An unaccustomed sight greeted Washington supermarket shoppers last June 1 — hard liquor on supermarket shelves.
OLYMPIA, Jan. 19.—The folks who brought you Initiative 1183, the measure that closed the state liquor stores and put Jack Daniels in the supermarkets, are bringing a new booze battle to the Legislature this year, arguing that the state Liquor Control Board has squelched the competitive market they envisioned when they convinced voters to say yes to privatization in 2011.
Washington’s restaurants, big-box stores and large supermarket chains are pushing a measure that might truly be described as a simple little bill – a one-and-a-half-pager that inserts two new definitions into state liquor law. But the modest clarification carries enormous implications – the change would allow retailers to compete with the big liquor distributors that immediately took over the market when the old state liquor stores closed last June.
And so the battle over House Bill 1161 is going to involve every interest with a stake in Washington’s nearly billion-dollar-a-year booze business – not just the big distributors, the big retailers and the state’s restaurateurs, but also the little guys – the small grocers and particularly the mom-and-pop shopkeepers who decided last year to take a gamble on the liquor biz. The result is one of those factional business fights in which every interest says it wants a level playing field but no one agrees what it means. “They wrote the initiative and now they’re trying to change the rules in the middle of the stream,” complains John Guadnola of the newly formed Association of Washington Spirits and Wine Distributors.
Those who pushed privatization say it’s a matter of implementing the law as it was intended – and they ought to know, since they’re the ones who wrote it. “We’re not asking to change the initiative,” says Bruce Beckett of the state Restaurant Association. “We’re asking the Legislature to implement the initiative as it was intended.”
Now there’s a new voice – the little guys who shelled out a total $31 million last year to take over the old state liquor stores. They say regulators yanked the rug out from under them and cut out a big chunk of their trade. But they don’t like the bill much, either. “The way things are going in Olympia right now, we are going to be wiped out by the big corporate folks,” says Jas Sangha of the state’s new Liquor Store Association. Battle begins Thursday when the bill gets its first hearing in the House Government Accountability and Oversight Committee.
Restaurant Sales the Issue
The Liquor Control Board’s rulemaking hearing was the hottest thing in Olympia last May 28 — not an empty seat in the room.
Back when voters said yes to Initiative 1183 in November 2011, all they likely knew was that they would be greeting Jim Beam in the Safeway. The measure got the state out of the liquor business after 78 years, forcing it to auction its chain of 167 state-owned liquor stores, and allowing the 162 privately operated smalltown contract stores to go their own way. The brave new world began last June 1, when hard liquor turned up on Washington store shelves for the first time since this state enacted its own Prohibition law in 1915.
Yet the truly remarkable part of the initiative was the back end – it aimed to create a new sort of liquor marketplace in Washington. In every other state where private liquor sales are permitted, all sales must go through distributors. Washington’s initiative aimed to create a more direct sales channel, allowing retailers to buy directly from manufacturers with volume discounts and allowing restaurants and bars to buy in stores. So the real battle was for control of the market, and it explained why Washington-based Costco Wholesale spent nearly $23 million to promote the measure, and why liquor distributors nationwide raised most of the $12 million spent to defeat it. Thus I-1183 became the biggest-spending initiative campaign in state history. But after it was all over and voters said yes by a resounding 59 – 41, the Liquor Control Board, with two key decisions during the rulemaking process last year, essentially handed the market to the distributors.
One decision was that retailers had to collect a 17 percent tax when they sold booze to bars and restaurants for resale. Distributors don’t have to pay that tax. So a restaurant or bar owner pays a whopping premium to buy supplies at a retail store, such a price difference that the board’s decision has closed off that sales channel and given the bar and restaurant market over to the distributors. That’s a huge chunk of business – restaurant and bar sales account for 30 percent of hard-liquor consumption.
If that wasn’t enough to seal the deal, the other decision was. The initiative imposed a 24-liter limit on sales by retailers. The board took it a step further and decided that it meant 24 liters a day – and no restaurant buys just two cases at a time.
So HB 1161 does two things. It says the 17 percent tax shall not be charged on liquor for resale. And it says the 24-liter limit is per sale – meaning that a restaurateur can go through the line more than once and stock up that way.
Want Competition for Well Drinks
Bruce Beckett of the Washington Restaurant Association declares victory on election night 2011, when I-1183 passed 59-41.
The Restaurant Association’s Beckett says the coalition that pushed I-1183 has regrouped to press the bill this year. Though Costco essentially bankrolled the initiative campaign, the measure had strong support from big chains, the Northwest Grocery Association and the restaurant operators. Beckett notes that nearly all liquor sales in this state go through two major national distribution companies, Southern Wines and Spirits and Young’s Market Co. “What the board’s decision basically did was to put all that market power in the hands of these two large out-of-state companies,” Beckett complains.
