VIRGINIA ABC AUTHORITY RESPONSE TO COVID-19 AND SALES OVERVIEW

Senate Finance and Appropriations CommitteeSeptember 15, 2020

Travis G. Hill, ABC CEO

Multi-Dimensional Response

• Central Office

• Enforcement

• Retail Operations

– Stores

– Warehouse

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Enforcement Division sought Agile Solutions

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• Pursuant to Executive Order Fifty One (51), Declaration of a State of Emergency due to Novel Coronavirus (COVID-19), and acting under the Authority, the Virginia ABC Bureau of Law Enforcement published responses regarding procedural and regulatory matters for ABC licensed businesses affected by the Novel Coronavirus (COVID-19) outbreak

• 16 topics were developed beginning in March that provided guidance and in many instances an easing of regulations to the affected businesses

Regulatory Guidance Balanced Public Safety and Business Needs

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• Reducing touch of shared surfaces during deliveries • Providing opportunities for manufacturers to make hand sanitizer and waiving grain and

industrial alcohol permits for certain medical professions and facilities• Adopted a General Permit to allow on-premises licenses permission to also sell wine and

beer for off-premises consumption to include delivery. Affected approximately 6200 licensees

• Adopted a General Permit to allow off-premises licensees to include breweries, farm wineries and wineries holding a retail off-premises license to make deliveries without obtaining an additional permit from ABC. Affected approximately 6500 licensees

• Created an accelerated process for receiving and processing requests for outside dining areas. (Reduced approval time from approximately 30 days to 1 day.) 600 approved areas since May 20

• The allowance for shipment of spirits by ABC Distillery Stores. Approximately 40 distillery stores participated

Executive Directive 10

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• Deferred License Renewals– Deferring of the collection for license renewal fees for 90 days from original expiration date for

licenses and permits expiring in March, April, May and June– Waiving of any late penalties and fees as long as the license was renewed by the 90 day expiration

date– Approximately 9000 licensees were eligible accounting for an estimated deferral of $4.5 million in

license renewal payments

• “Cocktails to Go” – Included Distillery and limited distillery licensees with an agreement with the Authority,

Mixed beverage restaurants and Limited mixed beverage restaurant licensees– Distillery licensees limited to a maximum of two mixed drinks per delivery takeout order– Mixed beverage restaurants and limited mixed beverage restaurants limited to four

cocktails for each delivery or take out sale. At least one meal as defined by ABC included in order.

– Approximately 5400 licensees eligible to take advantage of this process.

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• Partnership with the Virginia Department of Health to visit licensed establishments to reinforce compliance of Executive Orders. The Bureau of Enforcement assisted with 97 inspections of establishments resulting in 9 health permits being suspended.

ABC Assisted in Enforcing COVID-based Restrictions

New Regulatory Responsibility – Games of Skill

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• In accordance with Chapters 1217 and 1277 of the 2020 Acts of Assembly, the Virginia Alcoholic Beverage Control Authority was given regulatory responsibility for “games of skill”

• In June, Virginia Administrative Code Chapter 80 was approved

• Bureau of Law Enforcement (BLE) developed a regulatory program to register, track movements, and inspect games of skill in two and a half months

• Department of Taxation responsible for tax collections

Games of Skill Activity

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• ABC BLE registered 87 Distributors representing a total of 10,291 machines.

• According to Va. Department of Taxation, the first month of tax payments accounted for $12,049,200.00 from 10,041 machines

• Most recent reports from distributors show 9,331 machines in play during the second month

• Distributors reported $176,363,358.77 wagered on skill games and $135,364,444.66 in prize winnings

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Region TOTAL WAGERED TOTAL AWARDED Warehoused In Play Total Machines

Region 6 (Richmond) $40,389,821.00 $32,240,969.87 106 1,816 1,922

Region 8 (Chesapeake) $32,030,480.94 $23,773,859.35 40 1,677 1,717

Region 4 (Alexandria) $22,780,445.02 $17,495,297.19 29 996 1,025

Region 2 (Lynchburg) $21,515,293.51 $17,046,037.80 81 1,095 1,176

Region 7 (Hampton) $18,892,985.00 $14,958,971.78 35 1,022 1,057

Region 1 (Roanoke) $15,982,536.30 $11,641,001.41 98 1,116 1,214

Region 5 (Fredericksburg) $9,233,866.00 $6,758,624.24 25 573 598

Region 3 (Staunton) $8,984,282.00 $6,547,979.40 35 577 612

Region 9 (Charlottesville) $6,553,649.00 $4,901,703.62 168 459 627

SGD-049 Warehoused $0.00 $0.00 343 343

Grand Total $176,363,358.77 $135,364,444.66 960 9,331 10,291

July 2020 Monthly Report

Retail Stores Response to COVID-19

• Safety in stores – Enhanced cleaning– Store modifications– Contracted cleaning for stores with symptoms or confirmed exposure– Masks mandatory

