News Release Contact:Virginia ABC Communications - (804) 213-4413
Beginning Saturday, July 1, laws impacting the operation of the Virginia Alcoholic Beverage Control Authority (ABC), its licensees and applicants for ABC licenses will take effect. The Virginia General Assembly passed the following Virginia ABC-related legislation during the 2023 session, and Gov. Glenn Youngkin has since signed them into law.
Crossover Product Rules (HB 1979 and SB 809) – Both bills established guidelines for licensees regarding the display of alcoholic beverages near non-alcoholic beverages of the same or similar branding, logo or packaging. The new law was created to address innovative “crossover products” that contain alcohol and may cause consumer confusion or appeal to an underage audience.
Virginia ABC developed resources addressing crossover products for licensees, including stickers and a product guide. In July, ABC’s Bureau of Law Enforcement agents will distribute these resources, which will also be available online.
Employment Restrictions Relaxed (HB 1730) – This law streamlines the process for licensees to hire individuals with a felony conviction. Prospective employees must be two years past their conviction, with all terms of probation or parole completed (or have written permission from Virginia ABC and consultation with the probation and parole officer).
Seasonal Marketplace License Fee (HB 2336) – This law lowers the annual state license fee from $1,000 to $500 and the annual local license tax from $200 to $100 for marketplace licenses, when licensing privileges are exercised for six or less consecutive months, if such a period is specified prior to the beginning of the license year.
Local Alcohol Safety Action Boards (HB 2370 and SB 841) – Both bills modified the jurisdiction and composition of local alcohol safety action boards.
Per the Code of Virginia, ABC’s profits from in-store and online retail sales provide funding for designated state programs and services. For fiscal year 2022, ABC contributed a total of $622.8 million ($243.6 million from retail sales) to the commonwealth.
The Virginia Mercury - BY: MEGHAN MCINTYRE - JUNE 27, 2023 12:04 AM
After discovering at least seven cases of embezzlement at stores around Virginia, the Virginia Alcoholic Beverage Control Authority issued a press release early this month stating inventory losses incurred by the authority “compare favorably to the overall retail market.”
However, the authority’s numbers and explanations for its losses have fluctuated dramatically, causing some ABC insiders to wonder whether the authority is accurately reporting how much liquor is going missing from its books.
In response to questions from the Virginia Mercury, ABC officials claimed they cannot provide a detailed breakdown separating inventory losses at ABC retail stores from inventory losses at the authority’s distribution centers – despite a presentation recently given to ABC’s Board of Directors and authority documents that indicate the authority tracks that data. That distinction is important, according to business experts, because addressing inventory problems can be difficult if the source of those problems is unknown.
Despite ABC’s claims, authority emails obtained by the Mercury through a Freedom of Information Act request indicate the distribution centers may have been the primary source of inventory losses, and warehouse losses in fiscal year 2022 may have been greater than the authority recently reported.
A shrink in distribution center inventory
Jim Bradley, a professor of operations management and information technology at William & Mary, said all businesses experience losses due to “shrink,” an industry term used to describe when a company has less inventory — or liquor, in ABC’s case — than previously recorded. Shrink results in a loss of profits because missing products cannot be sold.
In its June 6 press release, Virginia ABC said it had conducted inventories of its distribution center and 394 stores this March and found approximately $1.5 million worth of shrink from the two combined in fiscal year 2022.
A June 6 press release from Virginia ABC describing shrink over the past few years.
This was the same number authority officials presented to the Board of Directors June 8 while detailing the transfer of inventory from the authority’s old Richmond distribution center – the warehouse where the majority of inventory was kept before being shipped to stores – to its new distribution center in Mechanicsville throughout 2021 and 2022.
But an internal ABC report dated June 29, 2022, which was obtained by the Mercury through a FOIA request, pinpointed over $2.7 million in shrink for the same year tied to the authority’s distribution centers alone. The same report also identified $540,000 worth of “swell” — the opposite of shrink, describing a situation in which products previously recorded as missing are found — occurred in stores that year.
An internal ABC report dated June 29, 2022, which was obtained by the Mercury through a Freedom of Information Act request.
