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Clash of the Middlemen

Is Costco's initiative to privatize liquor sales coming back to bite it in the ass? (And will the rest of us get screwed as a result?)

Clash of the Middlemen

Kelly O

The last days of state-run shelves.

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BATCH 206 DELIVERS The beginning of a new era.

On March 1, Rusty Figgins, master distiller at Batch 206, walked through the front door of Oddfellows Cafe & Bar with a case of vodka on his shoulder and a smile on his face.

Figgins said he'd been working at the distillery since two that morning, but he looked chipper as he posed for a photo, set his box on a table, and stood by while Oddfellows owner Linda Derschang wrote him a check.

That morning, for the first time since 1919—the year Prohibition began—restaurateurs were legally buying spirits from someone besides the state. Our state monopoly on liquor had ended.

Even though Washington's liquor business has crossed the threshold of privatization, it isn't all craft distillers and rosy smiles. The turbulence over what the new landscape will look like (the variety of brands, who will pay which taxes and fees, who will control the almighty distribution channels between distillers and store shelves, and how much your favorite drink will cost in six months as a result) is still roiling.

Voters passed Initiative 1183 last November, after retail giant Costco spent almost a year drafting it and more than $22 million (a state record) to stump for it. But after all that effort and money, Costco finds itself fighting two behemoth national liquor distributors for control of the new market.

"It's a big initiative that impacts several layers of the industry," says attorney Stephanie Meier, who specializes in food and beverage law. "This is a lot to deal with, and there are many parties that have a stake in the outcome."

According to its annual report, the state sold $890 million worth of alcohol in 2011, and the Seattle Times has reported that Costco stands to make more than $81 million a year from selling spirits. In the past 30 days, 448 businesses have applied for "spirits retailer" licenses—I-1183 opened the door to privatization, and now businesses are fighting to see how many of them can squeeze through the frame.

The biggest fight at the moment, according to pretty much everyone paying attention, is over an ambiguous phrase in the initiative that restricts the volume of sales from one retailer to another. That is, it would limit businesses like Costco from selling more than three cases of liquor at a time to a bar or restaurant, which is partly what they raised $22.5 million hoping to do. According to the initiative, "no single sale" from one retailer to another "may exceed twenty-four liters" (three cases).

Now the three members of the Washington State Liquor Control Board (WSLCB) are trying to decide what a "single sale" means. Costco argues the rule should stand as written—a "single sale" is a single sale, and on any visit to Costco, a bar may make as many three-case, retail-to-retail purchases as it likes.

Meanwhile, the two big liquor distributors, Young's Market Company and Southern Wine & Spirits, are lobbying the WSLCB to rule that "single sale" means one sale per day, effectively shutting Costco out.

"Costco is not getting a distributor license, but it wants to act like a distributor," says WSLCB spokesman Brian Smith. Young's and Southern argue that Costco's interpretation of the rule would give it an unfair advantage—Costco wouldn't be on the hook for the $150 million the state says distributors must pay in licensing fees by March 31, 2013. (If the distributors' fees don't total $150 million by that date, each will have to write a check to the state for its share of the shortfall.)

The WSLCB, Smith says, is currently leaning toward the 24 liters per day interpretation of the rule—which would cut Costco out of the distribution game and effectively give Young's and Southern a lock on an estimated 90 percent of spirits sales. That scares some restaurant and bar owners, even ones who resisted Costco during the I-1183 campaign. Without Costco exerting some market competition, they worry, Young's and Southern will replace our state monopoly with a corporate duopoly and set prices at their whim.

"Young's and Southern are going to our members and saying, 'You're going to have to accept a 30 percent price hike,'" says Bruce Beckett of the Washington Restaurant Association. "They're out there trying to gouge the market."

The WSLCB is taking public comment on the rules until May 23, but some worry that no matter what it decides, liquor prices will spike. "Because of beer 'competition,' do beer prices at bars go down?" asks bar owner Dave Meinert. "No! The two major distributors raise their prices in identical ways at identical times. It happened three times last year."

