It is my pleasure to present the comprehensive Annual Financial Report for the fiscal year ending June 30, 2020, in accordance with § 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 388 stores and employed over 4,480 employees throughout the Commonwealth. The Authority works closely with the Secretariat of Public Safety and Homeland Security in communicating and implementing ABC operations. 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 $11.4 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 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 suggest that both the national and Commonwealth economies will continue to grow, but at a slower rate than recent years (U.S. economy expanded by 2.3% in 2019). 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 3-4% 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 2020, ABC’s total operating revenue, excluding state tax on distilled spirits and wine, was $1.0 billion. Gross sales of alcoholic beverages in the retail stores accounted for 97.8% of this revenue. The remaining 2.2% of revenue was generated largely through the ABC’s regulatory and licensing activities.

ABC contributed $212.1 million of net profits to the Commonwealth and collected $275.5 million of taxes on ABC store sales (distilled spirits and wine) and wine and beer wholesaler taxes, and an additional $57.7 million of general sales tax totaling $545.3 million.

The increase in profits over the prior year was primarily driven by increased sales, which in turn, was primarily driven by:

• COVID-19 Pandemic — As of the end of February 2020, Virginia ABC was on pace to potentially generate approximately $1.125 billion of gross store sales revenue for the fiscal year. This trend was eclipsed by heightened consumer purchasing behavior starting in mid-March as the pandemic began to impact the Commonwealth, and resulted in fiscal year store sales of $1.173 billion, $48.6 million above the prior trend.

• Same Store Sales — As of the end of February 2020, prior to the impacts from COVID-19 impacting sales, same stores sales had generated $723.1 million, up $37.1 million over the prior fiscal year, or 5.4%. Including the impacts of COVID-19, same stores sales for the full 2020 fiscal year generated a total of $1.141 billion, up $94.3 million over the prior fiscal year, or 9.0%.

• New Stores — During fiscal year 2020, Virginia ABC opened twelve new stores across the state, generating $18.3 million in sales. Additionally, the seven new stores that opened across the state during fiscal year 2019 generated $5.7 million more in sales than in the fiscal year they opened, due to being open for the entire fiscal year. In addition, ABC also oversaw six store remodels and thirteen store relocations to improve market areas, enhancing customer service and accessibility.

• Sunday Sales — In fiscal year 2020, Sunday sales grew to $93.8 million, up $14.4 million, or an 18.1% increase. This increase is attributed to overall pandemic sales growth. There were 52 Sundays in both fiscal year 2020 and 2019.

The Authority’s operating expenses increased 12.6% in fiscal year 2020. Personal service cost increased by $17.0 million from fiscal year 2019, primarily due to increased staff and pay to run stores during the pandemic. In addition, contractual service cost increased $9.1 million primarily due to increased IT contractor support to assist with the implementation of internal projects, particularly POS and 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, 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 57% of ABC non-merchandise expenditures, 16% are for continuous charges such as rent and utilities, 22% are for contractual services such as credit cards fees, shipping product to stores and telecommunications, and 5% are for miscellaneous expenses such as supplies, 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 56-60.

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 adequate accounting data is compiled for financial statements.

Internal accounting controls are designed to provide reasonable, but not absolute, assurance 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 are 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, 2019. 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 second time last fiscal year (fiscal year 2019). 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