Farmington's municipal liquor operations, which had performed so poorly that the city had discussed exiting the business, have undergone a significant turnaround.

A new manager hired last year to oversee the city's two stores has instituted several changes, like installing more eye-catching displays and expanding the selection of craft beers. The downtown store also has benefited from increased customer traffic at a neighboring business — the town's only supermarket, which has seen its sales climb since undergoing a substantial makeover last year.

The city recently reported that liquor stores posted a net profit of about $191,000 in 2012, up sharply from about $108,000 in 2011. The net profit through the end of August this year is about $168,000, a period that doesn't include the holiday season.

"That's the busiest three months of the year," said Liquor Operations Manager Blair Peterson. Typically the holidays can account for at least 30 percent of a store's annual sales, he said.

The stores' profit margin now is about 6.8 percent — a substantial improvement from less than 0.4 percent in 2010 when Farmington ranked last among 17 metro-area municipal liquor store results tracked by the Minnesota Office of the State Auditor. Under Peterson's management, Farmington's stores have set a 6 percent profit margin goal for 2013.

"I couldn't be more excited about this turnaround," said Mayor Todd Larson. Profits from the liquor stores fund city operations like parks, the pool and the Schmitz-Maki Ice Arena.

"It's an important revenue stream for the city," Larson said. Tapping liquor store profits reduces the need for the city to use its general fund for those operations.

Peterson had spent about 16 years at Lakeville's municipal liquor operations before coming to Farmington about a year ago. He said some of the first changes he made were fairly basic, liking rearranging store displays to make them more attractive and customer-friendly.

Peterson said he also has worked to find better deals with wholesalers to boost profits, and also to pass on the savings to consumers and compete more effectively with other liquor stores. "We're doing more advertising to get the word out there about our pricing," Peterson said.

The ads also have promoted the stores' expanded selection of craft beers.

"That's a big and growing segment of the retail liquor business," Peterson said. "A lot of people into craft beers don't have a lot of brand loyalty. They just want to try the next thing that's out there. We need to be on that cutting edge."

The municipal liquor operations' profit margin also has been helped by lower rent at the downtown store. When the lease expired last spring, the city was able to negotiate a reduced rate, according to City Administrator David McKnight.

McKnight and Larson said the downtown store also has benefited from improved customer traffic at the neighboring supermarket, Family Fresh Market. The grocery store, which had operated as a Savers Choice with deep discounts and generic goods, was renovated and converted last year to a full-service store with brand-name merchandise. Both grocery chains are owned and operated by Edina-based Nash Finch Co.

"The customer base has exploded since they went to Family Fresh," McKnight said. The supermarket and city liquor stores have developed a partnership, with the grocery store promoting liquor specials in its weekly ad circular.

Jason Bartholomay was one of two council members who had suggested that the city let private business take over the liquor stores when they were struggling. He said hiring Peterson was an important step in turning the operations around.

Bartholomay also said the operations have benefited from some organizational changes, like the formation of a liquor committee made up of McKnight, Larson, a council member and residents. Larson agreed, saying the residents have been able to contribute their business and retailing expertise.

Bartholomay said he has heard from merchants, including the supermarket, who have told him their business has improved since the liquor stores have rebounded.

"The businesses are feeding off each other," Bartholomay said. "The more we can do keep shoppers from driving north, keeping them in town — that's one of the best economic development tools we can have."