Lakeville Liquors: Friend or Foe?

Lakeville’s municipal liquor stores have been a hot topic recently. Blamed for costing the city retail development opportunities such as Costco and Trader Joe’s, the the new mayor and City Council has asked for a full analysis of the benefits and pitfalls of Lakeville's liquor operations. At issue is whether the more than $1.1 million in annual profits generated from their operation is worth precluding possible future liquor related business development, and how to replace those funds should the city decide to get out of the liquor business.

With the initial meeting of a newly formed liquor committee last week, the issue is in the very beginning stages of being looked at, but the discussion is already in full swing.

At a where the status of municipal liquor wasn’t remotely on the official agenda radar, numerous residents showed up to speak out on all sides of the liquor debate. Mayor Mark Bellows responded at the time by saying the city’s liquor involvement wasn’t a finished story. Bellows said the issue would be examined from all angles before any decision was made.

“We’re in the early end of it,” said City Administrator Steve Mielke recently. “The council is working with the staff to try and identify what the study will entail.”

Mielke said there is no time frame for when the analysis might be completed, only that the committee was in the process on “laying out a framework” for what the study would entail.

And even as discussions are taking place regarding the feasibility of getting out of the liquor business, expansion plans and talk of an additional store are also being considered. Some mentions have been made about the County Road 70 and I-35 interchange as a possible target for a new city-owned liquor store. Walmart has announced plans to develop a 152,000 square foot retail store in the area and future development opportunities could typically be expected to follow suit making the location an attractive possibility if expansion were to occur.

Some of the issues and figures the committee will likely be considering when forming a recommendation and reaching their conclusions center around deciding how much of a friend or foe the liquor stores really are.

Lakeville Liquor: Friend

By all accounts, the Lakeville liquor stores are venerable cash cows. The city boasts the most robust financial figures out of the 212 cities operating municipal liquor stores in the state as of the latest audit of 2008 figures.

While municipal liquor operations are trending downward at the state level overall, the cities that are abandoning their municipal operations are predominantly rural operations, many with combination on-sale/off –sale operations. Metro area operations, in contrast, are booming.

Part of that boom is attributable to off-sale only operations. Those operations, such as Lakeville’s, have shown a 23.5 percent increase in net profits during the five years prior to the 2008 audit. Off-sale operations, in contrast, have shown a dramatic 46 percent reduction in profitability.

Nineteen cities in the metro area operate municipal liquor stores, and though that accounts for less than 9 percent of the total cities in the state that operate municipal liquor stores, the metro operations account for more than 40 percent of sales and profits statewide.

Of all the operations in the state, Lakeville ranks at the top of the municipal liquor ladder in both revenues and profits.

The city grossed more than $14 million in sales in 2008 and netted a profit of more than $1.3 million. Edina, Eden Prairie, Richfield and Apple Valley are the next biggest sellers. Profits in those cities ranged from $1.2 million in Eden Prairie to $535,000 in Apple Valley.

Those are pretty friendly numbers.

According to City Finance Director Dennis Feller, the liquor fund currently has a working balance of just over $6 million. Expenditures from that fund have historically gone toward paying down debt or for capital improvement projects and equipment.

Feller says past items funded through the liquor revenues have included the concrete floor at , land acquisition for the , the reconstruction and improvements among others.

He also indicated that the bulk of the current liquor fund reserves were being earmarked for expanding the city’s liquor operation should the council decide to that the Liquor operations are ultimately more friend than foe.

“The Liquor Fund capital improvement plan anticipates investment in future stores. If approved, a significant portion of the working capital would be appropriated to the investment in future stores," Feller said.

The current revenue numbers and lure of even greater profits could make it difficult to seriously consider voluntarily getting out of the business.

 Lakeville Liquor: Foe

Losing out on retail giants and development due to the state’s municipal liquor non-compete laws is one argument for the city getting out of the liquor business. Costco is the most mentioned example. The warehouse retailer set up shop in Burnsville after flirting with a Lakeville and the city’s municipal liquor stores were the “primary” road block according to Mielke.

“They indicated a search area primarily along the I-35 corridor and specifically some property that abutted Burnsville along County Road 46,” said Mielke. “They have very specific parameters for their site selection, something like 150,000 people must reside within fifteen minutes, but the primary issue was having liquor as a product for sale.”

Costco had been eyeing Burnsville since approximately 2003 as the ideal location for expanding into the south metro. Lakeville was a relatively late entry into the site search due in part to Burnsville’s liquor ordinance that limited the spacing of liquor operations, and lack of a suitable site within the city that met their space needs.

The south metro is blanketed with municipal liquor operations and Burnsville was an attractive island in the municipal liquor sea of the south metro that also made the city an attractive location for the company.

Costco did open a store in Eden Prairie, which also operates municipal liquor stores, but Mielke says company officials were adamant on retaining rights to sell liquor in any new stores.

“They acquiesced in the Eden Prairie case because they could not find another suitable location to meet their needs,” he said. “But they made it clear at the corporate level they were not willing to repeat that. They were willing in that case, but not south of the river.”

