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. 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 377 stores and employed over 3,200 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. Since its establishment in 1934, Virginia ABC has dispersed $10.9 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

The economic outlook for the coming years suggests that both the national and Commonwealth economies will continue to grow, but at a slower rate than recent years (U.S. economy expanded by 2.9 percent in 2018). As the overall economy continues to grow at a stable rate, so does the sale of alcohol. The U.S. market for distilled spirits is expected to grow by 2.9% annually for the next several years.

ABC’s profit, however, is a factor of two elements: sales performance and trends in expenses.

In fiscal year 2019, ABC’s total operating revenue, excluding state tax on distilled spirits and wine, was $902.7 million. Gross sales of alcoholic beverages in the retail stores accounted for 98% of this income. The remaining 2% of income was generated largely through the ABC’s regulatory and licensing activities.

ABC contributed $196.7 million of net profits to the Commonwealth and collected $254.0 million of taxes on ABC store sales (distilled spirits and wine) and wine and beer wholesaler taxes, and an additional $48.8 million of general sales tax totaling $499.5 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 2019, Sunday sales grew to $79.4 million, up $5.5 million, or a 7.4% increase. This increase is partially attributed to having 52 Sundays in fiscal year 2019, up from 51 in fiscal year 2018.

• New Stores—During fiscal year 2019, Virginia ABC opened seven new stores across the state, generating $7.8 million in sales. ABC also oversaw eight store remodels and four store relocations, enhancing customer service and accessibility.

• Days of the Week—During fiscal year 2019, sales from Fridays totaled $254.6 million, up by $11.7 million, despite having 52 Fridays in both fiscal year 2018 and 2019. Friday sales accounted for 24% of total sales.

• Marketing & Merchandising—During fiscal year 2019, Virginia ABC continued to expand its consumer engagement initiatives to increase sales. Efforts included the most extensive promotional holiday campaign in Virginia ABC history with two Virginia ABC “firsts"—the first ever statewide media campaign and the first ever use of TV in the campaign to educate Virginia residents about the upcoming holiday promotions. The results were outstanding. Sales increased over the previous year generating $7.5 million in incremental revenue, which paid out the incremental media investment several times over. The spring of 2019 saw the first ever Cyber MOM-Day and Cyber DAD-Day promotions to coincide with Mother’s Day and Father’s Day gift giving. These promotions brought greater attention and awareness to Virginia ABC’s e-commerce capabilities.

These one-day offers (20% off all online purchases of $100 or more) exceeded expectations. Cyber MOM-Day produced nearly 4,000 online orders for $0.7 million in sales and Cyber DAD-Day produced nearly 5,600 online orders for almost $1.0 million in sales.

The Authority’s operating expenses increased 5.5% in fiscal year 2019. Personal service cost decreased by $1.9 million from fiscal year 2018, primarily due to an increase in personnel turnover and a limited increase in benefit rates. In addition, contractual service cost increased by $6.0 million primarily due to increased IT contractor support to assist with the implementation of internal projects, particularly the new financial management services (FMS) system.

On the expense side, ABC is faced with mandated salary and benefit costs, energy inflation, automatic rent escalation, technology and telecommunication costs and growth in credit card discount fees that are all very difficult to influence in the short run. Personnel costs account for 57% of ABC non-merchandise expenditures, 18% are for continuous charges such as rent and utilities, 21% are for contractual services such as credit cards fees, shipping product to stores and telecommunications, and 4% 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. ABC must invest in upgrading its systems to maintain viability, increase efficiency, and provide service excellence to its internal and external customers. 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 55-60.

FINANCIAL CONTROLS

The accounting system of the Authority is dependent upon a strong system of internal accounting controls to ensure that financial information is both accurate and reliable. The Authority’s internal controls are designed to ensure that the assets of the Authority are protected from loss, theft or misuse, and to ensure that adequate accounting data is compiled for financial statements. Internal accounting controls are designed to provide reasonable, but not absolute, assurance that the objectives listed above are obtained. Reasonable assurance recognizes that the cost of the control should not exceed the benefits likely to be derived and the evaluation of costs and benefits is an estimate determined by management.

All internal control evaluations occur within the above framework. We believe the Authority’s internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording transactions. The Authority’s internal controls are reviewed as necessary and tested annually as part of the Commonwealth’s Agency Risk Management and Internal Control Standards program.

AWARDS AND ACKNOWLEDGEMENTS

The Government Finance Officers Association of the United States and Canada (GFOA) awarded the Certificate of Achievement for Excellence in Financial Reporting to the Commonwealth for its CAFR for the fiscal year ended June 30, 2018. The Certificate of Achievement is a prestigious national award that recognizes conformance with the highest standards for preparation of state and local government financial reports. In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report that conforms to program standards. Such reports must satisfy both accounting principles generally accepted in the United States of America and all applicable legal requirements.

A Certificate of Achievement is valid for a period of one year. Virginia ABC has received a Certificate of Achievement for the first time last fiscal year (fiscal year 2018). I believe that this year’s report continues to conform to the Certificate of Achievement program requirements and we are submitting it to GFOA.

This report could not have been prepared without the full cooperation of all state agencies within the Executive Branch, the Legislature, the Judiciary, the Component Units, and especially the dedication and professionalism of the financial reporting staff in the Department of Accounts.

Respectfully submitted,

/s/ A. Jerome Fowlkes
Chief Administrative Officer