Young's, Southern, and Costco all declined to comment or did not respond to requests for comment. Other distributors and retailers are reluctant to estimate how much they'll be charging for spirits. "We're trying not to give away too many of our trade secrets," says Andrew Bohrer of Vinum, a wine distributor that's trying to break into the spirits market. "We're all holding the cards really close."

Grocery retailers such as QFC are also taking it slowly. According to QFC liquor czar Dale Wilson, "We're waiting to see how the taxes are applied." According to their current math, could spirits be cheaper under I-1183 than they were before? "No, no," he says. "Not even close."

The Costco/distributor fight isn't the only friction of transitioning into a privatized liquor market. Some small distillers worry that they'll have a more difficult time competing for shelf space with big brands, which have enormous national contracts with distributors such as Young's and Southern. (Before I-1183, small distillers applied directly to the state for shelf space.) There are questions about central-warehousing rules, which might allow bars to pool their orders and qualify for volume discounts from distributors. And there's the question of what will happen to the 166 state liquor storefronts. The initiative says new stores must be more than 10,000 square feet to sell liquor, but the leases to the old state stores (which are less than 10,000 square feet) will be auctioned off with a right to sell liquor, per agreement from the respective landlords.

"Other concerns? There are a hundred of them," says Smith at the WSLCB, who also guesses liquor prices will go up under I-1183, perhaps by 20 percent. "That's what's invisible to the public—they saw privatization and voted it in, but it affects all the different business entities in different ways. That's what the LCB is working through."

Nobody knows what will happen, of course, especially not until the rules governing I-1183 have been written and June 1 arrives, when the public starts buying spirits—or not buying spirits, depending on how much money people are willing to spend.

Amid all the anxiety, Orlin Sorensen of Woodinville Whiskey is a rare voice of optimism: "There will be some bumpiness, but the liquor control board and lawmakers will make sure it all works out... I think we'll all look back on this and say, 'The transition was tough, but it turned out fine.'" recommended

This article has been updated since its original publication.

 

Comments (47) RSS

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1
If the Liquor Board changes the intent of the initiative as it is proposing to do, then liquor prices will go up 30% at bars and restaurants because Southern and Young's will have a duopoly on the marketplace - they together will control over 90% of the liquor distribution market.

Expect retail prices at the average grocery store to be up to 64% higher than you pay now at a State owned store.

The proponents of this initiative lied about it lowering prices. Consumers and small business owners are about to get fucked.

The first hope is that the LCB doesn't add to the problem by reinterpreting the initiative and punish Costco (who admittedly suck for pushing this initiative to start with, it's so bad on so many levels).

The second hope is the current lawsuit trying to throw this whole thing out.
Posted by whoknows on March 7, 2012 at 9:51 AM · Report this
lukeiscool 2
If you think a 64% markup makes any business sense at all you are out of your mind. No one is going to pay $22 for a bottle of Schmirnoff, or $36 for a bottle of Jack.
Posted by lukeiscool on March 7, 2012 at 11:02 AM · Report this
Simple 3
Hello Indian Reservation!! 2 bottles of whiskey, a gross of bottle rockets and a carton of smokes please.
Posted by Simple on March 7, 2012 at 11:24 AM · Report this
4
TOtally, #3 - Online stores and Indian Rez.
Posted by scottleigh on March 7, 2012 at 11:56 AM · Report this
5
@1 ""If the Liquor Board changes the intent of the initiative [...]"

I am not all that interested in your predictions or hyperbole, but I do find that the implication of your preface quite interesting. Is the intent of Costco, or douche-nozzles like Eyman, or any initiative writer for that matter, actually important?

