AUGUSTA — The state is scaling back its proposal to hike the prices of many low-end “value” spirits.

Gregg Mineo, the executive director of the Bureau of Alcoholic Beverages and Lottery Operations, said Thursday that after hearing from companies in the liquor business, he agreed to cap the increase to any particular product so that nothing would go up in price more than $1.

Though the move won’t change the price increase for tiny bottles known as “nips,” which are slated to rise from 99 cents to $1.49, it will reduce the bottom line for many larger bottles that had been slated for larger hikes on Oct. 1.

Even so, there is still considerable agitation about the proposal to create the value pricing category as a way of bolstering state profit levels that have remained stagnant despite rising spirits sales.

Lawyers for the Louisiana-based Sazerac Co., which owns a 124-employee bottling plant in Lewiston, said proposals to hike prices sharply are unfair and appear to be “retaliation” for the company’s successful opposition to a proposed ban on the 50-milliliter nips.

Three days after the Liquor and Lottery Commission refused last month to go along with Gov. Paul LePage’s effort to ban the smallest, cheapest bottles of alcohol, regulators quietly announced a big price hike for nearly 1,000 products they lumped into a new “value” category.

The price hikes would push up the cost of a range of lower-end spirits, including a 50 percent increase for most of the increasingly popular single-serving liquor bottles.

Attorneys representing Sazerac said two-thirds of the 245 products offered in Maine by their client will get socked with price hikes under the plan.

“This is clearly discriminatory and unfair,” attorneys Edmond Bearor and Joshua Tardy wrote in a July 25 letter obtained by the Sun Journal through a Freedom of Access Act request.

Mineo called their words “insulting and demeaning” given the extensive back and forth he’s had with Sazerac and other companies since last fall over the possible price hikes. He said the new pricing was in the works before the nips issue arose and had nothing to do with it.

Sazerac’s lawyers called the move “a $10 million stealth tax increase on Maine consumers” that will drive people to buy alcohol more cheaply in New Hampshire or switch to other brands.

Maine Chamber of Commerce President Dana Connors said in another letter that the chamber worries “that such a dramatic price increase could negatively impact sales and, in turn, impact jobs here in Maine.”

“Talk about a gift to New Hampshire!” Nels Kramer of Enfield told regulators. “This is by far the stupidest idea yet in this child’s play with the Governor’s Office.”

Mineo said that he doubts Maine will see any loss of sales to New Hampshire or anywhere else with price hikes capped at no more than $1 a bottle.

Critics said that the proposal isn’t the best way to raise more revenue.

“Targeting value price points not only discriminates against certain consumers, but targets specific brands and producers as well,” said Craig Wolf, president of the Wine and Spirits Wholesalers of America.

He said the price changes will wind up costing Maine nearly $23 million in gross sales while consumers would ultimately pay $21 million more for their spirits.

“In other words, consumers will pay $2.40 for every additional dollar that the state collects in profits and taxes” from the new pricing scheme, Wolf said. He said it is “not a very efficient way to raise revenue.”

Wolf called on regulators to “reconsider the impact of this misguided proposal and instead seek more fair, equitable and consumer-friendly solutions.”

State liquor regulators have been trying to figure out a way to bring more revenue into state coffers since last fall.

Mineo said he asked the bureau’s experts to do “a deep dive” into the numbers to figure out why state profits, which total more than $140 million during the past three years, were flat while sales were growing 4 or 5 percent annually. There were, he said, “significant soft spots in our profit” that had to be addressed.

The proposal to create a new value category is a consequence of that effort, he said, and one that most of the people in the industry knew was in the works.

Still, though, the value pricing scheme came as a surprise to some.

The rollout of a new pricing scheme created confusion among producers because regulators didn’t have the prices figured out when they announced the change. An online pricing calculator and vendor portal were not ready when officials disclosed the creation of the value category in a Friday afternoon email July 14.

A July 21 email from Tracy Willett, manager of liquor operations, recapped some of the problems the seemingly rushed announcement created.

