Big stores, small, specialty and grocers – all will compete for your liquor dollars

Near South 37th and Steele streets in Tacoma, two retail giants are girding for battle this summer. Each is betting that its business will win over a significant and profitable share of Tacoma liquor consumers.

Beginning June 1, those customers will no longer be restricted to buying their liquor at the state’s monopoly liquor outlets.

On the north side of South 37th is one of Costco Wholesale’s big warehouse stores. Costco invested more than $20 million in the campaign to persuade voters to approve Initiative 1183 last fall, ending the state’s grip on liquor sales and opening to private industry.

On the south side is a former strip mall music store where construction workers are working furiously to convert that space into the first Washington outpost for big California spirits retailer BevMo.

This one battle for liquor business in Tacoma, with two powerful vendors directly across the street from each other, is a microcosm of the larger contest for market share that will be played out throughout Washington in the coming months. These two stores are among more than 1,500 retail outlets set to sell liquor in the Evergreen State. That’s nearly five times the number of stores that sold liquor under the state monopoly system, and the number is still growing.

Now that last fall’s heated political fight is fading (though a court decision on the initiative is still pending), private business people large and small will see whether the marketplace endorses their liquor vending business plans with its dollars.

Much money is riding on the results.

FIERCE AND EXPENSIVE COMPETITION AMONG STORES

Private business people spent a total of $31 million to buy up the rights to operate the state’s former network of stores as private businesses. And dozens of merchants big enough to operate stores larger than the 10,000 square-foot minimum set by the state for liquor sales are adding new shelves, rearranging their aisles and even hiring new personnel with liquor sales expertise.

Big liquor distributors have moved into the state or expanded their existing beer and wine inventories to include spirits to serve the hundreds of new retailers selling spirits. There are about 30 distributors with liquor distribution licenses in Washington, with 75 locations listed for these distribution centers on the state database.

The nation’s largest spirits wholesaler, Southern Wine & Spirits, has opened a large warehouse in Puyallup to serve its clients in the Puget Sound area and is hiring dozens of workers. The wholesaler has licenses for eight warehouses throughout the state.

Virtually every large grocery, discount and drug chain store is adding liquor to its inventory. The list of new spirits retailers in the region is a litany of familiar names: Safeway, Albertsons, Fred Meyer, Top Food, Costco, Target, Walmart, Walgreens, Rite Aid, Bartell and others.

“There’s going to be a lot of pushing and shoving in the first few months,” said Stadium Thriftway owner Mike Hargreaves in Tacoma. “I expect some will drop out, but in six months or so it will all be settled out.”

Liquor industry observers are watching Washington’s transition with great interest. Eighteen states still will have some kind of monopoly control of liquor sales or distribution after Washington goes fully private June 1.

“There has not been a state that has completely privatized their system since the end of Prohibition. This is a very complex issue with many technical aspects and we stand ready to work with the state to ensure a smooth transition for our companies and consumers,” says Distilled Spirits Council president Peter Cressy in a statement.

The battle has not yet formally begun, but there already are dropouts among the would-be competitors. The state Liquor Control Board never received money for 18 former state-run liquor stores that were bid on as part of a recently completed online auction.

The state is “re-auctioning” those stores, said Liquor Control Board business enterprise director Pat McLaughlin. Those that did not pay their posted bid sacrificed their deposit in the process, Liquor Control Board officials said.

The new auction is set for 9 a.m. Thursday at the Liquor Control Board distribution center in Seattle, 4401 East Marginal Way. Bid deposits for the new auction are $10,000. Among the sites are one on Pacific Avenue that originally received a $750,000 bid, one at South 23rd Street and a store in Lakewood on Steilacoom Boulevard.

Nonpayment for those stores is just another step in the sometimes not-so-smooth process to open up liquor sales to private businesses.

The little guys — the contract liquor store owner and those who successfully bid on former state-run liquor stores at auction — have raised concerns about fees and lease negotiations, while some don’t think they’ll be ready for business by June 1.

THE PRIVATE SIDE OF PRIVATIZATION

No one is saying for sure what the competitive strategies will look like. The major players are keeping the specifics of their plans private.

