Auditor General: Wine Kiosks Are Not the Innovation LCB Should be Pursuing

HARRISBURG – Auditor General Jack Wagner commended the Pennsylvania Liquor Control Board’s innovative attempt to expand customer convenience and boost profits by placing wine kiosks in grocery stores, but a special performance audit, released today by his department, found that the program fell short of established goals in large part because of mechanical malfunctions that caused the PLCB to shut down all 29 operating kiosks during the busy Christmas season.

Wagner said the PLCB should take immediate steps to terminate its contract with Simple Brands LLC of Conshohocken if kiosk operations cannot be modified to meet the originally stated objectives.

“We agree with PLCB that innovation should always be a top priority with regard to customer convenience, which was a specific goal of the kiosk program,” Wagner said. “However, the most fundamental goal that needs to occur within the PLCB and state government – through action by the General Assembly – is greater customer convenience by opening all PLCB stores seven days a week, 12 hours a day.”

According to a map put together by Wagner’s audit team, none of the 622 PLCB retail outlets (600 stores and 22 kiosks) were open 12 hours a day, seven days a week, as of last month. However, 157 were open seven days a week, but with limited hours on Sunday; 419 stores were open five to six days a week, 24 were open only for limited hours three to four days a week in less-populated rural areas, and the 22 kiosks were open six days a week from 9 a.m. to 9 p.m., excluding Sundays.

“State-regulated industries like gaming casinos are open 24 hours a day, seven days a week,” Wagner said. “It’s time for the PLCB to modernize its retail operation and expand its daily operations to better serve the residents of the Commonwealth of Pennsylvania.”

The Pennsylvania Liquor Control Board is an independent government agency that was created in 1933 following the repeal of prohibition. It employs 4,800 and is responsible controlling the manufacture, possession, sale, consumption, importation, use storage, transportation and delivery of liquor, alcohol, and malt or brewed beverages in the commonwealth. In fiscal year 2010-11, the PLCB had $1.96 billion in sales and transferred $496 million in profits and taxes to the General Fund.

In an attempt to expand customer service and increase its annual revenue contributions to the state, which has been struggling with budget deficits in recent years, the PLCB last year began selling wine through automated “kiosks” located in supermarkets across the commonwealth. The machines required customers to have their driver’s licenses scanned to prove they were of legal age, and to breathe into an aperture to establish sobriety.

In a press announcement heralding the beginning of a test program launched in summer 2010, the PLCB said the kiosks would improve customer convenience and increase revenues to state government.

The kiosks did neither, according to the results of Wagner’s special performance audit. As of June 30, 2011, the PLCB spent more to operate the kiosks than it took in, resulting in an operating shortfall of $1.12 million, Wagner said.

Mechanical and technological malfunctions forced the PLCB to shut down the kiosks in all 29 supermarkets on December 21, during the height of the busy Christmas shopping season.

Although the kiosks were put back on line in January, their popularity has waned. Wegmans Food Markets canceled its participation in the program and Wal-Mart announced Aug. 24 that it had changed its mind and would not install 23 kiosks in its stores.  Currently, 22 kiosks are operating in supermarkets owned by Giant Eagle, Brown’s Shop Rite, Fresh Grocer, Shop ‘n Save and Giant Food Stores.

Wagner’s special performance audit, which is available to the public at www.auditorgen.state.pa.us, chronicled the problems that existed from the beginning of the ill-fated kiosk program.

The six findings, are:

• The board used kiosk technology that effectively controlled the purchase of alcohol.
• The board followed state procurement requirements, but the request for proposals did not enable fair and just competition.
• The board and the sole responding vendor negotiated the kiosk contract in ways more advantageous to the vendor than necessary.
• The board spent $1.12 million more than it took in over two fiscal years and has invoiced the vendor for the losses.  But the vendor has not paid.
• The board and the vendor lost credibility when the kiosks malfunctioned,
• The board overstated the convenience of the kiosks.

The audit, which generally covered the period Jan. 1, 2008, to April 30, 2011, but includes updates as late as Aug. 25, found that the PLCB is statutorily constrained by the number of stores it can open on Sundays. The Liquor Code allows for 25 percent of the total number of Pennsylvania wine and spirits stores to be open on Sundays; that number includes wine kiosks because they are considered stores. The audit report noted that PLCB officials stated that they would like to open the kiosks on Sundays since Sundays are top sales days for supermarkets, and that the PLCB favors a legislative change that would allow kiosks to remain open until 9 p.m. on Sundays if Sunday hours are granted to kiosks.  

In addition, the audit found that poor sales and high operating costs have threatened program success.

Based on calculations performed by Wagner’s auditors from financial data provided by the PLCB, from Jan. 29, 2009, through March 31, 2011, wine kiosk operations showed net income from sales of $206,060, and total operating costs of $1,131,375.

Wagner’s report noted that 20 of the 32 kiosks, or 63 percent, that were operational during the audit period failed to meet the minimum weekly sales threshold as determined by the board.  The unmet threshold for each kiosk was 210 bottles a week, or 35 a day.  Only three of the 32 kiosks had average sales that topped more than 210 bottles a week.

Furthermore, the audit found that 919 malfunctions were reported from June 21, 2010, through Dec. 21, 2010. Noted errors included 281 instances of kiosks not functioning, 179 instances of door and dispensing issues, 144 identification issues, 97 receipt issues, 70 breathalyzer issues, 67 audio or visual issues, 35 payment card issues, 18 out-of-stock errors, and 28 other issues.  The audit also reported that even after attempted fixes by the staff of Simple Brands, according to the board’s error log, there were 118 incidences of kiosk malfunctions from Jan. 19, 2011, through Feb. 22, 2011, at the reopened kiosks.  

Wagner’s auditors found that based on a subset of data covering the period October through December 2010, auditors determined that 1 out of every 21 transactions was problematic.  The malfunctions affected customer confidence, a factor that certainly negatively affected sales when the kiosks reopened and the malfunctions continued, Wagner said.

Wagner’s report made 12 recommendations to address deficiencies noted in his audit of the PLCB wine kiosk program, including:

• If it does not terminate the kiosk contract, the PLCB should continue its effective monitoring of alcohol sales at the kiosks but explore other options for testing blood alcohol concentration levels.
• Be even more aggressive in holding the wine kiosk vendor accountable for ensuring that all kiosks are fully functional at all times.
• Work with the General Assembly to pass legislation that would permit all stores and kiosks to be open seven days a week, 9 a.m. until at least 9 p.m., and all kiosks to be open seven days a week, 9 a.m. to midnight, if they are housed in stores that are open during those hours.
• Offer liquor for sale at the kiosks, as well as more local wines, to expand customer selection options and increase sales.