Briefing Report: Thrashing the Life Out of the Golden Goose

Booze, Self-service, a Sour Business Climate, and the Sweet-life for Big Labor
Thursday, February 23, 2012

Among the best known of Aesop's Fables is the story of the “Killing the Goose That Laid the Golden Eggs”. According to the fable, "A cottager and his wife had a Hen that laid a golden egg every day. They supposed that the Hen must contain a great lump of gold in its inside, and in order to get the gold they killed the Goose. Having done so, they found to their surprise that the Hen differed in no respect from their other hens. The foolish pair, thus hoping to become rich all at once, deprived themselves of the gain of which they were assured day by day."[1] In the modern idiom, the phrase has become synonymous with unwise and unprofitable actions born of greed.

Once upon a time, the Golden State was a “golden goose” that promised golden rewards to those who took advantage of the opportunities offered here to build new and better lives for themselves and their families. California’s “gold” was dazzling and abundant. Just the allure of the Golden West – weather, resources, skilled work-force, and geographic magnificence – was enough to attract and retain thriving business enterprises in California. Indeed, for a time, many felt it reasonable to smelt away some of that precious metal through legislative and regulatory action, in the name of improving the already high quality of life in California fostered by the cultural values of innovation, industry, and progress. But, the gold has tarnished and the cost/benefit of operating here has shifted the other way thanks, in part, to the fully-fired furnaces of California’s legislative smelting mill that continues to burn despite a lack of ore to process.

"Damn the torpedoes, full speed ahead!"[2]

Despite California’s economic malaise, legislative and regulatory activism continues unabated. A case in point occurred last year when the Legislature enacted a measure to prohibit grocery stores from selling alcoholic beverage products through self-service checkout systems.  In order to sell alcoholic beverage products, grocery stores, liquor stores, supermarkets, and “big-box” stores, amongst others, must hold “Type 21 Off-Sale General Licenses” which authorizes the sale of beer, wine and distilled spirits for consumption “off” the premises where sold.

The development of self-service checkout systems in recent years is a classic example of the free market responding to a need.  Self-service checkout machines provide a mechanism for customers to pay for purchases from a retailer without direct input to the process by the retailer's staff. They are an alternative to the traditional cashier-staffed checkout and have been installed in many grocery and other large-scale stores throughout California and the world. This checkout system has proven to be popular with customers in that it reduces the checkout time they must endure because stores are often able to run upwards of four self-checkout units efficiently where otherwise, only one cashier would have been available. Both business and customers benefit; the customer experiences a shorter wait-time in line when checking-out and business can save money by reducing labor costs, which it can pass on to customers in the form of lower prices and additional “specials”. Self-service checkouts lower a business’s overhead while providing a cheaper, more convenient product to customers. In turn, the customer’s purchasing power is stronger, which fosters greater economic activity and ultimately more revenue to the state. In ways large and small, this kind of innovation made California the economic engine of the nation that it once was.

Well, no longer. The State of California has enacted AB 183 by Assembly Member Ma (D-San Francisco), which banned alcohol sales through self-service systems.  According to the author, AB 183 precludes the possibility of underage drinking abuses occurring due to the usage of a self-service checkout kiosk. By forcing alcohol purchases to be made through a face-to-face transaction from beginning to end, the state of California can ensure that the necessary age verification steps are being taken to keep alcohol out of the hands of minors. What could be so wrong with that? After all, it helps protect the children from abusing alcohol. But, there is more to this fable than meets the eye.

A Solution in Search of a Problem

At the time the bill was pending in the Legislature, the Department of Alcohol Beverage Control (ABC) indicated that it had no evidence of any problems associated with minors purchasing alcoholic beverages through self-service checkouts. ABC has found that this is such an insignificant problem that it did not keep statistics about grocery stores using self-service checkout where minors have managed to buy booze. In fact, ABC had run “sting” operations against grocery stores with such self-service systems (existing law provides for a “decoy program” in which minors can be used to allow law enforcement and ABC to identify retailers who engaged in illegal sales). No grocery store allowed the decoy minor to buy alcohol at a self-service checkout. Furthermore any alcoholic beverage product scanned through the self-service checkout system will cause the machine to “freeze” the transaction, requiring clerk assistance to finalize the purchase.

Proponents cited the findings from a study entitled “Evaluation of Self-Checkout Lanes as a Potential Source of Alcohol for Minors,” as justification for the bill. However, according to opponents of the bill, this study was flawed in several respects. Firstly, the group of stores targeted in the “study” was provided by a “trade union” (the union representing grocery clerks had a vested interest in ensuring that self-service checkouts do not grow in use). Secondly it did not use a “corresponding control purchase through a standard (face-to-face) checkout counter to compare data and determine whether the rate at which IDs were not checked were different through each process.”