This means that Costco isn’t talking about how it plans to recoup its $20-million-plus investment in changing how liquor is sold in Washington. The company didn’t return repeated calls for comment.

The major supermarket chains say they’re giving their local managers considerable latitude in deciding what to sell and how to merchandise spirits in their stores.

Each one of Fred Meyer’s 59 Washington stores will handle liquor sales a little differently, said Fred Meyer spokeswoman Linda Merrill.

The demographics and buying habits of each store’s customer base will play a large role in determining what those stores will stock, she said.

The stores’ own internal retail geography also will determine where spirits will be displayed and how much space is devoted to liquor, she said.

At Safeway, spokeswoman Sara Osborne said the chain is using market studies to determine what products it will carry.

“We’re making decisions on a case-by-case basis,” she said.

Some stores could carry as many as 400 different spirits products. Most will carry fewer.

In some instances, the choice of products and how they’re sold will address neighborhood concerns about the new liquor outlets becoming a convenient source of liquor for those who might abuse the product.

At Tacoma’s Hilltop Safeway store, for instance, the store is taking special care to prevent sales to intoxicated individuals who several years ago populated the area’s business district.

Tacoma City Councilwoman Lauren Walker was among a delegation of Hilltop residents and business people who met with Safeway to discuss the upcoming liquor sales.

“We had some great conversations,” said Walker. “Safeway was as concerned as were we in keeping a problem from developing.”

The neighborhood wanted to have the same one-stop access to spirits as do residents in other Tacoma communities, but it wanted the store to carefully control sales and not become a source of small bottles of cheap liquor that could fuel the habits of problem drinkers.

The store agreed to keep the spirits under lock and key. Liquor will available only on request at the Hilltop store, she said.

And the store won’t be selling small “airline style” bottles.

Large chains say they’ve been re-educating their clerks to ensure compliance with liquor control rules.

At Fred Meyer and most larger outlets, for instance, the stores’ check-out systems will halt the sales of liquor when a spirits barcode is scanned and prompt the clerk to ask for identification. The sale can’t be completed until a specific birthdate is entered into the checkout computer indicating the buyer is of age to buy liquor.

The stores said they’ve also sent their personnel to classes to help them recognize tipsy customers to whom they can’t sell more liquor.

Stores in alcohol impact zones where specific cheap high-alcohol beer, malt-liquors and wines are banned from sale won’t be banned from selling spirits. If a particular brand of liquor becomes a favorite of drunks or lawbreakers in the area, local authorities can present a case to add it to the banned list.

The state says it doesn’t expect problems with liquor in those zones because spirits have always been available there in state-run stores without causing problems.

Beyond keeping liquor out of the hands of minors or serial miscreants, the new spirits retailers have to puzzle out what products will be in demand with their regular customers.

Stadium Thriftway’s Hargreaves said liquor distributors have been helpful in providing studies that suggest what products he should stock to best serve his customers.

Hargreaves is rearranging his store to allow a beverage sales manager to be stationed on the new aisle where spirits and wine are sold to offer advice to customers. When that beverage consultant is off-duty, the store’s new display cases will be accessible only on request to store clerks.

Hargreaves said he doesn’t expect the change to private liquor sales will reduce prices consumers pay for liquor. The plethora of taxes the state is imposing both at the distribution and retail level, he predicted, will keep those prices as high or higher than in the state liquor stores now.

He plans price labels that specifically show the breakdown of product prices and taxes on each product.

Liquor sales won’t be hugely profitable for grocers, he said, because of the tax burdens and the competition to keep prices low. His motivation in carrying spirits is to give his customers a one-stop experience where they can buy the food they need and also the beverages in one place.

Grocers say that the addition of liquor sales won’t necessarily diminish the variety of wines they carry. Many stores say they’re building taller shelves both for their wine and for spirits to take advantage of unused space. Most say they plan to sell snacks and other items in the same aisle as spirits to bolster the sales of those grocery items.

If grocers’ emphasis is on providing convenience, stand alone alcohol beverage dealers such as BevMo and others will highlight selection and pricing.