• Staffing measures – Allowing for self-quarantine increased call-outs– Service Commitment Pay– Reduced hours– Increased hiring - 1700+ people since March

• Alternative Shopping Methods for safety– Curbside Service – 370 stores– Home Shipping (pilot effort)

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• Enhanced cleaning protocols added to all retail stores along with 4 hours labor to support• Cost- $120,736 per week statewide

• Emergency purchase of supplies to support cleaning efforts and safety measures in stores • Cost- Approximately $62,000

• Addition of social distance markings and signage posted in all stores• Cost- $12,764

• Reduced operating hours begin due to staff shortages and safety precautions• Loss of 9400 operating hours per week statewide

• Counter stores implemented statewide to aid in safety of staff and customers• Cost of installation supplies- Approximately $5,175• Cost of additional labor to staff concept- $171,696 weekly

• Service Commitment Pay implemented for all field level retail employees. • Cost- $167,924 weekly

• 800 Plexiglas installed in stores at 2 registers per store• Cost- $267,200

Retail Stores Response to COVID-19

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Warehouse Response to COVID-19

• Staffing

– Implemented attendance incentive program 03/17/20 spend $202,000 (through June 30th)

– Implemented social distancing guidelines, made masks mandatory (once available) ahead of VA ABC and VDH guidelines and made hand sanitizer readily available with help of Virginia Craft Distilleries

– Reduced cases picked per man hour by 8% to adhere to social distancing guidelines

• Pre-COVID 53 Full Time, 40 Part Time / Temps

• Current 53 Full Time, 67 Part Time / Temps

• Shift change from five eight-hour days to four ten-hour work days to minimize overtime and adjust to productivity reduction (warehouse operates Mon – Fri)

• Project increased payroll budget for FY21 of $828,000 or 18%

– Daily cleaning of high touch areas between breaks and lunch $11,600 (through June 30th)

• Break room, shipping platforms, pick module stairwells, depal, and receiving areas

– Contractor deep cleaning every Saturday for the same areas plus bottle pick room $40,800 (through June 30th)

– Provide lunch daily beginning 03/27/20 spend $109,500 (through June 30th)

• Minimize staff exposure to public areas and support local restaurants

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Shipping Volumes

• Cases Shipped to Stores

– March thru June up 224,871 or 12.4%

– July thru August up 148,184 or 16.3 %

– Holiday-like shipping volumes• In May we had the 7th largest shipping

day in FY20, we shipped 29,353 cases.

The six days larger in FY20 occurred during

the 2019 Fall Holiday Season.

• Case shipments have been suppressed due to

high inventory Out of Stocks.

(often over 4,000 cases in a day)

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29,444

35,333

32,515 32,09430,246 29,693 29,353

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Aug 2019 Dec 2019 Dec 2019 Dec 2019 Dec 2019 Dec 2019 May 2020

Cases Shipped

Supply Chain Issues – Warehouse Out of Stocks

• Out of Stocks

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Import products:

• Tequila and brandy supply chains have be the most affected due to plant shutdowns, long lead times, increased demand

• Consumer have shifted from smaller sizes to larger sizes such as 1.75L bottles, causing glass and inventory shortages

Calendar 2019

• Average – 75

• Peak – 128

Calendar 2020

• Average – 119

• Peak - 195

Supply Chain Issues – Retail Out of Stocks

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• 2019 Sept 4th vs. 2020 Sept 2nd

93

144

85

30

7

5

0

12

65

103

100

82

9 9 %

9 8 %

9 7 %

9 6 %

9 5 %

94% AND BELOW

RETAIL STORES IN STOCK %

Sep 2019No. of Stores

Sep 2020No. of Stores

FY20 Results• Key Metrics

– FY 2020 Gross Sales of $1,174 million (up 11.3%)– FY 2020 Profits of $212 million (up 7.1%)– Retail Licenses: 20,204 (up 1.7%)– Total Cases shipped to ABC stores: 5,858,919 (up 10.2%)

• Operating Expense– FY 2020: $788.5 million (up 11.7%)– FY 2020 Operating expenses include: alcohol – 71.4%,

personnel – 16.3%, retail occupancy - 4.6% and contractual (VITA, freight, credit card fees) – 6.3%

• Employee Numbers– At end of FY 2020 ABC had 4,676 total employees

• 1,289 full-time employees• 3,387 part-time employees

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Historical Profit Growth

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100

150

200

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400

450

$0.0

$25.0

$50.0

$75.0

$100.0

$125.0

$150.0

$175.0

$200.0

$225.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Number of ABC StoresProfits

ABC Profits and Number of Stores FY 2008-FY 2020

Profits No. of Stores

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Contributions to Commonwealth Last 7 Years Total $3.2B

