what happened this year at the LCB and I believe
these numbers show what happened,” said Wilkinson. “We gave back more savings
to the licensees than we should have, and our costs went up, and we’ve been
saying that all along.”

A deeper dig into the
report shows that the LCB’s business strategy of the last few years to purchase
more products directly from suppliers has damaged their bottom line.

In fact, the LCB paid
more money in interest on the amount of liquor they purchased this year, than
they contributed back to Worcester County ($160,000 in interest paid vs.
$111,000 given back to the county.)

A look at the excise
taxes paid by the dispensary also seems to indicate that the amount of direct
purchasing has risen each year almost as consistently as revenues contributed
back to the county has fallen.

An excise tax is paid by
the LCB on direct purchases only. Simply put, when the LCB buys a bottle of
liquor directly from a supplier, rather than from a wholesaler, they are
required to pay a $1.50 tax per gallon. In 2010, the LCB’s excise taxes spiked
29%, meaning it purchased approximately 11,000 more cases of liquor direct than
they did the previous year.

Industry insiders say
that when a wholesaler like the LCB buys a product direct from the supplier, it
must buy in large quantities and often to secure the account, and it is also
widely known throughout the industry that bottles of liquor purchased directly
have a higher margin of profit, which would inevitably urge an entity like the
LCB into going direct if possible.

Yet, Wilkinson contests
that the rise in excise tax doesn’t mean that the LCB is sitting on a bunch of
liquor that it can’t sell.

“Yes, we have been
buying more products direct and we have said that in some cases that it could
have hurt our bottom line,” said Wilkinson, “but it’s not like we have 10,000
cases of Stoli sitting in our warehouse that we can’t move. In the future, we
won’t be looking to secure more direct accounts, but we will consider direct
purchasing as part of our business model as the economy improves.”

Another point raising
eyebrows is that the cost of goods sold by the LCB in 2010 went up over
$500,000 on the wholesale side.

“Even with all the
direct purchasing that they did, which is supposed to lower the cost, how do
their cost of goods on the wholesale side go up so substantially? It just
doesn’t make sense,” Buxbaum said.

Wilkinson attributes
much of the LCB’s more than $742,000 losses on the wholesale side to an
increased cost of goods, and he says that the retail stores’ almost $300,000
profits recorded in 2010 were a direct result of the economy.

“My theory is that the
retail stores did better because people wanted to buy a bottle of liquor and
stay home rather than go out and sit in a restaurant and have to pay eight or
nine dollars for one drink,” said Wilkinson.

Although the report most
certainly shows that the LCB took significant measures to lower their expenses
in 2010, the below the surface numbers, most notably, the dispensary’s direct
purchasing practices and what those purchases are apparently doing to their
overall bottom line, which has dipped more than $700,000 since 2008, has caused
both politicians and licensees to continue to wonder where all the money has

“This report still
raises a lot of questions,” said Buxbaum. “It doesn’t hand us a smoking gun
concerning illegal activity and we didn’t expect it to. What it tells us is
that there is gross mismanagement and a very poor business model in Snow Hill,
because if you buy more products directly, your profits should go up, and
theirs continue to fall drastically. There’s just no excuse to continue to sell
more than $14 million worth of liquor and give back less to the counties and
municipalities than you paid in interest on the booze you bought. It blows my