HomeFEATURESTrust the process: Is there still a place for liquor licensing trusts?

Trust the process: Is there still a place for liquor licensing trusts?

Most of New Zealand’s retail market has been more or less free to trade as it wishes since the deregulation process begun in the Rogernomics era of the 1980s. However, in four corners of New Zealand, liquor retailers are subject to comprehensive regulation under liquor licensing trusts. How did this happen, and should it continue? 

What are liquor licensing trusts?

Liquor licensing trusts are a form of community enterprise set up under legislation passed in the shadow of prohibition during the 1940s. In ‘A Great Social Experiment: The Story of Licensing Trusts in New Zealand’, Bernard Teahan, former chief executive of the Masterton Licensing Trust and Trust House, describes the legislative environment at the time as full of restrictions on alcohol consumption that were “often little short of ridiculous and at times harmful”.

The purchase of alcohol by Maori and women was restricted, the infamous ‘six o’clock swill’ was in effect, patrons typically stood up to consume their beverages, and many areas of New Zealand were still ‘dry’.

The liquor licensing trusts model was created with the intention of satisfying consumers’ desire for these restrictions to change, while soothing the fears of those still inspired by the anti-alcohol temperance movement.

The result is a series of community-owned body corporates controlling liquor sales which distribute surplus profits back into the community and are accountable to that community through the election of their trustees. These enterprises pay tax and operate under the scrutiny of the Auditor General.

How do liquor licensing trusts work?

The Sale and Supply of Alcohol Act 2012 sets out the statutory requirements of licensing trusts as:

  • sell and supply alcohol; 
  • establish and operate premises to sell and supply alcohol, provide accommodation for travellers, and to sell and supply food and refreshments; and 
  • conduct any other business that, in the licensing trust’s opinion, can be carried on conveniently with any business associated with the above objectives. 

In the areas where a licensing trust operates with exclusivity, only it can be granted certain alcohol licenses, and only it can operate hotels, taverns and off-licenses. The biggest difference for many consumers is that beer and wine can’t be sold in supermarkets operating in these ares. Venues which fall outside the above categories, such as restaurants, can sell alcohol with no restrictions. 

Today, many trusts also provide gaming machines (pokies) at their premises under licenses held by their related entities. They are flexible investment vehicles which own or have an interest in a wide range of related entities such as property investment or social housing. A legislative change in 2004 allowed for further flexibility, letting licensing trusts operate outside their districts or restructure into community trusts if they wish.

Of the 30 trusts which became operational by 1975, 18 are still functioning as of 2017, and four still retain their exclusivity rights: Invercargill, Mataura (Southland) and Portage and Waitakere (both in West Auckland). 

Are liquor licensing trusts under pressure?

As the drop in numbers and lack of newly-formed liquor licensing trusts would suggest, this model has become less popular and less prevalent over the last 45 years, even as their community support donations have become more substantial since the late 1990s. In the latest available data licensing trusts collectively paid out nearly $27 million in community support donations during 2014. Teahan estimates that by 2017, the sum total of licensing trusts’ cash donations stood at more than $500 million.

He considers that the post-1980 social climate may have favoured greater individualism and market beliefs, and that other forms of enterprise, such as charitable trusts, proved easier to form and run.

In assessing the cause of death for the 12 demised trusts, Teahan identifies six common causes:

  • Inadequately defined markets
  • Poor service/product
  • Overinvestment
  • Inadequate equity capital or too much debt
  • Poor management
  • Poor governance

The latter two are applicable to nearly every failed liquor licensing trust, while the first four are more evenly spread. 

In her 2014 report, ‘Challenges facing licensing trusts’, Controller and Auditor General Lyn Provost says the four licensing trusts that have retained exclusive rights, and those with well-established operations, have fared better than others, but increasing numbers of licensing trusts struggle with profitability and financial viability. 

“Licensing trusts are facing growing pressure through increased competition, declining revenue, changing social attitudes, and tougher legislation, combined with pressure to return more funding to their communities. These challenges have been prevalent for some years now.”

Achieving change doesn’t necessarily mean dissolving liquor licensing trusts, however – a less extreme action is to remove a trust’s exclusivity rights and open it up to the same market competition faced by other retailers.

West Auckland Licensing Trusts Action Group (WALTAG) representative Nick Smale.

What’s not to like?

Liquor licensing trusts are community-owned, so only the community can decide if its exclusivity rights should stay or go. A competition poll can be triggered in one of two ways: either a liquor licensing trust can resolve to hold a poll, or at least 15 percent of the population in its area of exclusivity must request a poll in writing. The number of requests, in practice, should be higher than 15 percent as the appointed scrutineer will not accept those with invalid or indecipherable details.