I'd love to see opinions from legal professionals, but it would seem to me that any legislative intent, insofar as it would ever have anything to do with the application and interpretation of the law, would have to derive from the understanding of the electorate at the time they voted in the initiative, as I would argue they are doing the "law-making" for all intents and purposes.
Posted by The Crowd Booze on March 7, 2012 at 12:04 PM · Report this
6
@5,
How on earth would you determine "the understanding of the electorate at the time they voted in the initiative"? Were such a thing possible, I suspect you would find the electorate's entire understanding of the initiative can be summed up in 3 words, "privatize liquor sales". You think they all went ahead and read section xviii, subsection 23-2, clause c.3 before they voted?
Posted by cynar cynic on March 7, 2012 at 12:57 PM · Report this
Lew Siffer 7
Fuckin English, how does it work.
Posted by Lew Siffer on March 7, 2012 at 4:25 PM · Report this
8
@7 What they're saying is that we're gonna pay more, not less, for alcohol.
Posted by DarthTagnan on March 7, 2012 at 8:24 PM · Report this
9
Why doesn't Costco just apply for a distributor license?
Posted by pussnboots on March 8, 2012 at 7:59 AM · Report this
10
Even better, why don't they buy out a current distributor? Recently. Kings try to buy out K & L (bud distributor, but distributes hard alcohol in Alaska)at way more then it was worth. The family of K& L were ready to sell. Kings is such a small moms and pops organization, they couldn't secure the funding for the sale. If Costco buys out a current distributor of soft sales, it isn't that much to bump up to hard sales.
More pointedly, the WSLCB seems intent on punishing voters of diminishing their control on hard liquor. It also begs the question whether any of the WSLCB members have interests in Young's or Southern's.
Posted by pussnboots on March 8, 2012 at 8:10 AM · Report this
11
Toldja. Idiots.

This is what you voted for. This is the way the liquor business runs in the US of A. Distributorships are monopolies. Palookaville. You just traded a regulated one for an unregulated one. Way to go.

The other big fights are central warehousing, the meaning of "at that location", section 302 which was ruled unconstitutional in Cowlitz Co. (mark your calender for Mar 19), and many, many more.

AND... the very instant the state is out of the liquor business, expect the goo-goos to do to drinkers exactly what they've done to smokers.
Posted by Paddy Mac on March 8, 2012 at 1:34 PM · Report this
12
Someone was hittin the Kirkland Brand Vodka pretty hard when they wrote up the initiative.
Posted by drinkup on March 8, 2012 at 5:27 PM · Report this
13
Are we forgetting Costco is a wholesale as well as retail company? Don't you think Costco can afford lawyers smart enough to write an initiative with their best interests in mind?
Posted by Spittongue on March 8, 2012 at 6:15 PM · Report this
14
@13 "Don't you think Costco can afford lawyers smart enough to write an initiative with their best interests in mind?"

The definitely can afford to do so, but in so far as the language is open to different interpretations, it may be that they failed.

@6 "I suspect you would find the electorate's entire understanding of the initiative can be summed up in 3 words, "privatize liquor sales"."

Yes.

I argued up there that #1's idea that Costco's "open new markets, make more money" should not be given much consideration when the courts have to determine if the law meant per day or per transaction in it's limitations.
Posted by The Crowd Booze on March 9, 2012 at 11:53 AM · Report this
15
#2: Go across the border to the North. $31 for a fifth of Jack Daniel's #7, and $24 and $28 for Smirnoff Red and Blue labels.
Posted by FromWA on March 9, 2012 at 12:44 PM · Report this
16
Every flippin jihadic moron that said hells yeah to kicking the state stores out owes me money for extra scotch costs. Every damn one of you. I hate you all and hope you die.

I knew this would result in a worse deal, it was all right there in the law if you idiot teabagging morons had bothered to read with your brains instead of your assholes.
Posted by certaindoom on March 9, 2012 at 1:25 PM · Report this
ScienceNerd 17
lol I like you, 16.
Posted by ScienceNerd http://stanichium.tumblr.com/ on March 9, 2012 at 3:56 PM · Report this
slade 18
Cuz Washington sucks.
What is cheaper in WA State? If your going to be a media slut at least make the bed? You pay more for everything.
Posted by slade http://www.youtube.com/user/guppygator on March 10, 2012 at 2:35 PM · Report this
19
This article talks about the limits on retailer-to-retailer sales. However, in this instance, wouldn't Costco be functioning as a wholesaler?
Posted by bitterlake on March 11, 2012 at 5:34 PM · Report this
20
It is not Costco's fault the current crop of liquor distributors and the WSLCB are corrupt.

