Liquor stores and legal pot face ferocious competition

The fate of Washington’s liquor stores should be a cautionary tale for lawmakers and local governments trying to make legal marijuana stores as advertised. The parallels are many and sobering.

Liquor sales were privatized by Initiative 1183 two years ago. The initiative offered a deal that hundreds of entrepreneurs couldn’t resist: the chance to buy one of the state’s old liquor outlets, and exclusive rights to run these small liquor enterprises in their existing locales.

The buyers expected a lot of the neighbors to keep on coming through the doors.

Not quite. Most of the new owners have gone bust in the scant 19 months since the state auctioned the stores.

The extreme risk of these ventures was written right into the initiative. The law – drafted by Costco and friends – was designed to enrich the big guys, not the small.

You didn’t have to be Warren Buffett to figure out that the Costcos, Safeways and Fred Meyer stores were going to bury the little stores with economies of scale and bargaining power. The surprise was how quickly it happened.

Now the parallels with Initiative 502 and legal marijuana.

Like the privatized liquor stores, licensed and regulated marijuana – stores, farms and distributors – faces an overwhelming rival. It’s called the black market.

In one sense, the roles are reversed. Illegal grow operations, distributors, dealers and “medical” shops are the status quo, not newcomers. Their roots are deeply sunk into a decades-old drug culture. Customer bases are well-established.

Imagine newly created small liquor stores facing already-established goliaths doing mass sales of untaxed spirits. That’s where regulated marijuana will stand in the absence of stepped-up enforcement against the dirty guys.

The failing liquor store buyers had at least some reason to believe they were getting the neighborhood market. Not so the licensed marijuana outlets. They’ll face dealers already in the neighborhood – in nearby apartments, in cars cruising through, in nearby parking lots and sidewalks.

Licensed marijuana growing and distribution faces even meaner competition. To some extent, it will be competing with criminal syndicates in British Columbia, Hell’s Angels and Mexican drug lords running their goods up the I-5 corridor – the people I-502 was supposed to shut down. Try telling a biker gang to go out of business.

Unlike the little liquor stores, licensed pot operations seem unlikely to fold; they’ll be the only legal option in town. But without a crackdown on the black market, they could wind up as mere bit players in what would still be a largely illegal dope industry. The most important promise of I-502 – cutting into sales to minors – will have turned out to be a joke.

In theory, the initiative could deliver on that promise. Legality might deal a gut punch to the black market. But only if the state and the feds greatly increase the risk of illegality.