It is easy to understand why alcoholic beverage retailers and their employees already have a very strong market-based incentive not to allow alcoholic beverages to be sold to minors considering the penalties in existing law for doing so. ABC will revoke an alcoholic beverage license if that licensee is caught allowing a minor to purchase alcoholic beverages three times within a 36-month period or sooner “when the circumstances warrant that penalty.”

But, Big Labor was seeking to gain leverage in its attempts to prevent the development of self-service checkout systems in order to maximize the number of unionized employees in the California grocery store marketplace. “Preventing under-age drinking” argument was just the means to an ends. Common sense suggests that grocery stores, the primary site in which self-service checkout systems are found, have an even stronger motivation than smaller retailers, such as single counter liquor stores, not to allow minors to purchase alcoholic beverages. Besides the fact that grocery stores do not want people stealing their products (whether or not that product contains alcohol) the lost revenue to a grocery store from an alcoholic beverage license revocation would likely be a very hard hit to that store’s profitability.  What is more, the store brand would suffer a serious public relations problem that would likely impact their overall sales in a negative way.

The Crux of the Matter

AB 183 was a blatant case of the big labor unions yelling, “Jump!”, and the Democrat-controlled Legislature responding, “How high?”  The fact that it was signed into law provided a teachable moment – of how a special interest, in league with the government, can alter the marketplace for its own benefit. Big Labor’s "concern" was that growth of self-service technology might reduce the number of unionized employees working in grocery stores which causes decreases in union membership and dues paid to the union infrastructure. Just what California needed: further disincentives for business to locate here.

In reality, the bill brought California’s Legislature into the middle of a labor-management squabble. A new entrant into the California grocery store marketplace, called Fresh and Easy (a subsidiary of the British grocery giant, Tesco) was planning on opening several supermarkets around the state. Fresh and Easy offers all self-service checkout lanes, with a business model that included establishing supermarkets in under-served areas such as Compton and, more importantly to many in the Legislature, is a non-union company. Clearly, the bill complicated Fresh and Easy’s planned business operations here in California, not to mention the potential of depriving the people of those underserved areas of low cost grocery alternatives.

AB 183 was the third legislative attempt at banning self-service checkouts at grocery stores in as many years (twice vetoed by Governor Schwarzenegger). Unfortunately, the third time was the charm. Governor Brown signed it into law.

Long-term Consequences

At a time when California's laws and regulations are driving business out of this state, this bill proclaims "business as usual". It provides further incentive for business and investors to avoid California like the plague. The fact is, existing law prohibits the sale of alcoholic beverages to, or the purchase of alcoholic beverages by, persons under the age of 21 years, and imposes severe penalties in that regard. The argument that this law will keep alcohol out of the hands of minors was a canard: “We’re protecting the children”.

As the bill just became law on January 1, 2012, its long-term impacts are uncertain at this point. Fresh and Easy has opened a number of stores around the state having progressed too far in its investment in California to scrap its plans. Most likely, proponents were betting on just that. Canceling its plans at an advanced stage would have cost the company more than to simply give in and alter its successful business plan in order to function in California.

In a broad view, all off-sale general licensees utilizing self-service checkout systems had to adjust their operations in order to comply with yet another government mandate.  The result of the actions by the union/legislative cabal makes it worse for a business to locate and put its business plan into effect in this state. Customers will be inconvenienced and forced to pay higher prices than in other jurisdictions.  This effort provides prima facie evidence of what has brought this state to the economic brink.  Other businesses considering expansion into California will see the AB 183 example and think-twice.

There is no Such Thing as Alchemy

Alas, in California, the goose is no longer producing its fabled treasure. Decades of laws, regulations, restrictions and taxes being piled one upon the other have taken its toll on the state’s onetime golden economy. Today, some analysts might compare California’s condition to that of the “cottager and his wife” after their imprudent action. However, unlike that “foolish pair” who realized their misfortune after killing their golden goose, California’s Legislature keeps beating the headless, spastic, and flapping carcass with a steel mallet hoping to coax out just one more treasured egg.

For more information on this report or other Governmental Organization issues, contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.

[1] Perry Index of Aesop’s Fables, No. 87, translated by Rev. George Townsend (1814-1900)
[2] Admiral David Farragut, Battle of Mobile Bay, August, 1864.