FY 2020 increased $46 million over FY 2019, $158 million over FY 2014Dollars in Millions

Revenue SourceFY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

ABC profit transfers $140.0 $152.0 $164.9 $171.2 $179.2 $196.7 $212.1

State excise taxes $132.0 $139.8 $147.8 $154.4 $160.9 $174.1 $193.7

General sales tax $36.9 $39.2 $41.3 $43.3 $45.4 $48.8 $57.7

Wine liter tax $34.6 $35.2 $36.2 $36.8 $37.6 $38.5 $39.6

Malt beverage tax $43.3 $42.9 $43.2 $42.8 $41.6 $41.4 $42.2

Total $386.9 $409.3 $433.4 $448.6 $464.7 $499.5 $545.3

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Gross Spirits SalesFY 2014 – FY 2020

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Monthly Profits & Sales: Profits & Sales remain elevated post COVID FY 2020 had stronger sales Mid-

March through the end of the year

Higher sales trend continues into

early FY 2021

FY 2021 GACRE projections will

include slight increase to baseline

revenue projections to account for

increased consumer spending

FY 2021 Risks include higher

staffing and COVID response costs,

impact of uncertain unemployment

levels, recession or inflation,

changing consumer patterns,

licensee closures and unknown

holiday season impacts.

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Jul'19 Aug'19 Sep'19 Oct'19 Nov'19 Dec'19 Jan'20 Feb'20 Mar'20 Apr'20 May'20 Jun'20 Jul'20

Mill

ion

s

Mill

ion

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Virginia ABC Monthly Net Profits & Sales, Jul'19 to Jul'20

Profits Sales

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Store Sales Growth: Growth remains volatile post COVID, but higherWhile sales remain elevated, there are numerous uncertainties on the horizon: unemployment levels, depressed licensee sales, decriminalization of cannabis and how COVID will impact holiday shopping

• Holidays may shift between weeks from year to year, driving wide variances, which is visible in November thru January for sales related to Thanksgiving, Christmas, and New Year’s Day

• At the end of February, Sales growth versus FY19 was 7%

• Volatility from COVID started in mid March, and has not completely stopped as of August

Holiday timing shifts COVID volatility

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Licensee Sales: Sales to licensees remain below pre COVID levelsSales to licensees generated 16-18% of Virginia ABC’s revenues pre COVID, impacts to these businesses continue to result in lower sales levels, even with multiple initiatives implemented to support the industry

• Licensee sales fell to 0% as the pandemic started and restaurants were shut down

• Virginia ABC waived restocking fees for licensees in March, allowing licensees to return unopened spirits that had previously been purchased, providing needed liquidity to restaurants to help keep staff. Nearly $0.4M in spirits were returned in March and April, the equivalent of all licensee returns in 2019

• “Cocktails To-Go” were implemented in mid April, designed to help these struggling businesses to increase customer revenues, and slowly grew some of the licensee revenue back

• Licensee revenue has stabilized at ~$2.5M per week, $1M below the pre COVID $3.5M weekly average

Holiday retail increases

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Online Orders: Purchasing behaviors are shifting towards online channelOnline ordering was already up 100% vs FY’19 pre COVID, and the pandemic has helped customers to choose this channel more frequently; Virginia ABC is working to meet this demand through curbside pickup and home shipping options

• Thru February, Virginia ABC was averaging 75 online orders per day in FY20, versus 37 in FY19, for 100% growth

• Customers quickly began utilizing online ordering more frequently, growing to 500 orders per day in early April

• In late April, Virginia ABC rolled out curbside pickup in most stores across the Commonwealth, which helped drive an increase in online ordering

• Online ordering peaked in May at >800 orders per day, and had leveled out at 400 orders per day by August

• Customer privacy concerns are a top priority at Virginia ABC, and no customer specific data is gathered or tracked; therefore we don’t know for certain how much of this growth in online ordering is a shift of existing store customers or new customers

Cyber Monday 2019Cyber Mom-Day and Dad-

day not held in 2020

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Online Orders: Online sales remain a small portion of Virginia ABC’s total salesAt the peak of COVID online orders represented 2% of total sales for Virginia ABC, and have leveled off just over 1%, which is 3X what they were for FY20 prior to COVID. Average online transaction size has fallen, likely from curbside usage. • Thru February, online orders were 0.3% of

Virginia ABC’s total sales in FY20, but are now >1%

• Retail industry data suggests that online sales channels will continue to become more important to consumers post COVID, and opportunity exists to continue to convert customers

• In order to meet this changing consumer preference, Virginia ABC rolled out a home shipping pilot in late June in the Tidewater region, and will be rolling out to four additional stores at the end of the month

• Rolling out curbside pickup likely reduced the average purchase amount per online order, as customers were more likely to do routine purchasing via curbside, versus more specialized purchasing via online pre COVID

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QUESTIONS

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