The Pros and Cons of Owning a Liquor Store
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Liquor is a heavily regulated industry. The policies for liquor store owners are different in each state and could vary even more at the local level.
If you don’t mind following the rules or ebbing and flowing with changing laws, owning a liquor store could present an opportunity to connect with your community. For example, Edward Mulvihill is a fourth-generation owner of Peco’s Liquor Store in Wilmington, Delaware. The store has been a community staple since 1936 and Mulvihill has nurtured longstanding relationships with the community. But it’s not all fun and games.
“It’s truly a thing you have to take seriously,” Mulvihill said.
Seventeen states and certain jurisdictions in Alaska, Maryland, Minnesota and South Dakota follow the “control” model and have a tight grip on the retail sale of liquor across the state.
The remaining jurisdictions and states, including Delaware, follow the “license” model, allowing people to independently own and operate liquor stores. But independent store owners still have to follow federal compliance laws, such as registering their businesses with the Alcohol and Tobacco Tax and Trade Bureau and paying federal alcohol tax on top of state taxes.
Keep reading to find out what it’s like to run a liquor store in a control state and a licensed state and use that information to decide if it’s the right business for you.
Benefits of owning a liquor store
Like any small business owner, a liquor store owner gets to wear many hats, Mulvihill said. On any given day, Mulvihill might be meeting with liquor wholesalers, placing orders, receiving shipments, or working the cash register and chatting with customers.
Community involvement. Mulvihill grew up watching his parents and grandparents run the family business. Although he always enjoyed working in the liquor store, he didn’t think it represented a viable career option, especially with growing competition from big-name stores like Total Wine & More.
“I never thought it would be possible to support myself and a family someday,” Mulvihill said.
He helped give the store a competitive edge, working with local breweries to add a large selection of craft beers and beer growlers a few years ago. He also pushed for more community events at the store, such as having food trucks come on Fridays and hosting in-house tasting seminars. Becoming more involved in the community has helped Peco’s build customer loyalty.
“We’ve picked up a ton of customers who abandoned the bigger stores,” Mulvihill said.
Flexibility in decisions at licensed stores. In college, Mulvihill spent some time working at a distillery in Pennsylvania, a control state, which gave him experience with both the control and licensed models. In a control state, he would not have had the freedom to sell products of his choice or host events at his store.
“Being an independent retailer, you can move a lot quicker than a state-run system,” Mulvihill said.
Mulvihill said, however, that control states have advantages. Store owners can rely on an assured customer base and can save money by placing large bulk orders, he said.
Reduced competition in control states. Control states have another advantage because they have a smaller number of liquor stores, Jason Hughes, CEO of the Mecklenburg County Alcohol Beverage Control Board in North Carolina, said. Hughes oversees 27 liquor stores in Mecklenburg County, the most stores in any county in the state. In a control system, local ABC boards limit the number of liquor stores in an area, reducing competition among retailers.
Local benefits in control states. The profits from liquor stores in control states go to public entities. In Mecklenburg County, for example, profits go to cities within the county to support law enforcement and alcohol education, as well as city and county library funds.
“The more we can earn, the more that goes to the local coffers, the less in taxes we have to pay,” Hughes said.
Challenges of owning a liquor store
To Mulvihill, the biggest misconception about starting a liquor store is that it’s an easy operation to run. In reality, a liquor store owner must remain legally compliant while maintaining competitive prices and managing cash flow in a low-margin industry.
“It’s not a turnkey operation,” said Mulvihill.
Cost of inventory
Brian Edwards opened Thoroughbred Spirits in Murray, Kentucky, five years ago. He and his business partner later opened four Cellar Door Wine and Spirits stores in the area. When they first started the business, they were shocked about how much they needed to spend on inventory. You have to purchase liquor in bulk to keep costs down.
“It’s overwhelming once you look at how much it really does cost,” Edwards said. “I think it scares a lot of people off.”
