Friday, July 23, 2010

Amynomics 101 - The Silly Economics of Dry Dallas

I took Economics 101 (at least twice) in college, and would like to talk about the economics of the wet vs. dry argument in Dallas.  Everyone thinks it's about a change in packaged wine and beer sales and sales tax revenue, or that it's about how much restaurants (licensed as clubs) spend to keep up a club membership database.  Chump change, guys, don't be like a pack of dogs distracted by Squirrels on the sidelines.  Into this argument let me introduce Amynomics 101, surely no Nobel Prize winning thesis, but an aspect of the economic consequences of the current law that are as relevant, if not more so, than those being currently discussed.

First, before we get into a discussion of what is best for Dallas, let me state that I'm very much for a system that controls alcohol consumption - especially when it comes to 1) minors and 2) over-imbibing and driving.   I agree with a system that works towards controlling both, while allowing those who don't break the rules the freedom to enjoy something that is completely legal.  I'm an accountant who loves to "follow the money", with a Bachelors of Science in Business Management from UT-D.  I am no economist, but for 20 years I've been working in the industry, trying to figure out the Texas Alcoholic Beverage Code, only to repeatedly find that just when you think you know it, you don't.

I completely agree that the sales tax revenue of retail store beer and wine (Squirrel - it's not really about sales tax revenue!) will vary little (relative to the total) between the wet-dry lines, but in these times can our city really afford to turn away any positive cash flow?   What will happen is a gradual shifting away from traditional Dallas "wet" area liquor stores to more grocery store/corner store purchasing within Dallas.  As beer and wine sales are siphoned from these high density liquor strips, there will be fewer stores that can survive on the leftover hard liquor sales.  Something like that seems to be going on up on Inwood Road in Addison since the suburbs surrounding them have voted themselves modified wet - lately I've noticed many shuttered stores that previously sold liquor, beer and wine.

It seems a break-even economic proposal unless you consider the cost to Dallasites who currently have to travel the extra distance to purchase (what in most towns is available on their neighborhood corner) beer and wine.   But Amynomics deals with the larger financial issues and how these ancient restrictions limit Dallas' economy, taxes, club licensees and their guests. 

Because of the way Texas' over 70 year old law was written, restaurants licensed as clubs in dry areas (Squirrel - it's dry, but it's not really dry!) must purchase their alcohol they sell through a 4th tier retail package store, paying as much as 20%-30% more for their inventory as a restaurant located in a wet area who can buy directly from a wholesale seller.   Highest in markup is wines, and a restaurant's alcohol sales are typically around 50-60% wine sales.

So based on the June 2010 report issued by the Texas Comptroller of Public Accounts (which was mostly payments for the month of May), I added up all the club licensees Mixed Beverage Gross Receipts payments and came up with the following numbers:

3 sample pages of June's TABC report,
yellow highlights are Dallas club licensees. 
Addison has zero club licensees.
Dallas clubs paid:  $1,061,163 in Mixed Beverage taxes in June, which mathematically translates to $7,579,736 in liquor, beer and wine sales. (These are not bars, they are restaurants, hotels, Veteran's organizations, country clubs.  They have strict requirements of how much alcohol can be sold relative to the amount of food sold.)   Let's say purchasing costs of alcohol for those sales is 30% of total sales, a pretty typical industry average and for purposes of this argument, by removing the 4th tier, let's use a lower 10% savings rate of overall purchases.

Wow, that's a savings estimate of $227,392.  For one month.  Almost $3 million per year.  Consider that this savings would be returned to Dallas business owners and their guests through lower prices.  And it costs the city NOTHING in lost tax revenue.  Higher cost-of-sales necessitates higher prices - an anecdotal story is my comparison of Merryvale Chardonnay at Houston's Park Cities vs. Addison. A $1 higher sales price per glass equivalates to a 10% buying premium for the same product in dry Dallas.   But laws of Economics (general laws, not just mine) dictate that as costs rise, demand drops, or in other words people will find ways to limit the higher costs of dining  out - by either doing without, by searching out BYOB places, by drinking at home, or by dining in a lower cost area like the 'burbs.   All of which results in lower taxes to the city.

