Sea Change - Wine in Washington State - 1183 in 2012

I like New Year's; it's the starting-over aspect that appeals to me. We Americans love 2nd acts, reinventing ourselves, and leaving the past behind.  How else to explain Newt Gingrich?  How else to explain the resurrection of this blog after a 2-year hiatus?  


As we are about to enter 2012, Washington state, where I live, is about to start its 2nd act with wine and liquor.  In November, voters approved Initiative 1183.  Here's what they thought they were getting:

• Liquor would now be available in chain grocery stores and Costco. 
• Liquor would be cheaper.

But 1183 had much more in it.  Costco wrote this initiative as it had 1100 which failed last year.  A few years earlier, Costco had sued the state of WA to overturn its wine distribution system.  On appeal, Costco lost most of its suit. So, with both initiatives, ostensibly only about privatizing liquor sales, Costco inserted language that got it all it had failed to get in its suit.  To wit:

• Quantity discounts allowed
• Uniform pricing on wine repealed
• Direct buying from suppliers allowed
• Central warehousing allowed

Not so bad, huh?  Sounds okay.  But, I voted no.  And, here's why:  I am all for letting grocery stores, warehouse clubs, and wine shops sell liquor.  But this law, in effect now since Dec. 8, was written by Costco for Costco, and tilted the scale way in favor of Big Business at the expense of small business.   Let me explain how it will affect the wine business here in WA:

• Quantity discounts allowed.  This effectively threw out a system where everyone--small wine shop, restaurant, chain grocery, and club store--paid the same price for one bottle or 100 cases.  This level playing field meant that Costco's only advantage was that their membership fees allowed them to work on a much lower profit margin (about 14% or lower) than the chain grocery stores (25-30%) or wine shops (30-35%). Now, which of these four types of retailers is going to have the wherewithal to buy in quantity? Rhetorical question #1.

• Uniform pricing on wine repealed.  Distributors are already planning  pricing for different channels of business, e.g. restaurants may pay a different price than the independent retailer next door.  And, there's nothing in 1183 that prevents a distributor from selling the same wine at a different price to the restaurateur who's a pain in the butt vs. the Joe Good Guy next door.

• Direct buying from suppliers allowed.  Full disclosure here, I work for an importer of wines from around the world.  We sell our wines to distributors whose job it is to place them in the market.  We do not, nor do other suppliers, have the manpower or trucks to sell directly to the thousands of stores and restaurants in any given area.  So, who's going to be able to buy directly from suppliers?  Rhetorical question #2.  A company with its own trucking system and a Central warehouse.  (Central warehousing of wine by a chain such as Costco or Safeway was illegal in WA until 1183.)

• Direct buying from suppliers allowed.  2nd point here: A supplier selling directly to Costco or other chains is going to accomplish three things:  

1. He's going to piss-off his distributor, not a good business move.  
2. He's going to alienate the rest of the market, meaning that wine he sold directly is probably going to be discontinued everywhere but that chain. 
3. He's going to make his bonus, once.

• 10,000 square-foot minimum store size to sell spirits. This was one of two major changes between the Costco initiative that failed in 2010 and 1183. Designed to overcome the objection that mini-marts and gas stations would be able to sell spirits and would be more likely to violate the law by selling to teenagers, this section nonetheless contributed to the overall tilt of this law in favor of big business.  Only one wine shop in all of Washington meets this minimum (Wine World in Seattle).

• Shelf Space Squeeze.  So, where's all this liquor going to go in Trader Joe's, Safeway, QFC, Fred Meyer, or Central Market?  Rhetorical question #3.  In the wine department, of course.  Notice all that extra room there?  Rhetorical question #4.  Wine choices will be fewer in these chains, and yet, ironically, because they can buy in quantity or directly from suppliers, they'll have the best prices.    

So, predictions are many about the unintended consequences of 1183, but the prediction not in doubt and put in its most pleasant way is that Washington will become a chain store-driven wine market with fewer choices but lower prices. Costco has told stock market analysts that it intends to take on the liquor laws in Oregon and Idaho next and go nationwide from there.

(Two lawsuits have been filed to overturn 1183.  Both contend that 1183 violates WA state law that prohibits an initiative from addressing multiple subjects.)

**Next blog:  Why 1183 will not result in lower liquor prices in WA state.