Taken together, the figures put ABC’s overall shrink for 2022 at over $2.2 million, all of which stemmed from its distribution centers.
Even with this higher number, Virginia ABC still falls well below the 2021 national average of shrink as a percentage of gross sales, according to data collected in a 2022 National Retail Federation survey.
Asked about the discrepancy between the $2.7 million and $2.2 million drawn from the internal emails and the $1.5 million noted in the press release, ABC spokesman Pat Kane said the larger figures obtained through the FOIA request “are working documents, and do not reflect the final numbers.”
Where losses come from
Pinpointing the source of the authority’s losses is complicated because ABC has not provided a breakdown of its $1.5 million figure into shrink from stores and shrink from the distribution centers.
Megan Hess, associate professor of accounting at Washington and Lee University, said from a managerial perspective, knowing where shrink is coming from is important for figuring out what controls need to be in place to mitigate losses.
“If you’re trying to solve that problem, you need to know why it is happening. Where is it happening? How much is it happening?” Hess said.
Kane told the Mercury the authority is “not able to provide separated numbers.” ABC Director of Communications Nick Schimick also told the Mercury that “historically separate adjustment categories have not been broken out between the stores and distribution center.”
However, comments at a Board of Directors meeting and internal ABC documents obtained by the Mercury indicate the authority has at different times tracked how much shrink is occurring in stores and distribution centers individually.
At the June 8 meeting, ABC Automation Control and Inventory Supervisor Kate Sheehan told the board the distribution centers’ 2023 “year-to-date shrink is $340,000.”
Schimick said that figure “was and is an internal working number, and as our systems stand today, it is not integrated into our financial systems and not reported out as its own bucket.”
Additionally, a March 30 screenshot of the authority’s new centralized dashboard, which the June press release noted will be used to track shrink, shows annual shrink and sales numbers for stores dating back to 2020.
A March 30, 2023 screenshot of ABC’s new centralized dashboard.
The screenshot was shared with the Mercury by sources with knowledge of the authority who requested anonymity due to concerns over retaliation.
When the Mercury asked why ABC couldn’t provide separate shrink numbers when the dashboard indicates otherwise, Schimick told the Mercury that “the data referenced in the dashboard does not reflect final adjustments.”
The March dashboard screenshot records the total shrink in 2023 for stores only as $1,127,449 – the same number ABC presented in its press release as the total shrink that year for the authority’s stores and distribution centers combined.
In response to questions about the inclusion of distribution center shrink in ABC shrink data, Schimick told the Mercury in an email, “store shrink is what we reported $1,127,449. The numbers reported for the distribution center represents the net adjustment from the full physical count in March 2023.”
Knowing only total shrink “doesn’t permit a company to manage it,” said Bradley, the William & Mary operations management and information technology professor. “You need to know which items are being lost, where in the supply chain you’re losing it and why you’re losing it and then come up with a strategy to fix it.”
The Virginia Mercury - BY: MEGHAN MCINTYRE, GRAHAM MOOMAW AND SARAH VOGELSONG - JUNE 7, 2023
Embezzlement occurred at seven stores operated by the Virginia Alcoholic Beverage Control Authority over the last year, according to ABC officials, after employees exploited a vulnerability in the cash register system that was flagged by an internal audit report in September 2022.
The liquor authority’s leadership insists that audit report went undetected by senior officials for six months and was only rediscovered in February of this year, a claim ABC Board Chairman Tim Hugo recently said he found “perplexing.”
“It’s got people interested — how this thing has been floating around for six months from September to February and nobody knew,” Hugo, a former Republican delegate appointed to the ABC role by Gov. Glenn Youngkin, said at a board meeting last week.
Questions about that timeline have taken on added significance due to four high-ranking ABC officials who worked in retail and logistics recently being placed on administrative leave, a move that has sparked concern among some in the agency that those employees are potentially being scapegoated for cash register vulnerabilities known to at least some ABC officials in audit and law enforcement roles.
Hugo seemed to draw a connection between the disciplinary actions and the internal thefts in the board’s public meeting before he and others in the room agreed further discussion of personnel matters should only occur in a closed session.
“From the process point of view, everybody should be treated the same,” Hugo said.