Nothing a lawsuit can't fix.
Posted by bornhere on March 11, 2012 at 5:40 PM · Report this
21
Boohoo Stranger. I seem to recall you all being big supporters of privatization. Now consumers will pay more, while state workers lose jobs, small businesses get screwed, and the state loses revenue. Awesome all around
Posted by Racing Turtles on March 11, 2012 at 9:17 PM · Report this
22
@17 re: @16: I second that!

@18: You could always move.
Posted by auntie grizelda on March 11, 2012 at 11:08 PM · Report this
23
@21: The Stranger editorialized against 1183, endorsed a "no" vote, and wrote extensively about the unfavorable terms of the initiative as written.

(Funny how, with massive price spikes all but confirmed, the odious and self-righteous asshole from this thread is nowhere to be found.)

Posted by d.p. on March 11, 2012 at 11:25 PM · Report this
24
Privatizing liquor sales need not have such nightmarish results. If, after allowing for a transition period, prices remain high, I suggest a follow-up referendum to correct the law.

Arizona sucks in many ways--the summer weather is terrible and the political climate is even worse--but one thing this state does well is retail competition in the sale of liquor. Prices here are very cheap. Grocery stores have liquor sales in their weekly ads. A 1.5 liter bottle of Wolfschmidt or Fleischmann's vodka is $12.99-13.99 normally, but some major chain is sure to have it on sale for $10.99 any given week--and a couple times a year, you'll see it at $9.99. Or how about a 750 milliliter bottle of Captain Morgan or Jose Cuervo on sale for $12-13 (and a couple times a year at $10-11)?

Rewrite your law to mirror Arizona's, specifically encouraging grocery stores to enter the retail liquor trade, and I bet Washington state citizens would see the kind of price reductions that true retail competition can provide.
Posted by Functional Atheist on March 12, 2012 at 10:22 AM · Report this
slade 25
Washington would still suck if I left.

As with everything in WA State we the people are waiting for someone to take charge and hold a steady course so influx and price and demand and the skin flint tin horns are left behind?

We (supposedly) have no control over the price of anything and as well the economic forcasters cant predict anything so your going to loose your shirt and your home and your school?

Toll road,gas price gas,tax that tax this and the little guy gets pushed out.

get on your knees for the banks as they are the ones who own everything?

next year it will be a new ball of wax 7-11 will have its own brand of gin. and the market will be competitive and not haveing growing pains? untill then you snooze you loose and you should have stocked your wine cellar before the state had its panty tantrum.
Posted by slade http://www.youtube.com/user/guppygator on March 12, 2012 at 11:20 AM · Report this
26
@25: I wasn't being flippant re: my comment @18.

Yes, there is indeed a lot of political tea bag / Tim Eyesore-related bullshit destroying what's good here in Washington State. As a native, I have traveled across the United States and frankly wouldn't want to live anywhere else. Despite ample problems in Olympia, including the ridiculous inability to balance the state budget, home is where my heart is.

I guess it's a good thing I don't consume hard liquor.
Posted by auntie grizelda on March 12, 2012 at 12:06 PM · Report this
Rujax! 27
So Much for you ignorant assholes (yes YOU) who voted to privatize liquor sales.

Ha, ha, ha, ha, HA!
Posted by Rujax! http://rujax.blogspot.com/ on March 12, 2012 at 4:22 PM · Report this
Rujax! 28
Dumbfuck @ 27...

Arizona has a three-tiered distribution system...

...just like Washington is going to have. Distributor/Wholesaler (NOT Costco, BTW)/Retailer.

PS-The State taxes you pay on your favorite brain cell killer?...you'll stll pay 'em. Sucker.

Posted by Rujax! http://rujax.blogspot.com/ on March 12, 2012 at 4:30 PM · Report this
Rujax! 29
(the dumbfuck @ 28 was commenting to the dumbfuck @ 24)
Posted by Rujax! http://rujax.blogspot.com/ on March 12, 2012 at 4:46 PM · Report this
30
I suppose we all better buy up stockpiles of booze at the state stores before they close or go private.
Posted by Steve not registered on March 13, 2012 at 12:35 AM · Report this
Banned on The Seattle Times 31
We're fucked. We gave away the one monopoly we had that generated more revenue for the state than anything else and are now ready to get reemed by big business. I knew this would happen...

