On The Rocks: The Competitive Market For Liquor Licenses In State College

Jun 30, 2016

It’s lunchtime on a blue-skyed summer’s day, and Herwig’s Bistro is bustling. The owner, Bernd Brandstatter, is serving up their Friday specialty.

“We always have Schweinshaxen, which is a slow-roasted local bone-in, skin-on, bacon-wrapped pig leg,” Brandstatter said.

Herwig’s specializes in authentic Austrian dishes. However, there is one Austrian delicacy you won’t be able to purchase with your meal.

“I would really like to have some real...Austrian wines, and Austrian beers, and of course German beers, because that does pair really well with our food and what we do,” Brandstatter said. “So some people get upset, and I think that we’re missing out on a market share that we could actually be making some more money.”

Herwig’s—Brandstatter explains—doesn’t have a liquor license. So, why don’t they just buy a liquor license? Well, in downtown State College, they aren’t easy to find—nor are they cheap.

“My dad was interested in one—and this was maybe 8 years ago—and the guy wanted to sell it for $180,000. It’s too much," Brandstatter said. "Unless I get free beer and wine to sell, with that license...I can’t afford that.”

The cost of a restaurant liquor license in downtown State College is now estimated at more like $200,000 to $300,000. The college-town atmosphere and the post-recession boom in foodie culture mean there’s a lot of competition to get these licenses when one becomes available.

But the way that they’re allocated means licenses are in short supply. Generally, for every 3,000 people in a county, there is one restaurant license (R) or one take-out beer license (E). Pennsylvania Liquor Control Board (PLCB) member Mike Negra says every county is over quota, mostly because many licenses were grandfathered in.

“Now, there are really no new liquor licenses, you have to purchase them on the open market,” Negra said.

But entrepreneurs are finding other ways to expand local alcohol service.

The first workaround is a transferred license. Borough Manager Tom Fountaine is one of the key people involved in this process.

“Under the new state law that was passed in the early 2000s...there is the ability to transfer between municipalities in a county and we’ve had several of those requests in State College,” Fountaine said.

These licenses can often be cheaper than those bought and sold in the Borough, but the Borough Council places restrictions on incoming licenses to curb potential alcohol problems. Fountaine says transfers can still have negative impacts.

“The downside has been in those municipalities where those licenses have moved from in some cases they’ve been left without a restaurant or long-standing establishment,” he said.

Restaurants can also gain a license by linkage. If establishments are physically connected and have the same owner, they can—with PLCB approval—legally use the same license.  This is happening at several locations in State College that Fountaine is familiar with.

“Hotel State College which includes Zeno's, Bill Pickle's, The Corner Room, Allen Street Grill, Chumley's and Indigo are all basically connected and operating as a single license,” Fountaine said.

Hotel State College also employs another popular work around: the hotel license (H). These liquor licenses operate outside the quota, making them easier to get, and you only need a few rooms to be able to apply for one.

While the linkage workaround is one of the oldest in the book, Jeff Proch explains a newer one starting to be employed in PA. He’s the president of University Wine Company, and this month his winery started to rent space inside a restaurant to sell their wine.

“As a PA winery, we’re allowed to have five off-premise locations” said Proch. “This is our first satellite location...The Greek does not have a liquor license it’s BYOB—and remains BYOB—but now customers have the added convenience of being able to purchase a bottle right in the restaurant.”

While entrepreneurial local restaurants have been able to get around the cost and scarcity of liquor licenses, none of these are cheap and convenient alternatives.

Negra, the PLCB board member, is excited about the changes that are coming with the passage of Act 39 of 2016, which modernizes PA liquor laws.

“It's obviously the biggest piece of legislation that has occurred in PA when it comes to liquor in 80 years, since prohibition,” he said.

He added that the Act will bring about 1,000 more licenses into play statewide that have expired or been revoked. These dead licenses will be auctioned off in waves so they don’t flood the market. Mark Flaherty is a lawyer at Flaherty & O’Hara who specializes in PA liquor law. He says they’ll be capped at 50 per county per year.

“It should make for opportunities for people that may not been able to get licenses,” he said. “Now how high the bidding goes, who knows?”

The act will also allow gas stations to buy licenses and take out wine sales at licensed establishments, which could keep prices high as demand for licenses increases.

Ultimately, it’s not clear whether Act 39 will make liquor licenses attainable for small, independent restaurants like Herwig’s Bistro.

One entity will likely benefit, though—the State of Pennsylvania. Previously, the PLCB received only nominal fees for filing, renewing, or transferring a license. Supporters estimate these auctions—along with other Act 39 changes—will bring in $150 million in new revenue.

Act 39 will go into effect in August, and consumers could see wine sales in grocery stores as early as this fall. However, the dead license auctions will likely take about a year to implement.