Higher production costs means thinner margins for those businesses, which translates to less incentive for new businesses to grow in the area. This is huge, no, HUGE economics.   Between sales taxes, mixed beverage gross receipts taxes (14% of alcohol sales), payroll, property, unemployment and franchise taxes, few businesses generate tax-revenue-per-square-foot like a full-service, full-bar restaurant.  So dis-incentivizing these maxi-tax generating businesses is like saying "Thanks, but no thanks".  No problem, (they say), looking to the modified wet suburbs to the (north, south, east west) where the mix of residential and commercial rivals that of any Dallas neighborhood.  Leaving Dallas residents to figure out how to keep our libraries and community centers open without raising property taxes on our homes.

Entrepreneurs will always look to locate in the areas where they have the greatest opportunity to succeed, lower costs mean more money to pay back bank loans or other financing that helps open these very businesses.  Making the suburbs a better breeding ground for success means jobs and sales tax revenues move out of Dallas.  Add to the mix the high density of suburban residences and commercial areas that can help support community-based restaurants out there, and you have a higher chance of payback success outside of the city.   I am unqualified to put a $dollar amount on this loss of future business development, but am certain to my very business core that it is NOT insignificant.  Or else the suburbs would have stayed dry, I think.

Wet/dry politics is tied to land (Squirrel-it's not just Addison landowners that likes wet real estate!), in Dallas like no other large city in Texas.  Austin, San Antonio, Houston, El Paso......which are dry?  None.  One factor facing a modified-wet Dallas, where wine bars or beer bars would be allowed on local corners like in other cities, is what happens to the old "wet".  As retail sales and restaurant sales move to other more residential locations, the density of these businesses in traditional wet strips becomes less populated, reducing rental income and inviting redevelopment. 

Until then, what, pray tell, invites redevelopment of a scuzzy swab of industrial late-night clubs and liquor stores when a landlord can "churn and burn" differing bars or stores - as one fails and another tries to re-open to success. Keeping these strips of areas as "exclusive sales belts" limits regeneration in some of the precincts most needing a redo.  For now it also keeps cities like Addison in fireworks on the 4th of July, and promoting their local restaurants through city-sponsored advertising campaigns.

There are some incidental costs to dryness that are more nuisance than than prohibitive (Squirrel-these are not the real fight!).  For one, club restaurants have to transport their own alcohol from the sellers location to theirs, sometimes they do this themselves, or there are a few companies specially licensed to do this for a fee.  So while a beer truck delivers to Centennial Liquors, a block away from Sevy's Grill, Rathbun's or Hillstone, they are prohibited from crossing a 70 year-old line to deliver to our doors.  And then there is the membership database, most of us utilize Unicard which has a modest monthly cost considering the service they offer.  However both are just other expenses deducted from profitability, vs. a wet neighborhood (to the north, south, east, west of Dallas); another cost for an entrepreneur to consider when opening the restaurant of their dreams.

Let me digress about another economic point that seems unseen by the public (Squirrel! Squirrel! Squirrel!).  I am all for alcohol enforcement when it makes sense.  But tell me, does having TABC agents (licensed to carry guns, no less) go through boxes of membership records from the (months or years) past make sense to anyone?  Because the last time we had an audit, two agents spent 4 hours going through boxes of membership records going back 3 years. 

Perhaps, like me, you'd rather they'd find out the whys and hows of wrong-way drunk drivers on the tollway vs. who came in to have a gin and tonic at Sevy's bar six months ago.  To the agents credit - they are only following what the law requires, but in these economic times, is it wrong to question the entire premise of this rule of law and how our enforcement of alcohol is misguided?  Is it time to do away with the requirements of club membership simply based on the fact that it is a waste of taxpayer's money?

So Amynomics points you to keep the eye on the real prize, the higher costs and loss of growth and tax revenue to the city only results in profitibility to a few - and certainly not the Club restaurants, guests or citizens of the city.  If we want to see strong, vibrant restaurants in our neighborhoods we must keep up with our suburban neighbors, or risk losing business development to them.  Unlike many in these times, our industry is not asking for government financial handouts, only for fairness in laws, from which all of Dallas could benefit.

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