Goddamn fucking Teahadist revolt...
Posted by Banned on The Seattle Times on March 13, 2012 at 11:06 AM · Report this
32
Ya know, I would have been fine with the state maintaining the monopoly, if they had some stores open till 2, open on sundays, and more locations maybe.
Posted by rp on March 13, 2012 at 2:03 PM · Report this
33
@29. I related my experience with retail liquor prices in the real-world place called Arizona. If you are unimpressed by my anecdotal experience, that's you're privilege, but it hardly constitutes evidence that I'm a dumbfuck.

Of course there are excise taxes that are part of the shelf price of booze (just like there are sales taxes on top of the shelf prices I was quoting). Where did I imply or state otherwise?

Retail competition CAN be a good thing for those who buy liquor. Nowhere did I assert that that outcome is inevitable, or that it will be the case in Washington state.

So go fuck yourself, you dumbass fucking fuck.
Posted by Functional Atheist on March 13, 2012 at 2:20 PM · Report this
Rujax! 34
@33...

Back at ya, twerp.
Posted by Rujax! http://rujax.blogspot.com/ on March 13, 2012 at 2:35 PM · Report this
35
Yes, this initiative is bad on so many levels, as many of us understood it had to be, given the realities of our regressive and dysfunctional tax policies, and an irrational initiative system that lets any kook with an idea dress it up with help from people with money (who expect your idea to bring them more) and stick it on the ballot. It's like jigging for squid: every now and then, you catch one.

Voters (that's you, citizen squid) decided long ago that taxing liquor, retail sales, business, building, and a confusing tangle of other things was good policy, so our state has used the system you built to pay for all the services we have demanded of government.

We have usurped the judgment of the very judges we elected to judge, demanded by initiative that the courts mandate unthoughtful, unproductive, and needlessly expensive sentencing practices, despite evidence this will only make impacts on communities worse and more expensive; spend a lot of money on "security", which will only make matters worse and more expensive; Buy a bunch of snowplows, garages to house them and mechanics to maintain them, despite evidence this will only make impacts on communities worse and more expensive; and the demands for service go on, and on, and on.

Taxes, after all, in the words of justice Oliver Wendell Holmes, "the price we pay for a civilized society", and we, voters, have weighed-in through our elected representatives about what services we require. Our challenge has been to build a system of taxation that can fund our demands in perpetuity. As has been apparent in headlines and committee rooms for decades, the voters of Washington continue to do this very poorly, demanding the legislature fulfill under-analyzed knee-jerk mandates that poll well (throw away the key, clear my street, build me a bridge, provide emergency services, hospitals, libraries, sewers, power, water, public health and safety systems...), and then pitching a fit when work costs money. Dude, get real, there is no tooth fairy.

Recent electoral history is rife with examples o this failure of analysis. We insisted on putting the monorail concept into play before we had completed even a rudimentary analysis, so it could not succeed. We may well have done the same thing to the liquor system.

We watched Costco spend millions over years to convince us to give it control over our broken system, and now are complaining that it is going to do exactly what the people in Costco's PR department convinced the voters to ask it to do, which is make more money for Costco. Remember, it was YOU who said the rich can do a better job of managing your money than you can. So now, when you have to pay for what you bought, you complain it isn't what you wanted. A personal problem, if ever I heard one.

"Business sense" is exactly what Costco spent so much money to lead voters to believe it was introducing into the system, and it did so, exactly as advertised. So now we have added profit-making to a system originally designed as a way to pay for voter demands through taxation (the things we pay to get what we want from our society). Government exists to address the desires of citizens.
Business exists to address the desires of owners. Why the surprise? Way to go.

The truth is beginning to dawn that the changes the "government is a waste of money" people are causing may only make impacts on communities worse and more expensive. Way to go.

Yes, reservation jokesters, anybody can break the law and avoid personal responsibility for the functions of society, but law is the only way voters can enforce the rules we want. If you are really tired of society and want the wild west, move to Afghanistan, where no tax collectors will bother you. Good luck with war-lords and no laws.

