The liquor store hangover

Early this year when the state put its network of liquor stores on the auction block, many small-business people saw it as their path to prosperity.

Now, six months after liquor sales were privatized, many of those once-eager bidders, who collectively paid the state more than $31 million for the rights to the state’s former stores, have discovered their adventures in retailing are a road to ruination.

“I don’t think there’s anyone who bought a retail liquor store who’s making any money,” declared Jasmel Sangha, the interim president on an infant organization formed by concerned store owners, the Washington Liquor Store Association.

“There’s just a lot of pain out there,” he said.

No one knows precisely how many successful bidders for the state’s former network of 167 retail liquor stores are no longer in business. There are no firm numbers yet from even the Washington State Liquor Control Board or the Washington Department of Revenue, who license and collect taxes from spirits retailers.

Sangha thinks the casualty rate is near 30 percent.

“My best estimate is that at least 50 of the people who bought the rights to the retail stores aren’t operating today,” he said.

The liquor board says it knows of 11 stores that have gone out of business, but it acknowledges that’s likely not an all-inclusive number.

Sangha is among the casualties. He won the bidding for the rights to operate the only liquor store in Belfair, a small Mason County community at the head of the Hood Canal. With the shores of the canal lined with vacation homes, the community potentially could be a strong market for liquor.

Sangha thought he might have to bid $20,000 for the rights to the former state store in Belfair. When bidding turned lively, the Lacey businessman ended up paying $75,000. Buying the store’s inventory and other costs raised his final outlay to $100,000, he said.

When he approached the state’s landlord about signing a new lease, he declined to negotiate. The landlord’s largest tenant, Safeway, had invoked a clause in its leases that allowed it to exclude competitors.

Under the provisions of Initiative 1183, which mandated the state’s exit from the liquor business, Safeway and hundreds of other larger stores ranging from Walmart to Walgreens were now the former state stores’ competitors.

The liquor store association president, limited to locating within a mile of the former state store by liquor board rules, said there was no other suitable retail location in the small community. Sangha isn’t alone in encountering problems with landlords. A group of other successful bidders hired a lawyer, contending that the state should have allowed them to assume the state’s leases rather than having to deal with landlords who either couldn’t rent to them because of noncompetition clauses or because the state’s landlords upped rents knowing that relocating could be difficult and expensive.

Those real estate difficulties are among a handful of roadblocks to profit that liquor store owners say they’ve encountered. Among them:

 • High fees. When privatization backers designed the new system, they created fees to compensate the state for any income it would lose by leaving the liquor business. Those fees, disclosed prominently by the liquor board, require all liquor retailers to pay 17 percent of their gross receipts from spirits sales to the state. Those fees come from the store owners’ pockets. The state charges retail customers an additional 20.5 percent sales tax and a $3.77 per liter tax at the cash register. Distributors pay a 10 percent fee on spirits they sell to retail dealers and bars and restaurants.

Without the 17 percent fee, some owners say they’d be making money. With it they’re sinking.

Darren Smith, a Tumwater liquor store owner, said the 17 percent fee is a common complaint among fellow liquor store owners. “These people are struggling,” he said. “That fee is putting them under.”

Sangha contends that many of the liquor store owners are first-generation Americans who didn’t clearly understand that the fee would be collected on gross sales, not just on profits.

The liquor board says it very clearly outlined the fees on its website, in bidding documents and in personal briefings with potential owners.

 • The liquor distributors’ fee advantage. Many former state liquor retailers say they’ve lost virtually all of their bar and restaurant retail business, in part because the law allows distributors to directly serve Class H license holders, such as bars and restaurants. Distributors aren’t subject to the 17 percent fee. Depending on the location, under state ownership, bars and restaurants had only one source for spirits, the state stores.

Again, the state said the fact that distributors would have fewer fees to pay was no secret.

The larger distributors, (two, Southern and Young’s, own the lion’s share of the market) are setting up wholesale-only storefronts to capture even that smaller quantity business. Those stores are open only to Class H license holders.

 • Distributors’ pricing power. Under the new system, distributors can charge whatever prices the market will bear for the goods they sell to retailers, bars and restaurants. That’s because most distillers and wineries have signed exclusive marketing and distribution agreements with distributors. That means that for most brands of booze, there’s no competition on price among the distributors. Stores can deal with Washington distilleries directly without going through a distributor. However, that is a small fraction of most retailers’ business.

Distributors offer volume discounts to bigger customers. As the smallest customers in the liquor retail network, most former liquor stores say they’re at a competitive disadvantage to the big supermarket, discount and liquor store chains that buy dozens, if not hundreds, of cases of liquor at a time. Distributors say those discounts reflect their costs of handling and distributing smaller quantities of liquor. Generally, supermarkets bring their own tractor trailers to the distributors’ warehouses for loading and then handle distribution of liquor to their individual stores themselves.

Some retailers say that prices from distributors vary widely week to week and even store to store.

Calls to Young’s and Southern Distributor for comment were not returned.

 • Out-of-state competition. Because of Washington’s high taxes and fees, liquor in both Oregon and Idaho is substantially less expensive than in Washington. Liquor sales in Oregon stores near the Washington border jumped by 35 percent in June, the first month of privatized liquor sales in Washington, according to Oregon Liquor Control Commission statistics.

In Jantzen Beach, just over the border from Vancouver, Wash., an Oregon liquor store reported a 46 percent increase in sales in June. In Rainier, Ore., on the other side of the Columbia River from Longview, Wash., a liquor store says its sales levels have consistently outmatched last year’s summer and fall sales. In Idaho, a Post Falls liquor store expects sales of $10 million this year compared with $6 million last year after just seven months of higher prices in nearby Washington.