ABC spokesperson Pat Kane said the authority “does not comment on personnel matters in order to protect the individuals involved.”
According to the report, which was produced by ABC’s internal audit division and dated Sept. 13, 2022, the authority became aware of the vulnerability in the system after employees at one of its liquor stores in Roanoke figured out how to steal thousands of dollars from its cash registers.
ABC denied the Mercury access to the report, citing exemptions in the Virginia Freedom of Information Act. However, sources at ABC who spoke with the Mercury on the condition of anonymity out of concern about retaliation shared the report.
The report details a scheme by three employees at Store 289 to exploit the “suspend” and “item void” commands in ABC’s point-of-sale system to pocket more than $8,000 from the cash register without the losses being detected in daily store reports. Investigators said they were able to document the fraudulent activity beginning in February 2022, although they suspected it could have begun “as early as September of 2021.” The embezzlement was only detected, the report notes, when the store manager “had a ‘feeling’ about one of the 3 participants and began to investigate.”
“There was no internal control in place that facilitated the discovery,” the audit report notes.
On April 11, 2022, a regional manager contacted ABC’s enforcement division and other authority officials about the thefts. Kane said “his report described how the vulnerability was exploited and provided evidence of the activity.” An enforcement agent then began investigating the situation.
On May 5, ABC enforcement contacted the internal audit division about the investigation, according to Kane. The audit division then “confirmed it would initiate its own investigation to examine any controls that either failed or were non-existent that allowed for the exploitation to occur.”
The three employees of the Roanoke store were ultimately prosecuted and, according to court documents, convicted of embezzlement in Roanoke Circuit Court.
The four officials placed on administrative leave are not mentioned in the report, despite the incident ostensibly being a primary reason for their leave.
While the audit division completed its report Sept. 13, 2022, ABC officials have insisted they did not see the document until Feb. 14, 2023.
“The first we became aware of it was February of this year when the second instance of the suspend transaction we became aware of,” said Chief Administrative Officer David Alfano at the May 30 meeting.
ABC Chief Retail Operations Officer Mark Dunham agreed during the meeting the report had not been issued to the appropriate people and “sat around,” but said the authority has made “extensive efforts to make sure that it doesn’t happen again.”
However, Hugo responded that he was still “perplexed that you’ve got not a single email for the five page report that sat out there and nobody saw it.”
Kane told the Mercury ABC leadership didn’t see the report until February 2023 “due to a failure in the process to issue the report.”
“The former Director of Internal Audit departed the organization on September 1, 2022, prior to the date on the report,” he wrote in an email. “The action of issuing the report did not occur during the transition between the director and acting director. The individual serving in the acting director role left the organization as of January 5, 2023. … It was not until misuse of the vulnerability was reported at a different store in February 2023 that the existence of the report came to light.”
Kane said that “to avoid a similar process failure in the future, issuance of reports will now be tracked in Internal Audit’s auditing software, Audit Board.”
After the February 2023 thefts were detected, ABC’s enforcement and internal audit divisions launched an effort to find vulnerabilities in the authority’s systems, including reviewing video from a nine-day period at 34 stores. The investigation found “a total of seven stores experienced theft through the identified system and process vulnerability over the last 12 months,” said Kane.
ABC said six of those stores are currently under investigation.
At last week’s ABC board meeting, other board members suggested Hugo was dredging up old business that had been settled.
“I’m trying to figure out why we’re rehashing this again at this point,” said board member Mark Rubin. “Is there something that you know that we ought to be looking at differently?”
Board Vice Chair Maria Everett said, in her experience, the authority acknowledges problems “and our goal is to fix them and move forward.”
“And I think that’s been done over and over on this issue,” she said.
Hugo indicated he was unconvinced only a few people within ABC knew about the September report and said he had been hearing lots of concern about it.
“I think it’s bubbling up,” he said.
The Virginia Mercury sent ABC a list of questions this week following up on several public records requests submitted to the authority, giving officials until Tuesday evening to respond. Less than half an hour after sending its response, ABC issued a press release saying it was taking a “proactive” and “multipronged” approach to prevent theft and other inventory losses.