Edwards decided to open a liquor store when Murray became a “wet” city, meaning retail liquor sales became legal. The city awarded just seven liquor store permits, Edwards said.
Although the law is set for now, the volatility of other alcohol regulations could affect the business. For example, the town and the state both collect alcohol sales tax, and that tax could increase at any time, said Edwards. And, just like the city became “wet,” it could go back at some point, eliminating the legal sale of liquor in city limits.
“The laws are set in place, but if they come in and change them we could be hung out to dry,” Edwards said.
Managing cash flow can be difficult
At Peco’s, the fall and winter months are the busiest time of the year. But outside of October, November and December, Mulvihill knows cash flow might wane.
He keeps a smaller selection of liquor in the store and rotates constantly, calling it “dynamic inventory.” To keep costs down, he has to purchase inventory in bulk. But he’s also under pressure to sell that inventory quickly. He encourages customers to try new items if they can’t find a specific product in the store.
“It can be like a chess game,” Mulvihill said.
Limited selection in control states
In North Carolina, liquor stores are allowed to sell products that the state ABC Commission has approved. The commission stores all approved liquor in state-owned or leased warehouses, Agnes Stevens, deputy director of the North Carolina ABC Commission, said.
ABC stores are not required to have the same product selection, but all items must come from the state warehouses, Stevens said. As of May 1, 2018, there were 2,491 products available for ABC store owners to order.
Although the selection is broad, Hughes said it can be challenging to stick to the list of approved items. He might be able to place a special order, but he would have to buy an entire case of an item, which he might not be able to sell completely in his market.
“Even though we have a very good selection, I am confined by the selection that the ABC Commission approves,” Hughes said.
How to open a liquor store
Starting a store in a licensed state
Each state has its own alcohol beverage authority that regulates the production, sale and distribution of alcohol. Although the details might vary depending on your location, here are a few general steps to follow when starting a liquor store:
- Apply for a license. You must apply for a liquor license from your state alcohol control entity. Cities or counties might have a limited number of licenses available, which is what Edwards encountered when he opened Thoroughbred Spirits in Kentucky. In some states, such as Indiana, you might be able purchase a liquor license from someone who wants to sell it and complete a transfer of ownership application.
- Register with the TTB. After determining the business structure of your liquor store — sole proprietorship, partnership or limited liability company — you would apply online for a TTB permit.
- Find a location. States have specific zoning ordinances for liquor stores, limiting where you are able to set up shop. Those regulations could vary at the state and county level.
- Meet with distributors. Alcohol distribution in the U.S. occurs within a three-tier system. Alcohol producers represent the first tier, distributors the second and retailers are third. Neighboring liquor stores usually work with the same distributors, Edwards said, which is helpful for startups. The distributors can assist new store owners with product selection and store displays, he said.
Starting a store in a control state
When a local ABC board wants to open a new store, it must adhere to the state commission’s guidelines. Here are the basic steps the board must take:
- Get ABC Commission’s approval for store location. The state commission makes sure the proposed store location is in compliance with local zoning rules, including being the appropriate distance from schools and churches.
- Obtain financing to fund the new location. ABC boards do not use public funds to pay for new liquor stores. Most boards secure financing from a bank or use a portion of revenue from other stores in the county that was set aside for new locations.
- Hire staff. The ABC board appoints a general manager – sometimes called the CEO, like in Mecklenburg County – to oversees all county store operations. The general manager hires staff members to run individual stores.
- Order commission-approved inventory. The general manager works with distribution managers at individual stores to order inventory from a state-owned warehouse. The product selection is tailored to the specific market where the store is located.
Costs to start a liquor store
Several factors affect the cost of opening a liquor store, including the state where you’re operating and whether you’re buying or leasing a building, Mulvihill said. With so many variables, a brand-new liquor store could easily cost $1 million to get up and running, he said. Here are some of the initial costs you’ll encounter:
Liquor license. The price of a liquor license ranges from hundreds to thousands of dollars. In Oklahoma, liquor retailers pay $905 for a license, but store owners in California could pay between $12,000 and $400,000 for one.
