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Facing tough competition, Shorewood plans to sell liquor stores

Small cities can raise cash by running liquor monopolies, but with many private sellers nearby, this city is leaving the business.

By Jenna Ross, Star Tribune

Last update: August 21, 2007 - 12:01 PM

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HOW MUCH?

Year-by-year, here's how much Shorewood's liquor operations have brought in:

Net income 2003: $22,965

Net income 2004: $54,514

Net income 2005: $42,112

Net deficit 2006: -$15,930

Year-to-date income 2007: $20,033

Sources: City of Shorewood, Office of the State Auditor

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Shorewood's getting out of the liquor business.

At a recent meeting, the City Council voted 3-2 to sell the liquor store operations that the city has run since 1961.

The decision was part philosophical and part economical.

Under state law, cities with populations less than 10,000 can own liquor stores as a way to fund city functions. When a city does so, it owns a monopoly; Shorewood's liquor stores are the only two within city limits.

Council Member Martin Wellens, who introduced the motion to sell the business, doesn't believe selling liquor is part of a city's job.

"I'm a free-market guy," Wellens said. "The original justification for cities owning the stores -- to control the market, ensure that no minors are being served -- just doesn't hold water anymore."

Shorewood's stores have been struggling to remain competitive against the MGMs and other sellers that aren't located within city limits, but aren't too far away.

"Shorewood's geography works against us," said City Administrator Craig Dawson. "We're six miles long but rarely more than a mile from north to south. It's very easy for private operations to be nearby."

Shorewood's operations don't always make a profit. Because of a one-time adjustment to employee benefits, the stores lost almost $16,000 in 2006. Although the business is showing a profit of $20,033 thus far this year, in March the council reviewed a study which noted the strong competition in the area and the potential for it to hurt Shorewood's sales.

In a report released this year, the Office of the State Auditor found that the combined net profits of Minnesota's 226 city-owned liquor operations decreased by 7.1 percent from 2000 to 2005.

Shorewood is one of four west-metro cities that operate liquor stores.

Eden Prairie made almost $1.1 million from its three locations in 2005 -- the third highest municipal profit in the state, according to the Office of the State Auditor. (Although Eden Prairie is larger than the 10,000-population rule, it began liquor sales when it was small and was grandfathered in.)

Wayzata made $218,624 in 2005 from its store and bar. That same year Mound lost money -- almost $118,800 -- because it built a new store.

Cities differ on how they use their money from liquor sales.

Eden Prairie's profits go into the city's capital improvements fund and pay for public buildings, sidewalks and open space. Shorewood has always added its earnings to its general fund. "It's never been earmarked in any sense," Dawson said.

The city must decide what to do without that income. Wellens wants to cut spending. "It's 1 percent of the budget," he said. "I don't know if that we're even going to notice it."

But other council members have spoken about combining the liquor store reserve fund and the money from the sale and investing the lump sum. Then, the city might use its interest for yearly operations.

The city hopes to hire a broker by September to help set a price and sell the two operations as soon as possible. The sale will include inventory, fixtures and the goodwill of the business -- but no land. The city leases its store locations.

Although Wellens has been advocating selling the operations since he began on the council more than two years ago, the vote came as a surprise and was not on the agenda. The council had been discussing renewing its lease when Wellens made the motion. The city was not required to hold a public hearing on the sale, Dawson said.

Jenna Ross • 612-673-7168

Jenna Ross • jross@startribune.com

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