Rough road when it comes to liquor sales

When Michelle Tate and her father, Teddy Rayford, initially planned to buy the Tacoma Sixth Avenue state liquor store where she worked, those plans included a brief remodeling and a mid-June reopening of the store as a private business.

They had planned to pay perhaps $300,000 to the state at auction for the rights to operate the store.

But the reality was significantly different from the plan, They ended up paying $354,000 for the store, And their opening was delayed a week beyond their original schedule because of paperwork issues in Olympia.

When they ordered more liquor to completely stock the store, they found they’d again have to tap their own cash reserves because banks wouldn’t lend money with spirits as collateral, and despite the fact that the store had operated for years as a state-owned liquor outlet, the bank considered them a brand new business with no bankable track record.

But Tate and her father consider themselves fortunate among the dozens of new owners of the state’s former network of liquor stores. They’re up and running with fresh paint and new carpet. Their shelves are stocked, and old customers are returning to the store at 2805 Sixth Ave. that Tate now calls Pops Liquors in honor of her dad.

“Every day we see more of the regulars coming back in,” said Tate. “We know we can be successful.”

Tate’s perspective on the transition from state liquor sales to private isn’t shared by all the entrepreneurs who bought the state’s 167 stores at auction.

Even now, a month after the state ended its own liquor sales and transitioned to private industry, the new system is still finding the road toward profitability is punctuated with potholes and unexpected detours.

That transition was triggered by the passage of Initiative 1183 last November. That initiative mandated the state abandon its nearly 80-year control over liquor sales and distribution within a short, six-and-a-half month window and turn that system over to private enterprise.

GROWING PAINS

The switchover, especially for the retailers who paid some $31 million for the privilege of operating the state’s network of stores, has been both more complicated and more costly than most had anticipated.

Many were slow in reopening the state stores even as the giant retail grocery and drug chains became their instant competitors in a state that now boasts some five times the number of spirits retailers than under state control.

The uneven transition is leaving some of the newly anointed liquor retailers frustrated and considering lawsuits against the state.

But others say the rough spots were tolerable, and they’re looking forward to becoming profitable enterprises once the dust settles in the liquor sales business in the Evergreen State.

Considering the complexity and enormity of the task voters presented the Liquor Control Board, said a Washington State Liquor Control Board spokesman Brian Smith, the changeover has been accomplished fairly and expeditiously.

But a group of new liquor store owners claims the state failed to fully disclose the particulars of the deal, the stores’ profitability and to assist them sufficiently in getting their businesses up and running.

“Many stores are bleeding money right now and we fear that they may not be around for the long haul,” they said in an email to other owners. “Many of you have other businesses. I’m sure you have not negotiated the purchase of a business in the manner in which the state has dealt with us. The state has used deception and strong-arm techniques to cheat us,” said a group of about a dozen new owners in an email to other purchasers of the former state stores. Those owners said they have consulted attorneys about filing suit against the state, and they are seeking other new liquor store owners to join them.

COURT BATTLE

If the owners file a lawsuit, they’ll have company.

Already a coalition of powerful backers of the initiative including Costco Wholesale Co., the Washington Restaurant Association and the Northwest Grocers Association have filed suit in Thurston County Superior Court contending the liquor board improperly implemented the initiative.

The group complains that the board’s rules favored big distributors and stifled competition in the newly privatized industry.

“Thousands of small businesses throughout the state will be harmed by the LCB’s rules, which impede competition and transfer market power away from the consumer,” Washington Restaurant Association Washington Restaurant Association CEO Anthony Anton said in a news release.

The group of state store owners issued a preliminary bill of particulars that accuses the state of failing to treat them well in several specific areas.

 • The state told them that the state stores averaged a net profit of 14 percent. The store owners say that’s untrue.

 • The state neglected to inform them that bars and restaurants were able to buy directly from distributors instead of having to buy through their stores.

 • Sales to restaurants and bars are being treated as retail sales in their stores instead of wholesale sales that would be taxed when the bars and restaurants served drinks.

 • The state told buyers that their stores would be fully stocked when they opened their doors if they had chosen to buy the stores’ inventory. In many cases, they claim in court documents, the store’s stocks had been deeply depleted leaving only unpopular spirits.

 • The liquor board changed its rules about sales to bars and restaurants through retail stores after it auctioned off its former stores. The new rules allow a maximum purchase of 24 liters a day, not 24 liters per transaction as the new retailers had expected. That rule has diminished sales to restaurants and bars, they contend.

 • The state required store buyers who purchased the state’s inventory to pay up front for the normal inventory of spirits at the store. But in most cases they received a depleted inventory, and the state was tardy in returning the overcharges, cutting the funds available to buy new inventory.

Contrary to what the owners contend, the state says it went to extraordinary lengths to explain personally what the purchases included.

Pat McLaughlin, the liquor board’s business enterprise director, said he personally met with every successful bidder either in person or by phone to explain the specifics of the deals and to answer their questions.

Board spokesman Smith said the board extensively publicized the specifics of the new rules, the stores being auctioned and the rules for liquor sales.

“I can say that we had bidder conferences in several places and on the web to explain exactly what to expect,” he said.

Downtown Puyallup liquor store owner Sat Grill, one of perhaps two dozen owners who expressed interest in a possible lawsuit, said the acquisition was “full of surprises.”

“Working with the state, there was just no communication,” he claimed.

The state’s auction website crashed under the bidding frenzy in the first auction,” he said, leaving him and others not knowing where they stood.

The state had told him that the Puyallup store would be available May 27 or 28, but it wasn’t available until June 1, he said.

McLaughlin of the state board said some of the unhappy group of owners’ charges are simply untrue.

The state, he said, tried to keep inventory levels at normal levels in its stores, but a last-minute rush by regular customers, afraid that prices would rise or selection diminish under private owners, cut stocks the new owners had bought.

The state, he said, issued refund checks to owners for overcharges by June 15.

The state isn’t the only target for retailer complaints. Liquor distributors are getting broadsides from some store owners. Liquor deliveries are erratic, said some store owners. The quantities store owners ordered aren’t always available, and the proliferation of distributors, each with different exclusive lines of products, makes ordering difficult, said one store owner.

“It’s chaos,” said store owner Grill.

A spokesman for the state’s liquor distributors had no comment on the situation other than to note that distributors had just a few months to create warehouses, hire staff members and contact store owners before the privatization went live.

The liquor board gets high praise from the CEO of the first large out-of-state chain to open an outlet in Washington.

Alan Johnson, BevMo chief executive, said he’s witnessed changes in the liquor industry in several states over a quarter century.

“Anyone who expects a major change like this can be done with no wrinkles is living in a fantasy land,” he said. “I think they’ve done a pretty good job of making the transition.”