For instance, an online price calculator they use to figure out the bottom line wasn’t updated when the new values sector was first added.

Willett said on the morning of July 19 in another email that the figures could be arrived at by hand.

“Excel isn’t working for us to do this, and I am not a programmer,” Willett said, so the bureau asked Pine Tree Spirits, the state’s contractor for the liquor business, to develop one.

Later that day, Willett notified officials from six companies that the contractor had come through with one they could use.

A vendor portal the liquor industry uses in its dealing with the state wasn’t updated fully until July 20, halfway through the 10-day comment period set by law for a response to the value pricing arrangement that Willett announced July 14.

Mineo said the agency hurried to get information about the price adjustments out soon enough for suppliers to consider possible price changes before an Aug. 1 deadline. After that, he said, they wouldn’t have another shot at changing the price on their end until February.

Figuring out the retail cost of any given bottle isn’t exactly simple.

One of Willett’s emails explained how to figure out the new prices for value products.

Take for instance, a 50-milliliter bottle of cheap vodka — a typical nip.

The cost of the spirits to the state is $62.64 for 120 of the tiny bottles, which amounts to 52 cents apiece.

The markup rate for vodka is 189 percent, which means they multiply the wholesale price by 1.89, reaching a price of 99 cents. But there is also a 3-cent “premium tax” that brings the total up to $1.02.

But the pricing policy requires rounding up the bottom line to the next established price point. That brings it to $1.29 as a retail price.

Except that it doesn’t meet the required state profit level, which is figured by subtracting the initial 52-cent purchase price and the 3-cent premium tax from the retail price. Knocking off that 55 cents brings the minimum profit level to 74 cents on each vodka bottle.

That, however, is one penny short of the 75-cent threshold set by the state so it’s necessary to add 1 more cent to the price, bringing it to $1.30.

There is, though, no allowable price point between $1.29 and the next level: $1.49. So the price on the shelf for that vodka nip would be $1.49 — 97 cents more than the cost of the bottle to the state.

The minimum state profit level rises under the proposal with each increase in the size of the bottle.

For 100-milliliter bottles, the state requires a $1.20 minimum. It’s $4 for 750-milliliter bottles and $6 for 1.75-milliliter bottles.

There are other ways to approach the problem of making more profits for the state.

Sazerac’s president, Mark Brown, laid out one alternative in a Dec. 7, 2016, email to Mineo.

After speaking with Mineo, Brown wrote him to say he’d been thinking over the conversation that had focused on a key issue: that Maine’s liquor profits have not been keeping pace with the growth in sales since a 2014 shift meant to make the state’s prices more competitive.

Brown suggested that “the simplest way to solve the issue” would be to create a target profit number and then convert that into a percentage profit margin that could be applied to all of the liquor sold in Maine, something that could be easily adjusted annually.

Brown said it would treat every product equally, foster transparency and remove the ability of anyone to “accuse the governor or the administration of discrimination” against any segment of the population.

It would also eliminate the guesswork at trying to figure out the impact of setting particular prices, he said.

Brown said that because the percentage hike that would be required would be small, it would likely create little negative publicity and avoid distorting the market.

Brown also said that his alternative would “avoid a scenario whereby value brands are more heavily impacted, which in turn could lead to job layoffs at our Maine plant” that has been “a great economic and job creation story.”

Maine is one of 18 states that control the sale of alcohol within its borders. It regulates the liquor business entirely, including figuring out which spirits can be sold and how much they cost, decisions made by the Bureau of Alcoholic Beverages and Lottery Operations with input from the Liquor and Lottery Commission.

LePage and regulators sought to ban nips because, they said, the tiny bottles made it too easy for people to drink and drive. They can easily chug one down and toss it out the car window, officials said, contributing to both litter and drunk driving.

But liquor commissioners declined on a 4-1 vote to back the ban. A new nickel deposit on nip bottles takes effect in 2019.

It is possible the commission will discuss the value pricing changes at its next meeting Aug. 8.

scollins@sunjournal.com

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