Liquor Warehouse for State Distribution

On a given day, the state Department of Revenue’s Liquor Control Division’s 100,000-square-foot warehouse in Helena holds about $15 million in liquor inventory for shipping across the state, says Shauna Helfert, the Division’s administrator. The state’s monopoly on distribution of hard alcohol is just one part of a state liquor law that includes million-dollar licenses alongside $400 licenses

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Want the right to serve alcohol in a Montana restaurant or bar?

Better save your money.

State licenses to sell alcohol have sold for as much as $1 million in Gallatin County; many go for more than $500,000.

That's remarkable, considering the state only collects about $200 to $800 on most new licenses.

Although the secondary market for selling liquor licenses is legal, it's also largely unregulated and can only be measured by the sale prices voluntarily reported to the state.

Some call it a healthy system that puts value in the pockets of the business owners who get their hands on a license while also protecting Montanans from an overabundance of drinking establishments and the public safety concerns they bring.

Others say it's an outdated, archaic and restrictive system that doesn't fit with the modern marketplace.

"It's a funny balance," said Shauna Helfert, administrator for the Liquor Control Division at the state Department of Revenue.

That balance may be in question now, as two state legislators have brought measures forward to consider changes to that system, renewing a conversation that continues to draw strong opinions and emotions.

And while one of the those measures already failed to clear a House committee, the issue is not likely to take a backseat any time soon.

The quota system

The high price of licenses in more populous Montana cities can be traced to the state's quota system, which limits the number of the most common on-premise liquor licenses (such as for bars and restaurants) based on population.

In roughly nine communities — the most populous areas, Bozeman among them — the number of licenses already exceeds the quota, thanks to inclusion of licenses issued before the 1947 law went into place.

While Montana is not alone in privatizing ownership of those licenses, it is the only state that ties gaming to liquor licenses, a factor that some say further inflates the values.

Helfert says many license holders praise the system for turning their licenses into an asset. 

But change may be on the horizon.

To change, or not to change?

Rep. Jenny Eck, D-Helena, proposed a bill that would remove the restaurant beer and wine license (commonly called a cabaret license) from the quota system.

The bill was tabled the day after its first hearing last week, but the conversation is likely to continue.

While some restaurant owners may support the central idea of the bill, they remain concerned that the hundreds of thousands of dollars they have paid for their licenses would be essentially lost if the system changed.

"I think they need to keep the scales on balance," said Henry Fargot, owner of South 9th Bistro in Bozeman.

He holds a cabaret license, which requires that 65 percent of his sales are food, and doesn't believe his license should be held under the restrictions of all-beverage or beer and wine licenses, he said. But he doesn't want to risk losing his investment, either, he said.

Fargot paid $125,000 for his license and he thinks he and anyone else who would stand to lose that value should be paid for it, he said.

A second bill in the state House proposed initially to create a committee to study the entire liquor control system and recommend possible changes. That bill's sponsor, Rep. Chris Pope, a Bozeman Democrat, believes the liquor control system could use a 21st-century update.

"There are a couple places where the old model isn't serving as well as it could," he said this week. 

Beyond looking at the quota system, the study would also have assessed the state's laws limiting craft brewer barrel limits and consider the three-tier franchise system that separates alcohol manufacturers, distributors and retailers.

State law restricts business owners from holding licenses at more than one level (manufacture, distribution or retail) of the market. Craft brewers get an exemption that allows them to distribute and retail their product up to a certain amount.

Retailers have criticized the franchise system in the past because roughly 22 wholesale distributors sell most of the beer and wine across the state. 

But Pope's measure, House Bill 618, drew strong criticism from restaurant owners and other liquor license holders (and particularly the Montana Tavern Association) who said his bill language seemed to suggest the quota system could be thrown out the window if the committee sees fit.

Pope said he had no intention of "blowing up" the quota system and he acknowledged the value that business owners have in their licenses.

"There's a ton of equity built into that quota system," he said. "We're going to have to delicately sort through this process."

The criticisms had an impact, however, and while Pope's measure cleared its House committee Thursday and was endorsed by the House Saturday, the only surviving portion of the amended bill was the component to study the creation of an alcoholic beverage council. 

That was the only portion of the bill that should have been kept, said Mike Hope, vice president of operations for the Rocking R Bar in Bozeman and president of the Montana Tavern Association.

Though the bill only proposed a study, another study of the liquor system published in 1980 resulted in strong recommendations, including one bill draft that would have phased the quota system out over a 15-year period.

Despite the failure of that measure, the industry has seen less significant rule changes over the years, and some say it's adapting just fine.

Cabaret licenses, like what Fargot holds, were added in 1997 to try to give restaurants an option that didn't require a full liquor license. And in 2007, the quota on those licenses was doubled to allow more restaurants into the mix.

In 1999, lawmakers and industry groups compromised to allow breweries to sell samples in their tasting rooms with limits on the hours they can sell (10 a.m. to 8 p.m.) and the amount they can sell (48 ounces per customer per day).

"That's an example of where the system has shown flexibility over the years," Hope said.

Meanwhile, executive directors for the Montana Brewers Association and the Montana Beer and Wine Distributors Association testified that the industry isn't flexible enough.

The private ownership and attached gaming (for some license types) are two aspects in particular that should be studied, said Kristi Blazer, executive director of the Distributors Association.

And the quota system should be reconsidered, too, she added.

"If the quota system is allowed to adapt and change, it may be something we can work with," Blazer said in a recent interview. "It needs to adjust with the times."

The Brewers Association, which earlier this year stood in opposition to distributors over a bill that proposed allowing breweries to hold retail liquor licenses, hoped the study bill would lead to a new compromise to allow craft brewers to expand the hours and serving limits of their tasting rooms, the group's executive director, Tony Herbert, told the House Business and Labor Committee during a hearing for the bill last week.

Pope's initial draft bill mentioned the idea of a brewpub license, and he admitted the failure of the earlier compromise was one factor that prompted the bill.

"Now we kind of have to start over and see if we can find a slightly different direction to the finish line," Pope said. "How do we rethink a future...that would allow craft brewers to be selling their beer in a way that's fair to the tavern owners and fair to the distributors?"

The study and potential creation of an alcoholic beverage council bears a strong resemblance to the coalition that was formed two years ago to come up with this year's compromise bill, except the council would be tasked with identifying "future issues and opportunities" in the industry, a more broad objective than a compromise for brewers.

Whatever ideas that council came up with, it seems unlikely that ditching the quota system would be among them, and industry players agree a major change would be difficult, if even possible.

"I don't see the population quota system going away," Hope said. "I do think there are tweaks, and as changes happen the whole industry has to look at how to accommodate those."

But despite what appears to be failure for Eck's bill and significantly less impact for Pope's, the conversation around Montana's liquor industry isn't likely to be quelled. If the price of liquor licenses remains high, brewers operate outside the quota system and a small number of distributors control much of the market, industry players will continue to push for change.

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Daniel DeMay can be reached at ddemay@dailychronicle.com or at 406-582-2651. He is on Twitter at @Daniel_DeMay.