*This report was replaced in its entirety by the Virginia Alcoholic Beverage Control Authority on February 28, 2019.

The following comprehensive Annual Financial Report for the fiscal year ending June 30, 2018, is presented here in accordance with Section 4.1-101.07 of the Code of Virginia. This report consists of management’s representations concerning the Virginia Alcoholic Beverage Control Authority’s (the “ABC") finances. Management assumes full responsibility for the completeness and reliability of all information presented. Data presented in this report is believed to be accurate in all material respects, and provides all disclosures that are necessary to enable the reader to obtain a thorough understanding of Virginia ABC’s financial activities and results.

BACKGROUND

On March 22, 1934, the General Assembly voted to create the Alcoholic Beverage Control Board with three board members. The Virginia ABC opened its first four stores in Richmond on May 15, 1934 and continued to grow over the decades to 159 stores statewide by 1959. In 1971, the ABC warehouse moved from Harrison and West Broad Streets in Richmond to its current location at 2901 Hermitage Road. By the end of the 1970’s, ABC was operating over 250 stores and generating more than $240 million in gross store sales. In 2009, when the Department celebrated its 75th anniversary, 332 stores were in operation statewide. During fiscal year 2018, under Virginia Code Title 4.1, Virginia ABC transitioned from a Department to an Authority.

Virginia ABC is currently considered a Blended Component Unit Enterprise Fund by the Commonwealth for financial reporting purposes in accordance with accounting principles generally accepted in the United States of America. Five part-time board members govern the Authority, which as of June 30, operated 370 stores and employs nearly 3,500 employees throughout the Commonwealth. The Authority works closely with the 11 public safety agencies under the Secretariat of Public Safety and Homeland Security for the Commonwealth. Virginia ABC administers ABC laws with an emphasis on public service and a focus on protecting citizens by ensuring a safe, orderly and regulated system for the convenient distribution and responsible consumption of alcohol.

ABC is a leading revenue producer for Virginia and a vital source of future economic growth and innovation for the Commonwealth. On the retail side, profits come from the sale of distilled spirits within ABC stores. The Authority’s Bureau of Law Enforcement generates revenue from taxes collected on beer and wine sales, violation penalties and license fees. The money that Virginia ABC disperses to the Commonwealth provides much-needed funding for use in programs across all secretariats, thus benefitting citizens in all areas of the state whether they choose to drink or not. Since its establishment in 1934, Virginia ABC has dispersed $10.4 billion to the Commonwealth’s General Fund, which supports major education, health and transportation initiatives. As one of 17 control states across the United States—where the state government manages the sale and distribution of distilled spirits at the wholesale level—ABC stores are the only retail outlets in Virginia where consumers may purchase distilled spirits.

ECONOMIC CONDITION AND OUTLOOK

According to key economic indicators such as gross domestic product, the economic outlook for the United States and the Commonwealth of Virginia is healthy and positive. The U.S. economy expanded 2.3 percent in 2017, exceeding marketing expectations, with increases in personal consumption and consumer spending contributing to the significant growth. As the economy continues to grow at a stable rate, so does the sale of alcohol. ABC’s profit, however, is a factor of two elements: sales performance and trends in expenses.

In fiscal year 2018, ABC’s total operating revenue, excluding state tax on distilled spirits and wine, was $844.9 million. Gross sales of alcoholic beverages in the retail stores accounted for 97.3 percent of this income. The remaining 2.7 percent of income was generated largely through the ABC’s regulatory and licensing activities. ABC contributed $180.8 million of net profits to the Commonwealth and collected $240.2 million of taxes on ABC store sales (distilled spirits and wine) and wine and beer wholesaler taxes, and an additional $45.4 million of general sales tax totaling $466.4 million. The increase in profits over the prior year was primarily driven by increased sales, which in turn, was primarily driven by:

• Sunday Sales—In fiscal year 2018, Sunday sales grew to $73.9 million, up $14.0 million, or a 23.3% increase.

This increase is partially attributed to having 51 Sundays in fiscal year 2018, up from 50 in fiscal year 2017. Additionally, two high sales days, Christmas Eve and New Year’s Eve, both fell on a Sunday in fiscal 2018, further driving Sunday’s sales volume.

• New Stores—During fiscal year 2018, Virginia ABC opened five new stores across the state, generating $5.4 million in sales. ABC also oversaw 11 store remodels and two store relocations to improved market areas, enhancing customer service and accessibility.

• Days of the Week—During fiscal year 2018, sales from Fridays totaled $242.9 million, up by $0.7million, despite having only 52 Fridays in fiscal year 2018 compared to 53 Fridays in fiscal year 2017. Friday sales accounted for 24.7 percent of total sales.

• Marketing & Merchandising—During fiscal year 2018, Virginia ABC implemented new marketing and merchandising programs for retail stores and the website, resulting in marked increases in customer transactions and sales. The educational and promotional kiosk display program expanded to 137 stores while the success of the inaugural Door Buster Days sale in November 2017 prompted a second Door Buster promotion in June 2018. Fiscal year 2018 also saw an expansion of Virginia ABC’s Cyber Monday promotions, resulting in sales in excess of $0.3 million.

The Authority’s operating expenses increased 4.3 percent in fiscal year 2018. Personal service cost increased by $5.8 million from fiscal year 2017, primarily due to increased staffing for high-performing stores, increased benefit rates, and back filling information technology (IT) positions that were vacant in fiscal year 2017. In addition, expendable equipment decreased by $0.9 million primarily due to capitalizing shelving and fixtures installed in the retail stores compared to expensing them in the prior fiscal year. On the expense side, ABC is faced with mandated salary and benefit costs, energy inflation, automatic rent escalation, telecommunication and technology costs and growth in credit card discount fees that are all very difficult to influence in the short run. Personnel costs account for 60 percent of ABC non-merchandise expenditures, 17 percent are for continuous charges such as rent and utilities, 18 percent are for contractual services such as credit cards fees, shipping product to stores and telecommunications, and 5 percent are for miscellaneous expenses such as supplies and materials, equipment and depreciation. Increases in expenses are exacerbated by the need to make significant ongoing improvements in order to improve our IT infrastructure. Currently, several of ABC’s systems are outdated and have reached their end-of-life, needing to be upgraded to maintain viability and to keep up with ABC’s growing needs. Upgrading the outdated systems also addresses a Commonwealth of Virginia’s Auditor of Public Accounts’ audit point, ensuring that ABC complies with state and industry security standards. Changes in salary and benefit cost rates, as well as mandated Appropriations Act disbursements, can also significantly impact the accuracy of ABC’s expense forecasts.

For more detailed information regarding Virginia ABC’s finances for the fiscal year, please see our Management’s Discussion & Analysis section of this report found on pages 46-51.