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Recent state liquor license auctions have garnered fewer bids, lower prices, but the process will keep flowingLast call or let the good times roll?

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Despite falling prices and a waning number of bidders, state liquor regulators say they will continue to hold auctions for expired restaurant liquor licenses.

There are still nearly 1,000 idle licenses across the commonwealth and plenty of buyers looking for an alternative to the private market, said Elizabeth Brassell, a spokeswoman for the Pennsylvania Liquor Control Board. The state has held seven auctions so far under the Act 39 liquor reform law, enacted in 2016.

“I don’t think we’ve seen any decrease in interest,” she said. “There are a handful of new bidders each time.”

But recent auction results, which have seen lower prices, have raised conflicting concerns about the value of liquor licenses.

Small restaurants say high prices in some areas make it harder to compete with larger retailers. But the decline in prices at recent state auctions is generating concern that prices will keep sinking – and undercut the value of existing licenses for their owners.

Changing places

When the auctions began two years ago, the state came out swinging, opting to sell more licenses in urban and higher-priced areas.

As the auctions have continued, state liquor regulators shifted to selling licenses in smaller, more rural counties, where prices tend to be lower.

The Pennsylvania Liquor Control Board is pleased with the auction process so far, Brassell said. It has sold 236 licenses, generating revenue of $23 million with an additional $4.4 million in escrow from pending license approvals, according to the board.

Brassell said the board has tried to offer a broad mix of licenses in each auction, so as not to flood any one area with licenses and impact prices on the open market.

But Brassell also said the board anticipated auction prices would steadily drop, based on where the auctioned licenses have been located.

Buying big

Large retailers dominated the early auctions, buying up licenses in growing areas such as Cumberland County and suburban Philadelphia. Licenses in those counties are selling for $350,000 to more than $500,000. Prices are higher in those areas because there are fewer licenses available on the private market.

But the high auction prices, paid by deep-pocketed companies like Giant Food Stores and Sheetz, have made it even harder for smaller restaurants to get their hands on liquor licenses, according to the Pennsylvania Restaurant and Lodging Association. The auction process requires winning bidders to remit full bid payment within 14 days of selection, which can make it tough for mom-and-pop shops to compete, said Melissa Bova, the association’s director of government affairs.

A license can be vital to a restaurant’s survival because liquor is where owners make their money, given tighter margins on food sales. Owners, at least those in areas where licenses are in high demand, also see a license as a way to finance their retirement. If they have owned the license for a long time, chances are good it will be worth more than they paid when they look to sell.

“The liquor license is an asset,” said Mick Owens, who owns Lancaster County chain Mick’s All American Pub, as well as Maize Mexican Cantina. “It shows on our books. It’s a physical, tangible thing.”

Owens owns four liquor licenses. He praised the auction process as a way to get dead licenses back into the marketplace, but he remains concerned that high prices and a limited supply of licenses will block new restaurateurs in many areas.

“The only people who can afford $500,000 for a license are the big players coming in and opening 300- to 400-seat restaurants,” he said.

A small startup, he said, can’t afford to open an establishment big enough to justify the high cost of the license in many areas, including Lancaster County. So selling liquor may be off the table for many restaurant owners.

But larger retail chains may have had their fill of licenses, based on recent bidding activity, said liquor law attorney Matthew Anderson, who works in the Allentown office of law firm Norris McLaughlin P.A. The larger chains are still bidding, but they are being more selective and the tide is shifting to other buyers.

In the last two auctions, 58 licenses went up for sale overall, but 13 failed to garner any bids, including eight in the last auction. Less than 100 bidders competed for the other 45 licenses, which were mostly in smaller counties.

By comparison, the fifth auction attracted 66 bidders for 26 licenses. The very first auction drew 134 bidders for 37 licenses and the high price was $556,000 for a Cumberland County license.

Lower cost

In each auction at least one license has been sold in the Philadelphia region, where the highest prices are found, lifting the average winning bid. However, the averages and the highest prices have fallen in nearly every auction as more licenses came up for sale in rural areas.

The average winning bid has gone down from $212,000 in the first auction to $73,915 in the seventh auction.

The high price for the seventh auction was $176,001, for a license in Philadelphia County. That was down from $351,001 in the sixth auction for a license in Bucks County.

The trends have some people questioning future license values. If bidders can buy licenses for a little less at each auction, prices in the private market may also go down. The price of a liquor license is often baked into the sale of a restaurant. But licenses also can be sold when a restaurant closes.

Indeed, Anderson said some of his restaurant clients are seeing lower offers for their licenses, as auction results offer a public record for the cost of a liquor license in Pennsylvania.

“I think initially the open market saw increases when the auctions started,” he said. “People called us and saw $500,000 and said, ‘I want to sell mine for that.’”

That expectation has changed as more licenses hit the auction block.

However, there is still a finite number of licenses available in larger growth areas where people want them. So prices should remain steady, Bova said.

Demand for licenses is usually much lower in less populous counties, so the value is less.

The restaurant and lodging association has recommended allowing the transfer of licenses between counties, which would require a legislative change. The change could help balance the supply and demand for licenses across the state. Moving some expired licenses to heavily populated counties from more rural counties, at least those where no bids are coming in, could quell the concern about rising prices in places like Cumberland County.

“Maybe that would balance them out and distribute more while preserving values,” Bova said.

But transfers also could also disrupt the value of existing licenses, with prices going up or down depending on how the transfers are handled.

“It’s a fine line of preserving value,” she said.

License demand slowing

The first auction for expired liquor licenses drew the most bids (134) and the highest winning bid ($556,000). Here’s a recap of the seven auctions held so far, starting in 2016:

• Auction 1 (Results announced November 2016):

High price $556,000 (Cumberland); average winning bid $212,000; 134 bids

• Auction 2 (Results announced March 2017):

High price $463,802 (Montgomery); average winning bid $119,315; 90 bids

• Auction 3 (Results announced July 2017):

High price $347,127 (Montgomery); average winning bid $133,137; 131 bids

• Auction 4 (Results announced November 2017):

High price $351,502 (Montgomery); average winning bid $120,490; 106 bids

• Auction 5 (Results announced April 2018):

High price $350,000 (Montgomery); average winning bid $116,316; 66 bids

• Auction 6 (Results announced August 2018):

High price $351,001 (Bucks); average winning bid $94,609; 47 bids

• Auction 7 (Results announced November 2018):

High price $176,001 (Philadelphia); average winning bid $73,915; 51 bids

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Jason Scott

Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin and Cumberland counties. Have a tip or question for him? Email him at jscott@cpbj.com. Follow him on Twitter, @JScottJournal.

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