Inventory. To keep prices low, liquor store owners generally purchase inventory in bulk and maintain high turnover. Inventory costs could fluctuate throughout the year to accommodate busy seasons. Mulvihill’s monthly inventory expenses average $125,000, increasing during the fall and winter holiday season. Peco’s Liquor Store is about 6,000 square feet, so the owner might have higher inventory costs.
Location. You could purchase or lease a building for your liquor store, depending on which option makes the most financial sense for you. Within the store, you’ll have to purchase shelving, cold storage units and a sales counter. A point of sale or inventory management system will also cost you, as well as signage inside and outside of the building.
Alcohol excise tax. Distilled spirits are taxed at a higher rate than beer and wine to adjust for higher alcohol content. Spirit excise taxes vary by state, ranging from $2 in Missouri to $32.52 in Washington.
To finance Thoroughbred Spirits, Edwards took out a business loan and a line of credit from his local bank. Here are a few details on those financing products — and others — you could use to open your liquor store:
Small business loan
Small business loans from a bank or an alternative online lender could offer short- or long-term funding solutions. Approval is based on your credit history and the financial health of your business, and you must make business loan payments on a monthly basis. You could use one of these loans to cover large inventory or equipment purchases or for working capital needs.
Business line of credit
A business line of credit from a bank or online lender enables you to withdraw money as you need it from a set amount. You pay interest on the amount you borrowed and the full loan amount becomes available again once you pay off what you withdrew. You could use a business line of credit to cover short-term working capital expenses, such as a repair or a temporary decrease in cash flow.
The Small Business Administration provides long-term, low interest rate loans for small business owners through SBA-approved lenders. The application process for SBA loans, however, is lengthy and it might take a few months to receive funds. The SBA, however, typically approves small businesses that might not meet the requirements for traditional business loans.
Business credit card
Like a line of credit, a business credit card allows you to draw from a preapproved credit limit to make purchases. Keep in mind that you must pay off debt within 30 days to avoid accruing interest. A business credit card could provide a short-term financing solution, and many cards come with benefits including cash back or discounted hotel rates.
Is the liquor store business right for you?
1. Decide how much time you want to devote to a store.
For Mulvihill, running a liquor store is a full-time, hands-on gig. By staying involved, you ensure employees remain compliant by checking IDs and not selling to anyone underage. There’s also a monetary incentive to be involved in daily operations — you don’t have to take payroll out of already small profit margins, Mulvihill said.
“You can find a skilled manager, but you’re going to pay for it,” he said. “Or, you can do it yourself.”
Edwards took a different approach. He hired managers to run his five liquor stores and kept his full-time job as a commercial insurance agent at Assured Partners. He spends about two hours each day catching up with store managers and checking bank accounts and deposits.
“I’ve got a couple of good people who run the stores for me and my partner,” Edwards said. “That’s half the battle.”
2. Understand your customers
When he decided to open a liquor store, Edwards felt confident in his knowledge of the surrounding community. He knew each of the five stores would have a different clientele, and he ordered inventory accordingly.
“I think you need to know your community and know where you’re going,” said Edwards.
It’s important to understand your customers in a control state as well, Hughes said. He must decide what would sell best at each of his ABC stores to make sure products don’t sit on the shelves for too long.
Each ABC store holds the responsibility to order the products that will sell best in that individual store, Stevens said.
“Your general manager will determine what the appropriate inventory is, place those orders and purchase the product that he or she feels is going to be popular in a particular market,” she said.
Community connection and customer service is key to keeping Peco’s open, Mulvihill said. He has to keep a finger on the pulse of the community to know what new items he should be ordering. But even if a product is doing well at another store, it might not sell for him. He has to use his best judgment based on his clientele.
“It’s shocking how individualized it is,” Mulvihill said. “It constantly surprises me.”