The state of Idaho in mid-October opened its first new liquor store in three years near the Washington border to handle cross-border sales.

“We have been somewhat overwhelmed in the change in market conditions as a result of the passage of 1183 in Washington,” Jeff Anderson, the director of Idaho’s Liquor Division, told Spokane radio station KXLY. “With this change in consumer buying patterns, it became apparent we really needed to provide relief to that Post Falls store. We have been somewhat overwhelmed in the change in market conditions as a result of the passage of 1183 in Washington.”

The result for Washington retailers has been a huge sag in business in near-border stores. Sangha said one retail store owner in Vancouver now has only one store open in that Washington community of the four that he purchased.

 • The number and size of competitors. Virtually every corner drugstore and supermarket in Washington is selling liquor now. The number of outlets has increased five times over pre-privatization times. Coming to the state for the first time are such big-time liquor chains as BevMo and Total Wine and More that are opening spirits superstores with huge selections of wine and spirits. Among the competitors are such huge retailers as Costco, Walmart, Safeway, RiteAid, Walgreens, Target and Fred Meyer. “Those stores don’t have to make money on liquor. They can make it up on bread and meat and cheese and all the other items they sell,” said Sangha. The former state liquor stores, although they’ve added mixers and snacks and glassware to their product mix, still depend on liquor to pay their bills.

 • Tax-exempt sales on military bases. Nyong Pang, owner of DuPont Cigar & Liquor just across Interstate 5 from Joint Base Lewis-McChord, said she’s lost 40 percent of her business since the state left the business and prices jumped.

LARGER BATTLE AHEAD

The liquor store association’s Sangha said that if even more of these businesses fail, the tragedy will fall not on the owners but on their friends and families.

The new owners of the state stores are disproportionately first-generation Americans, he said. The association president estimated that more than 80 percent of the new owners are recent immigrants or new Americans.

“These people crowd-sourced their money. They got it from their family and their friends and their relatives overseas.

Pang, for instance, said she got the $150,000 she used to buy the DuPont store from family and friends and relatives in South Korea.

Owners of small liquor stores have joined together to create the association to lobby the liquor board and the Legislature for changes that could level the playing field for small business people. The group plans a statewide meeting this week at Emerald Downs to rally store owners.

The association is interviewing potential lobbyists to take its message to the Legislature, said Sangha. The group had tentatively picked one lobbyist to hire, but the liquor distributors stepped in first to put him on their payroll.

The association is also working to create a buying cooperative that will allow them to increase their negotiating power with the liquor distributors and cut the basic costs of their goods.

“We think that small retailers have a role to play in this business,” said the association president. “We hope we last long enough to prove it.”

John Gillie: 253-597-8663
john.gillie@thenewstribune.com

The ads for and against Washington’s liquor privatization Initiative 1183 last year were full of both dire and rosy predictions if voters took the state out of the liquor business.

Now, six months after private industry took over, how are those scenarios playing out?

Sales volume. Some opponents feared the vastly wider availability of liquor in more than 1,500 outlets in the state would spur a consumption binge. Nothing like that has happened. Through the first four months of private spirits sales, volume is up 2.9 percent, reports the Washington Department of Revenue. June through September, Washington spirits retailers sold 13.6 million liters of spirits, up from 13.2 in the same period in 2011. The monthly sales comparisons have been highly variable so far. June sales dropped from the 2011, July and August were up, but September posted only a modest increase over the year-earlier month.

State officials attribute the June decline to a buying binge in May when consumers stocked up at state stores anticipating price increases under the private system.

Prices. The average retail price of a liter of spirits, including taxes, was $24.09 in September, compared with $21.58 at state liquor stores a year earlier, the state reported. That was a 11.6 percent increase. That equals a nearly $2 increase for a standard 750 ml bottle, to $18.07 from $16.19 last year.

Liquor tax collections. Tax collections on liquor sales were up in three out of the first four months of private sales. Tax collections were off .3 percent in June compared with the prior year. In July, they were up 25.5 percent and 19.6 percent in August. September tax collections increased by 6.2 percent.

Liquor sales to minors. Initial enforcement actions showed 92.5 percent of merchants passed state compliance checks for sales to minors. That compares with 94 percent when the state sold liquor. In a July check in Tacoma, seven merchants of 35 examined failed the state’s compliance check. Those checks include not only spirits sales by retail merchants, but beer and wine sales and liquor and beer by the drink at bars and restaurants.

Distribution fee collections. The new state law imposes a 10 percent fee on spirits sold by distributors to retailers and bars and restaurants. Collectively, those distributors under law are required to pay the state an initial $150 million in April after the first year of distribution. The state now projects those distributors will owe the state between $108 and $112 million beyond the money collected by the 10 percent fees. That’s several million more than the state last year had projected they would owe.

Unhappiness. Small retailers who bought former state liquor stores are unhappy with the rules that restrict them from forming a co-op. They’re hiring a lobbyist to push for a change in the law. On the other end of the retail spectrum, Costco, which spent more than $22 million financing the I-1183 effort, also is unhappy with the rules. Costco wants to sell its house brand liquor in large quantities to bars and restaurants, circumventing the distributors. A liquor control board rule now limits sales by any one retailer to another retailer to 24 liters a day. Costco and others have sued the liquor board in Thurston County Superior Court to overturn that limit.

john.gillie@thenewstribune.com