Virginia ABC’s switch to a for-profit setup pays off during the pandemic

Source:  Roger Morris,  Global Drinks Intel

CEO Travis Hill tells Roger Morris of Global Drinks Intel magazine how a 2018 switch to a for-profit business structure allowed Virginia’s state-run liquor retailer to improve services and increase sales.

As with many business leaders, Travis Hill experienced lots of organisational headaches during the mandatory lockdowns and other restrictive measures enacted to limit the spread of Covid-19 during 2020 and 2021. At the same time, Hill discovered these hurdles also opened the opportunity to accelerate some important organisational programmes already on the drawing board. Even more surprising, as the pandemic stretched on, Hill found his business’s ability to exercise flexibility added greatly to the bottom line.
Hill is CEO of the Virginia Alcoholic Beverage Control Authority (ABC), the solitary retailer of distilled spirits in Virginia as well as the government unit responsible for collecting taxes on retail sales of beer and wine in the large mid-Atlantic American state. The ABC currently has 4,700 employees, operates 395 liquor stores, has a burgeoning online business and, in fiscal 2021, hit gross revenues of $1.4bn, a 13.5% increase over a very productive 2020.

Hill credits a 2018 structural change — turning what had been a state agency into a state authority set up to run like a for-profit business — with providing the flexibility needed during a very difficult time. “Being an authority allowed us to be more nimble with purchasing and personnel, to permit us to be rightsized,” he tells Intel. “It also allowed us to fast-track a much-needed distribution facility, but the most important thing was that it gave our people a new mindset, permitting them to think differently, to be good at working with change. This has been critically important during the pandemic.”
Virginia is one of 17 states of the 50 in the US charged with some or all retail sales of alcoholic beverages rather than having that function handled by private enterprise. Their setups vary considerably. Unlike many other control states, Virginia does not sell wine in its liquor stores except that which has been made in Virginia, a service that gives broader distribution to local producers. Restaurants, which can sell spirits by the glass, are licensed and regulated by the ABC.

Online expansion and collaboration with licensees
The pandemic experience, Hill notes, allowed the agency to expand its own online sales as well as work closer with the state restaurants — called licensees by the authority — in allowing premixed cocktails to be sold for takeaway consumption outside the restaurant. Those sales proved a big boon for struggling eating establishments. As with some other states and cities which enacted similar permissions, Virginia has extended the alcohol-to-go rule for the foreseeable future.
An examination of the authority’s $1.4bn gross revenue during 2021 shows a net profit of $616.4m, with $237.3m coming from ABC sales, $305.2m from taxes on spirits, wine and beer along with an additional $73.9m in general sales taxes. Gross alcohol sales of $1.3bn in 2021 represented the third straight year the billion-dollar mark had been achieved, following gross sales of $1.2bn in 2020 and $1.1bn in 2019.

Growth was seen in several areas. Store sales volumes measured in nine-litre cases increased by 8.2%, while revenues jumped by 13.4%, showing the trend toward premiumisation that took place during the pandemic when customers continued to trade up.

Tequila was the big volume gainer in 2021, moving past rum into third place behind combined whisky and vodka sales by categories and scoring a 33% gain with 615,000 nine-litre cases sold. Whisky (about 1.9m aggregate cases) showed modest gains, as did vodka (1.7m cases). Within whisky, a new category of flavoured whisky logged in at 336,550 cases. Rounding out the top five, rum sold almost half a million cases, and gin registered 250,000 cases sold.

Other major increases were experienced by Cognac/Armagnac (+24%), cocktails (+25%) and straight rye whiskey (+25%). Among brands, tequila products with large increases were Patrón Silver, 1800 Silver, Jose Cuervo Especial Silver, Don Julio Blanco and Casamigos Blanco, while other big spirits gainers were Tito’s, Hennessy VS and D’usse VSOP.

“One of our biggest opportunities came in building out our e-commerce business,” Hill says. “We had planned in 2019 to expand that segment, and Covid-19 accelerated that. We’ve continued to invest in our curbside business as well.” Overall digital and web sales grew from $3.1m in 2019 to $8.7m in 2020 to $14.8m in 2022. The popularity of curbside pickup and home delivery led to a 60.2% increase in e-commerce revenue from fiscal year 2020 to fiscal year 2021, and is up over 700% from 2019.

Hill says the ABC has worked diligently to help restaurants and other licensees — about 19,000 of them altogether — to maintain optimal revenues and better serve customers during the pandemic, and that some of those programmes will continue. “We didn’t want to do any planning without having their input,” he says, “so we set up conference calls at the beginning and asked, ‘What do you need?’”

​The authority has seen impressive results with its in-store marketing programmes. Spirited Thursday promotions, which provide discounts of premium brands in a single category on each Thursday during the month, have performed well during the pandemic. March 2020’s Irish whiskey event brought in-store sales of 3,338 bottles, a 102% category increase in revenue. July 2020’s event featured gin and brought sales of 2,959 bottles, a 478.8% increase in revenue over the previous year. The June 2021 Scotch whisky event resulted in store sales of 3,575 bottles for a 1,145% increase in dollars. September 2021’s Bourbon Spirited Thursday saw a total of 16,250 bottles for a 2,180% jump in sales. Online sales for each event saw similar incremental increases.

The ABC’s popular lottery offerings were put on hold during 2020 but were re-instituted in 2021. In March and April 2021, 2,200 bottles of various Bourbon products were offered, with three of the rarest bottles of Pappy Van Winkle Family Reserve 23yo selling for $299.99 each and more than 450 bottles of Old Rip Van Winkle 10yo selling for $69.99 each.

Flexibility and in-store marketing programmes One of the most popular and successful measures was the cocktails-to-go programme, “a totally foreign concept before the pandemic”, Hill says. “I think that the programme will be authorised [by the state’s General Assembly] for the next three years.” Flexibility was also needed, Hill says, in dealing with shipping delays and product unavailability due to glitches in the supply chain, “which was especially frustrating to our licensees”. He says supply issues have also led to adjustment in offerings during brand promotional programmes. Price inflation has not yet been a problem, Hill says, but he expects it to be a factor “during the back half of the year”.
Hill says that being able to operate like a for-profit business rather than a governmental unit was especially helpful in opening ahead of time a new 315,000sqft distribution centre and 95,000sqft headquarters near Richmond. The centre has advanced automated, web-based systems, with one employee being able to operate a dispenser that ships the ABC’s top 50 items. In addition, the facility can accommodate increasing e-commerce opportunities with additional space for expansion up to 399,000sqft.

“Business has increased to the point that we’re now shipping case volumes out of the new centre that we had previously only seen during the holidays,” Hill says. Additionally, in mid-2020, the ABC introduced a new point-of-sale (POS) system in its fleet of stores that streamlined many day-to-day store operations, including transactions, inventory management and licensee order fulfilment.

However, unlike a for-profit business, once the ABC’s business costs and reinvestment spending have been covered, net profits are returned to the state for education, health, human resources and public safety programmes.
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The 2021 profits of $616.4m was an increase of $71.1m over the previous year, bringing the ABC’s total contributions to Virginia’s general fund to more than $2.6bn in the last five years. Looking to the future, Hill says, “Our main focuses are maintaining a stable workforce, being prepared for whatever surprises that will be coming after the pandemic and being able to accommodate growth during whatever Virginia ABC’s new distribution centre near Richmond in Hanover County stretches over 315,000 sqft is the new normal.”