I will not even attempt to address any positions beginning with "all you gotta do is", "it's government's fault", "it's the union's fault this won't work", or "why don't they just". These vacuous voices help us get into these errors of failed analysis to begin with.

We did, indeed, trade an arcane but cost-effective and well-regulated taxation system for an expensive unregulated one. Way to go.

Cheap liquor, by the way, has never been the priority of Washington voters. Arizona gets cheap vodka, we get schools, roads, bridges, trauma centers, police, curb-cuts, and other things we want.

If we keep privatizing government functions, we will keep wondering why the CEOs have yachts, but our children have no schools. Way to go.

We will keep on getting into these dilemmas until we figure out how to put analysis into the initiative system and make our taxation system rational. Rational, by the way, does not mean free. Carry your weight.

More...
Posted by Songbird on March 13, 2012 at 4:38 PM · Report this
36
Since when did they let Arizona in the real world?
Posted by Paddy Mac on March 13, 2012 at 4:53 PM · Report this
37
I think I love you, Songbird.
Posted by earwig on March 13, 2012 at 8:19 PM · Report this
38
If prices are gonna go up, can we sue Costco for fraud, since they promised us prices would go down? That was a big part of what they hinged the initiative on, wasn't it? "If you do this for us, we'll bring prices down!" So, they committed fraud?
Posted by cattycat on March 13, 2012 at 9:48 PM · Report this
39
People keep harping on how we were all fooled by Costco, how much money Costco spent on initiative 1183 and how much money they are going to make.

Newsflash.... WE KNEW ALL THAT!

1.We would have voted the same whether Costco spent 20-dollars or 20-million. Having the government compete in the same marketplace of a product the government also regulates is both unfair and ludicrous.

2. Costco is a business. Which is in business to make money. I hope they become a shining beacon of how the private sector can do it better then the public sector and they rake in bucketloads of money with this initiative. Creating more jobs and opportunity for everyone such as the new Costco being built across the street from Alderwood Mall.

3. And the state will actually make MORE money due to that 17% tax that going to get tacked on.

Then the state can focus on what the business of the state should have been in the first place. Regulation. And lets be honest folks, no state does regulation better than this Gregoire land nanny state.
Posted by thatsjarrod on March 13, 2012 at 11:02 PM · Report this
40
Why do I feel like I'm watching the scene from National Lampoon's Animal House in which the Deltas had their fraternity charter revoked, all got expelled, Flounder just threw up on Dean Wormer for gleefully announcing that he had notified their local draft boards and told them they were now all eligible for military service, and Delta Fraternity President Robert Hoover is left saying 'I KNEW it!...I knew it! I knew it! I knew it!'??

And voters STILL yelled, Toga, Toga, Toga!

Welcome to the car wreck.
Posted by auntie grizelda on March 13, 2012 at 11:03 PM · Report this
41
@39: I agree on what good Governor Gregoire, Senators Patty Murray and Maria Cantwell, Mary Anne Haugen, and Congressman Rick Larsen among others have done for Washington State.

Unfortunately, with the passing of I-1183, a lot of state jobs got voted out. I don't foresee privatization of liquor sales actually restoring our high unemployment rate or skyrocketing college tuition fees any time soon.
Posted by auntie grizelda on March 13, 2012 at 11:12 PM · Report this
42
Whoops---I think I meant to say Senator Mary Margaret Haugen..?

Okay, I'n done.
Posted by auntie grizelda on March 13, 2012 at 11:19 PM · Report this
43
Dang---sorry for another typo! "I'm" not "I'n".

Note to self: post no more blogs on Benadryl.
Posted by auntie grizelda on March 13, 2012 at 11:21 PM · Report this
44
OKay---I really will shut up now.
Posted by auntie grizelda on March 13, 2012 at 11:22 PM · Report this
45 Comment Pulled (Spam) Comment Policy
46
@26: "I guess it's a good thing I don't consume hard liquor." What, can't mix booze with your anti-psychotic medication?
Posted by lolololol on March 14, 2012 at 7:02 AM · Report this
47
@46: Does your mom know you're out trolling?
Posted by auntie grizelda on March 15, 2012 at 12:42 AM · Report this

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