State's liquor-privatization showdown pits big business vs. big business

If voters choose to privatize liquor sales Nov. 8, Washington would be, in some ways, simply joining most of the rest of the country.

State government sells spirits in a minority of states – 18 – and operates retail stores in a smaller minority. And while it’s hard to predict how prices would change, competition among private companies might inch Washington toward other states where booze is cheaper.

But aside from privatization, Initiative 1183 puts under the microscope the byzantine regulations that govern alcohol sales across the country. Rules that replaced Prohibition set up a three-tier system, separating manufacturers, wholesale distributors and retailers.

Supporters of the measure backed by Costco say it would leave the three-tier system intact while changing some rules specific to Washington. For example, Costco and other big retailers would be able to negotiate discounts for buying in large quantities.

“That’s the way we do business,” said John Sullivan, associate general counsel for Costco. “If I’m a manufacturer, whether it’s wine or tires or mayonnaise, it’s more efficient for me to sell a truckload or a pallet to Costco rather than individual cases.

“That’s the way the world works.”

But John Guadnola, director of the Washington Beer and Wine Wholesalers Association, said I-1183 would “emasculate” the three-tier system of regulation, which he said discourages excessive drinking.

“I don’t think alcohol should be marketed like oatmeal, myself,” Guadnola said.

Washington bans alcohol price discounts based on quantity. Nor can grocers distribute alcohol to their stores from a central warehouse, which would allow them to bypass wholesalers. Costco challenged those rules in court but lost.

R. Corbin Houchins, a lawyer who has worked for large retailers on alcohol law and is a former counsel at the Olympia Brewing Co., said it’s common for states to forbid central warehousing. Some states, but probably not a majority of them, ban quantity discounts, he said.

I-1183 would leave the bans in place for beer, but would remove them for wine, and wouldn’t extend them to the new private market in hard liquor.

Small wineries won’t be able to compete for shelf space if retailers can command deep discounts for buying by the case instead of the bottle, Guadnola said.

Supporters of the initiative say wholesalers are just trying to keep their protected status. Wholesalers have become used to a market where they can name their prices and force everyone to pay, said Joe Gilliam, president of the Northwest Grocery Association, which includes large grocers like Costco. The distributors are afraid that a change in Washington might spread to other states, he said.

“They don’t want competitive prices in the marketplace because they’ve had it easy for a number of years,” Gilliam said. “That’s why you’re seeing the national money come in.”

Indeed, distributors are opening their pockets to defeat I-1183 – and Costco is matching them in the money race. The two sides combined have raised more than $15 million as the race enters its final month.

PRICES, SAFETY AT ISSUE

The money buys ads that make competing claims about prices, public safety and the role of government, and those will surely be at the top of voters’ minds when they mail their ballots.

In a provision that doesn’t seem to be modeled on any other state’s, small stores would be largely banned from selling liquor. That restriction was added to counter fears of mini-marts supplying underage drinkers, which helped defeat a similar Costco initiative a year ago.

There would be exceptions for small stores in areas with no big competitors, which will allow some rural contract stores to survive. The size of those areas isn’t defined, which opponents have seized on as a loophole, inventing their own definition that predicts small liquor stores sprouting up everywhere.

Most of the funding for the opposition comes from the Wine and Spirits Wholesalers of America. Others in the alcohol industry have helped, including Guadnola’s local group. A fraction of the spending comes from labor unions, including the United Food and Commercial Workers who represent state liquor store workers. The stores would close and many of the nearly 1,400 Liquor Control Board employees would lose their jobs if I-1183 passes.

Nearly all of the more than $8 million raised by supporters comes from Issaquah-based Costco, which has already exceeded its spending on last year’s measure. Trader Joe’s, Safeway and the Washington Restaurant Association have kicked in comparatively small sums.

Restaurants also stand to gain from warehouse delivery and volume discounts of wine.

And they expect to get better deals on liquor. Replacing a government monopoly with competition will bring down prices, said Chad Mackay, whose family owns El Gaucho steakhouses in Tacoma, Seattle, Bellevue and Portland.

The governor’s budget office says prices could increase or decrease. Mackay predicts a 5 percent drop – but more importantly, he said, service would improve and liquor selection would increase. Now, he has to go to the stores on a day selected by the liquor board. Under privatization, he said, liquor would be delivered just like everything else he buys.

“The liquor stores are the worst supplier of them all, and I’ve got no one to turn to when service isn’t right, when product’s out, when product needs to be delivered,” he said.

Mackay wants to put an El Gaucho private label on bottles, which will pressure other sellers to drive down prices to compete, he said.

“We have the most expensive liquor in the country, just about,” he said.

Guadnola said that’s because of Washington’s taxes – 20.5 percent of the sales price, plus another $3.77 per liter. Those will not change under I-1183, and two new fees will be added. What will go away is the state markup and other fees that pay for the liquor board’s operations, which distillers and distributors will replace with their own markups.

Guadnola predicted a few private-label brands at grocery stores and restaurants might become cheaper, but overall prices of liquor will only increase once the state, with its huge purchasing power, is replaced by smaller buyers with less leverage.

One of the new fees is especially worrisome to distributors. I-1183 makes a guarantee: Either it will raise $150 million in its first year, or distributors will pay the difference. The governor’s budget office predicts it will fall far short, requiring distributors to pay up to an extra $91 million to cover the shortfall.

It’s part of a series of changes Costco made after the defeat of its 2010 initiative that make the measure more palatable to government budgets. State and local tax revenue are expected to grow by hundreds of millions of dollars in the early years.

Jan Gee, CEO of a trade group for smaller grocers that is opposed to the measure, said the disadvantages for distributors will hit her members worse than the large grocers that will find it easier to buy directly from distillers.

Large chains “are at a significant advantage, and that’s where my people get really concerned,” said Gee, whose Olympia-based Washington Food Industry Association includes Thriftway, IGA and Metropolitan Market stores. “People aren’t just going to go to Costco and Safeway to buy their spirits. They’re also going to get their groceries.”

Jordan Schrader: 360-786-1826

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