The expenses of any resulting poll are borne by the trust. If the poll is unsuccessful and exclusivity rights are retained, the petitioners can call for another poll in three years’ time, but if the rights are lost, it’s permanent.

West Auckland Licensing Trusts Action Group (WALTAG) was formed in April 2018 to coordinate a petition requesting a competition poll against Waitakere and Portage licensing trusts. It originally intended for the petition to be submitted in June so any resulting poll could coincide with the 2019 local body elections, held in September and October. However, at the time this issue of NZ Retail went to print, it had instead resolved to submit a petition targeting only Waitakere at the end of September.

WALTAG’s vision for West Auckland is that by 2023, the loss of Waitakere and Portage’s exclusivity rights will result in more vibrant town centres, with a much greater range of dining and drinking options. It also hopes the trusts will cease hosting gaming machines, sell some venues, and stop holding “under-developed land” so that this land can be used for housing and commercial real estate.

Group representative Nick Smale says WALTAG feels the West Auckland trusts have been underperforming.

“We think the licensing trusts are great, they’re the fabric of this community. But there’s no reason, as we see it, for them to hold the monopoly.”

“If we lift the monopoly, West Auckland isn’t going to turn into Ponsonby, but in 10 years’ time, the West Auckland under the monopoly and the West Auckland without it will look very different.”

Asked why the West Auckland trusts are being targeted with a competition poll while Invercargill and Mataura aren’t, Smale agrees the visibility of central Auckland’s flourishing hospitality scene may contribute to West Aucklanders’ desire for a more diverse night economy in their area.

“If the hospitality offer in West Auckland is a bit rubbish, people go to the city. If so in Invercargill, they’ll still go out [locally].”

However, he says not everyone calling for the monopoly to be abolished is dreaming of vibrant indie bars and specialty bottleshops.

“It matters to me, but most people don’t feel that way. They don’t go out that much. The main impact for them is not being able to buy beer and wine in the supermarket.”

“I would like to have a choice of where to have a drink.”

He also feels the West Auckland trusts are less transparent than their South Island equivalents. 

Smale emphasises that WALTAG’s petition is not an attack on the trusts but a call for change.

“Fundamentally, I think the Trusts should be a force for good in our community. I’m not anti-trusts and I don’t think they should get out of West Auckland. I just think they should evolve.”

“If the community chooses to keep the monopoly, so be it.”

The Trusts chief executive Simon Wickham.

What do trusts add to West Auckland?

Waitakere and Portage licensing trusts manage many operational activities through a shared service model known as The Trusts. The Trusts chief executive Simon Wickham rejects Smale’s assertions of underperformance and lack of transparency. Each trust’s financial statements are independently audited and available online, and both hold monthly meetings open to the public. 

“On performance, there is often confusion around revenue versus profit,” Wickham says.  “Our performance needs to be measured by our profit levels, not total revenue generated. Hospitality and retail are tough industries with thin margins. If we look at our performance since 2011, we were in a very different situation back then with an underperforming business and limited giving back. We have worked hard to implement a strategy to turn the business around and we are now in a position where all of our businesses are profitable and we’re able to give back $3.5 million this year from our investment, retail and hospitality profits.”

Wickham says that as the community governs how a trust operates, the trust is thus required to meet their needs. He says West Auckland wants alcohol to be sold responsibly: “with a balance of convenience but not saturation”. 

“I think licensing trusts play an important role in the industry in terms of setting a high bar around what responsible alcohol sales should look like and proving that it is possible to have a model that balances convenience and access with proliferation.”

He says it’s a “major misconception” that the trusts hold back the development of the hospitality industry in West Auckland, explaining that the two trusts operate 11 of more than 100 licensed venues there. 

“We don’t set out to run all bars and restaurants in West Auckland, and nor would we want to,” Wickham says. “I think the ability for anyone to open a licensed restaurant, café, club, brewery, cellar door or nightclub (provided Auckland Council agrees) could be more widely understood.”

Addressing WALTAG’s point about gaming machines, Wickham says not every Waitakere or Portage venue has gaming machines in it, and The Trusts venues only house 22 percent of West Auckland’s gaming machines. The Trusts has reduced the number of machines in its venues by 50 percent since 2014. 

Wickham says the issue of town centres lies with Auckland Council, saying if WALTAG has concerns over the vibrancy of town centres, it needs to speak with the council. 

Wickham says consumer awareness of licensing trusts in general is low, but in the areas these enterprises exist, they’re “generally well liked”.

“I think communities in licensing trust areas understand the value they bring,” Wickham says. “You only have to look at some of the news headlines to see the reality in other parts of the country where people are protesting in the streets about bottle stores. One recent example would be the protest against another bottle store opening in Three Kings here in Auckland. Talking to their local MP the other day, he can see the benefits of the licensing trust model compared to their status quo.”