Costco officials did not return a request to comment.

Even though the city attempted to mitigate the issue by offering solutions that included renting out space from Costco for a city-run liquor store, the company ultimately decided to seize upon the Burnsville Grossman Chevrolet site when that property became available late in the discussions. The Burnsville City Council also voted to change their spacing ordinance for liquor establishments allowing Costco to move into the site across from MGM Liquor Warehouse.

It’s hard to determine what other similar retailers may be restricted by the no-compete liquor laws or if that time has passed. Walmart’s entrance to Lakeville should indicate the city is still attractive for developers and businesses

Others have taken a philosophical approach toward arguing against the liquor operations believing that government has no fundamental business of being in a commercial business endeavor.

“I don’t think a municipality has the right to operate a business, whether it’s a flower shop or a liquor store,” said one resident that addressed the council. “It’s not the municipalities’ job.”

Also along those lines is the argument that allowing competition will help consumers with lower retail prices as well.

Legislative Trends

Two major issues that keep popping up at the state legislature with potential influencing impacts include Sunday sales and allowing grocery stores to well wine.

SF 0197, a bill that would allow liquor retailers to open for business on Sundays is currently being heard for the first time by the Senate Commerce Committee and has gained traction on a usually slippery legislative slope that includes strong opposition from the state’s liquor industry. Similar bills have repeatedly been defeated, but the advancement to committee hearings shows the idea is gaining ground.

Passage of that bill would seemingly be a positive boon financially though some establishments argue they may not see enough increase in volume to justify extended hours of operation.

Allowing wine to be sold in grocery stores would theoretically negatively impact volume and profits for retail liquor establishments, though that proposal, too, has repeatedly been defeated due in part to the liquor industry lobbying efforts and no current effort to change that law is under consideration.

Going Out of Business?

Given the financial performance, voluntarily getting out of the liquor business would conceivably only make sense if that revenue could be replaced. How that revenue is replaced is the subject of another debate.

Shorewood, a community of approximately 7,500 residents near Lake Minnetonka, was the last metro area city to voluntarily get out of the municipal liquor store business. That community opted out in 2007.

While advocates there campaigned for eliminating the liquor stores on the philosophical argument that government shouldn't be in "business," financial data shows that the Shorewood liquor operations had lost $16,000 and $77,000 in the two years prior to selling the community’s two stores, effectively muddying the anti-government in business case.

Shorewood realized an approximate $350,000 windfall on the sale of their stores. They have transferred that money into their community investment account and, considering their liquor operations’ financial state at the time of the sales, have seemed content with replacing the losses with minimal investment returns.

“We can’t tell yet if it’s a good thing or bad thing in hindsight,” said Shorewood Financial Director Bruce DeJong. “We’re just moving forward with where we’re at right now. The cash is invested, but it’s not making a lot right now. Actually, we’re making very little return on it right now.”

What Lakeville could expect from the sale of their liquor operations is difficult to speculate.

Feller says an analysis of Lakeville Liquors’ commercial value has not previously been done and professional consultants would be needed to determine a fair market value. He did say the city pays out approximately $67,000 from the liquor store fund as payments in lieu of taxes (PILT).

“The stores at Galaxie and Kenrick are city owned stores exempt from property taxes,” said Feller. “The PILT is paid to the city General Fund and represents the estimated amount of property taxes which would have been paid to city, school district and county had the property been taxable.”

According to Dakota County tax records, the city’s land and buildings for the two liquor stores at Galaxie and Kenrick Avenue locations had an estimated total value of just over $2.4 million for 2010. The city leases its Heritage location.

Even if the city landed another potential Costco-like retailer due to removing the municipal liquor obstacle, the property taxes alone wouldn’t offset the loss of profits. The city retains on average, approximately 14 percent of total property taxes. Again, according to Dakota County tax records, Target, for comparison, paid the city approximately $66,000 in property taxes in 2010 based on a 2009 valuation of roughly $14.5 million. That number could drop to about $58,000 in 2011 based on a decrease in 2010 valuation.

It’s possible that the additional jobs and businesses would provide an influx of residents and housing development to help add to the tax base, but whether that would be to a large enough degree to offset the loss in revenue is also speculative.

“In the short term, I do not see any good reasons to discontinue city liquor sales,” said Council member Matt Little. “To fully replace that revenue we would have to increase taxes 5 percent or cut $1.1 million. From the previous would be for our city.”

That work session on Feb. 28, examined the on core services. Barring those cuts, a 5 percent increase in the city’s share of property taxes to make up the difference would translate to a hike of roughly $23 for owners of the average, $250,000 home.

Conceivably selling the stores could produce a short-term windfall that would cover the profits currently generated by the operations for several years. But once that windfall is realized, getting back into the business would be all but impossible.

One thing for sure is that no decision is imminent and that plenty of discussions will need to be had before any final determination on the city’s liquor operations can be reached. 

For now, though, it’s still business as usual at Lakeville Liquors and the doors are open six days a week.