A typical BevMo store might have eight to 10 times as much shelf space devoted to spirits as does a typical grocery store.

BevMo CEO Alan Johnson said the stores will use customer loyalty rewards programs and promotional pricing to drive business to their stores.

BevMo, which has 115 stores in California and Arizona, is opening five Washington stores initially, the Tacoma store across the street from Costco, and sites in Silverdale, Bellevue, Seattle and Tukwila. The company also is looking for additional locations.

SMALLER VENDORS WITH BIG DREAMS

How will the new owners of the former state stores cope with competition from these giant chains?

One business owner envisions about 80 former state-run stores operating under one brand, creating a chain of new liquor stores in the process.

That grand vision belongs to Jasmel Sangha, 51, of Lacey, a Wendy’s franchise and property owner who is set to operate three former state-run liquor stores in Kitsap and Pierce counties, as well as one in the Spokane area, he said.

But Sangha, originally from India, also is working closely with other members of the east Indian community that purchased about 80 former state-run liquor stores at auction.

Although frustrated by the state’s 17 percent fee on wholesale sales to restaurants and bars and the difficulties he and others have experienced in negotiating leases, Sangha thinks there’s a solution in combining their strengths and borrowing ideas from his franchise business experience.

He wants to open the stores under one brand: JusLiquor Beer and Wine, Your Local Spirits Store.

If successful, the former state-run liquor stores operating under one brand could be a $250 million business, he estimates. He sees the stores offering one-stop shopping for party needs, with an emphasis on appealing to the “shop local” movement by catering to local craft distillers and local craft brewers.

The combined strength of the stores gives them buying, branding and marketing power, he said. A fourth step is to seek representation in Olympia to protect their interests, the same way big box and other large grocery chains do, he said.

“I’d hate to see us get divided and have someone else rule us,” he said.

But Sangha doesn’t think those stores will be ready by June 1. Instead, his goal is to have the first four JusLiquor businesses open at the end of June.

Business Enterprise Director McLaughlin said he wasn’t sure how many former state-run stores will be ready to open on June 1.

“We are prepared to get out of the way, so it will be a question of their readiness,” he said.

AUCTION AFTERMATH

Since the conclusion of the online auction, the Liquor Control Board has been contacting successful bidders and setting up meetings to hand over title once confirmation of payment has been received, McLaughlin said.

The “title” is not a license but is the piece of paper that says they have the exclusive right to apply for that liquor license, he said. Once title is in hand, they head to the state Department of Revenue to begin the master licensing process.

So far a majority of the bidders plan to stay in their current state liquor store footprint and buy the remaining liquor inventory. Some successful bidders have transferred title to someone else, McLaughlin said, likely a sign that the exclusive right to apply for the license was sold, something bidders were allowed to do under the online auction rules.

“There’s a lot of horse-trading going on,” he said.

Andrew Thielen, 43, of Olympia, was the winning bidder for the former state-run store in downtown Olympia on Plum Street. Thielen bid more than $236,000 for the right to apply for the liquor license for that location, but he thinks his total investment – buying a point of sale system, buying inventory and renovating the store – will head north of $400,000.

Still, Thielen and his brother, Mike, 41, continue to view it as a worthwhile investment. They like the location because it is far enough away from other competitors, such as Ralph’s and Bayview Thriftway stores in Olympia, and it has a long-established customer base.

The tentative name for the business is the Thielen Bros. Liquor Lodge. State-run liquor stores stock as many as 1,700 liquor items, but the brothers plan to exceed that, Andrew Thielen said.

It also will sell ice, mixers, orange juice, as well as lemons and limes, have a snack counter and a walk-in beer case. The 6,000-square-foot building will get a facelift on the inside and outside, and they’ve decided to keep the four former employees, with plans to hire if the business grows.

“We want to make it the coolest liquor store in town,” he said.

They’ve also come to terms on a long-term lease with the landlord and just need to sign it, Thielen said. Hours, too, could be extended beyond 9 p.m. during the week, and the store could be open on Sundays. “If the customers are there, we will stay open,” he said.

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