What about Invercargill and Mataura?

Invercargill Licensing Trust chief executive Chris Ramsay wasn’t available in time to contribute to this article, but Mataura Licensing Trust general manager Mark Paterson was.

Paterson links Mataura’s strong performance and general popularity with its consistency over time: “We haven’t travelled too far from our core being and we still retain our preferential trading rights, which I believe is the reason we are still a successful trust.”

“Some of those unique things that were set up originally [in 1955], they’re still pertinent today, and I talk about the responsibility to enhance the wellbeing of our community, distribution of profits back to the community, provision of good model facilities for the [sale] of alcohol, meals and gaming, and the distribution of profits to the community, who are the people who own us. And that’s still strong today.”

Asked if any of the dynamics currently playing out in West Auckland are applicable to Mataura, Paterson doesn’t think so: “It differs completely from Auckland to Gore”.

“The key is that we are different down here in the South, the two Southland trusts. Markedly different from what’s going on up north. Southland people have a better understanding of what the trusts do. For a number of years, we never self-promoted, but obviously with the continued threat of opening up we’ve had to tell our story.”

Paterson says that because Mataura’s territory is a smaller community, that community has a good understanding of the trust and its charitable donations, totalling $19 million over the last 17 years. He says voting for the trust’s board members achieves an average turn-out of 60 percent – better than the local council elections.

“Virtually everyone in this community knows everyone, which just won’t happen in Auckland and can’t happen in Auckland,” Paterson says. “There would be no one in our area who hasn’t been affected in some way by money given to the community from the licensing trust.”

There’s not a lot of interest in other liquor licensing models in Gore, Paterson says. Noting that many forms of hospitality aren’t restricted under exclusivity, he feels hospitality is a tough business regardless of the operating model.

“Anyone can come and start a restaurant in Gore any time they like if they choose to. The reason they choose not to is because it’s a very difficult game to make money out of.”

He vigorously refutes any suggestion that the liquor licensing trusts model may stifle market-led creativity by removing competitive motivation to take risks, citing the 2011 Thomas Green café and bar as “better than anything [visitors] have witnessed in the whole of the country”.

“There’s two bottle stores in town, there’s a Liquorland one and a Super Liquor one, and they’re the equal of any bottle shops in New Zealand. We are doing things as well as can be done.”

Even with its resources and experience, however, Mataura Licensing Trust struggles to find qualified staff, and Paterson says staffing will be its major concern in the future.

He is clear that the loss of exclusivity would be a “death knell” for the trust. He feels Mataura’s liquor stores would not be able to compete with the convenience offered by supermarkets selling beer and wine, and the resulting pressure would force it to close pubs that are “currently borderline”. 

“There’s one operation where we’d take out 12 gaming machines, which would take away $85,000 per annum of gaming machine money that is given away to the community.”

“It would all snowball.”

What should be done?

Everyone we spoke to for this article has acknowledged that liquor licensing trusts aren’t well understood by the general public, and the low level of licensing trust literacy seems to have worked both for and against them. Theway the legislation works means the status quo equals continuing exclusivity – getting thousands of signatures to trigger a competition poll is hard work – but the trusts themselves are so complicated that even those who benefit from them seem to struggle to understand where the money is coming from.

As a complicating factor, many of the positives of liquor licensing trusts can be viewed as negatives, and vice versa, depending on your philosophical position. What looks like an underwhelming growth rate to one person could equally be seen as restraint by another. Centralised management of multiple outlets might spell familiarity and convenience to one party, and suppression of creativity to another.

Duncan Cotterill associate Nick Laing and partner Duncan McGill acknowledge existing frustrations with the liquor licensing trusts model, but saythat in their work with contested liquor licensing processes, they’ve also seen a “constant” theme from community groups wishing for a greater say on the location, operation and type of premises that open to sell liquor in communities.

Trends towards support for social enterprise, “for good” and community-focused organisations mean that liquor licensing trusts may in fact become increasingly relevant, Laing and McGill say.

“Sweeping structural changes are not necessary in our view, nor would they be easy to push through given the Sale and Supply of Alcohol Act would need amending,” Laing says. “The fact the licensing trusts allow for community input, despite dwindling public participation, is something we expect is actually desirable to retain.”

Viewed from one perspective, liquor licensing trusts are the result of clunky postwar legislation that’s out of step with our economy’s free-market principles. From another, they’re sophisticated social enterprises that simply emerged before their time.

Only one thing is for sure: the consumers of Waitakere, Portage, Mataura and Invercargill will have a tough choice to make one day.

This story originally appeared in NZ Retail issue 763 August / September 2019.

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