The initiative, as written, already gave distributors a preferred position in the marketplace, Beckett says, because it bars retail stores from selling to other retail stores. Retailers have to buy from distributors unless they can strike their own deals with manufacturers. So the real battleground is for sales to the restaurant trade, and even that is limited – the familiar national brands customers order by name are generally locked up in national distribution arrangements. The possibility of an alternate channel for restaurants and bars appears limited to generic house brands like Costco’s Kirkland Signature Vodka, and to less familiar brand-name beverages. In other words, the makings of well drinks.
Leaving aside concerns about pricing under a two-company monopoly, Beckett says distribution is spotty in rural areas and the two firms aren’t doing a good job serving restaurants and bars. Even if the contract stores get their product from distributors, they’re bound to do a better job for the restaurant trade. Under the old regime, that used to be their specialty. You have about 4,000 bars and restaurants that want to buy in stores and about 1,500 retailers who want to sell to them, Beckett says — and under the liquor board’s rules, they can’t do it. “That is completely inconsistent with the law.”
Distributors Must Pay $150 Million
John Guadnola of the Washington Spirits and Wine Distributors Association.
If retailers really want to distribute to restaurants and bars, Guadnola says they ought to play by the same rules. He is taking over as executive director of the Spirits and Wine association, a newly-formed group that represents hard-liquor distributor interests – he served formerly as director of the Beer and Wine Wholesalers Association. Guadnola points out that the initiative imposed steep costs on distributors as part of its new taxation structure. They pay a 10 percent tax as a “license fee” when they buy from distillers, and under the initiative, they must pay the state a total $150 million this year. In other words, if their license fees don’t pay the freight the first year, they have to make up the difference. March 31 is the deadline, and Guadnola says it’s looking like Young’s and Southern are going to have to cut checks to the state totaling $100 million.
“Wow is right,” he tells Washington State Wire. “Why in the world wouldn’t they be upset about people wanting to be distributors and not paying anything? It is just ridiculous. If you want to be a distributor, get a license and play in the game.”
The payment aimed to ease voter concerns that the state might give away the business for nothing. But it’s going to take years for the distributors to make back that money in profits, Guadnola says, and the initiative stuck the bill to just one class of business. The payment formed the official explanation for the liquor board’s rulemaking decisions. Members said last year that the initiative as written clearly carved out a special role for distributors, and that the agency’s rules ought to make sure they get something for their money. The 24-liter limit was meaningless unless it was per day. And members said the 17 percent “license fee” on all sales by retailers — not on retail sales — was clearly spelled out in the measure. They said it provided no exemption for resale.
In fact, there was another liquor board decision that boosted the distributor role. The regulators decided that if a retailer buys directly with a manufacturer, the retailer also is subject to that 10 percent license fee. That means retailers won’t have a cost advantage over distributors. This point isn’t addressed in the bill, but it is the subject of a challenge to the liquor board regulations that has been filed by Costco, the Restaurant Association and the Northwest Grocery Association. A hearing is set in Thurston County Superior Court for March 15.
“They pushed to pass this initiative saying the state would be made whole, and once it is passed they turn around and start trying to poke holes in the revenue for their own benefit,” Guadnola says. “I just don’t get it.”
Where it Gets Complicated
Jan Gee of the Washington Food Industry Association.
There are counter-arguments galore that get down to the nitty-gritty details of how the initiative was written, what the authors intended, and whose viewpoint ought to prevail. Suffice it to say that the initiative originally was crafted as a bill during the 2011 legislative session; the retailers and restaurateurs hoped to hammer out a deal with the distributors, and when it all fell apart in the waning days of the session the coalition rushed its proposed bill over to the secretary of state’s office to file it as a ballot measure. That enabled the coalition to beat a tight deadline for the gathering of signatures, but the wording of the initiative left gray areas for regulators to fill in. Beckett says the 24-liter limit on retail sales was never intended to be a daily limit, and even if the initiative didn’t make it clear, state policy has never been to tax products for resale. Meanwhile, he says the $150 million payment is a red herring – at one point in 2011, in an effort to defeat the measure, distributors argued the business was worth twice that. “Think of it – they’re getting a $900 million business for pennies on the dollar,” he says. And what ought to count with the Legislature is what the coalition had in mind when it filed the measure, not what the liquor board decided it meant.
Meanwhile, it is unclear whether it will take a two-thirds vote to pass the bill. It takes a supermajority to amend an initiative within its first two years of passage. Since HB 1161 aims merely to clarify definitions, Beckett argues that only a simple majority is required. But ultimately that is a decision for Speaker Frank Chopp and Lt. Gov. Brad Owen, the presiding officers in the House and Senate.
Enter the Little Guys
Process issues aside, there’s another complicating factor – the big players aren’t the only voices in the debate. The Washington Food Industry Association, representing the state’s small grocery chains and independent grocers, opposes the bill because the group maintains it gives big retailers too great an advantage in the marketplace. “Costco is once again trying to create a privilege for themselves that is not being extended to anybody else in the industry or to the distributors, and it gives them such a significant pricing advantage over everybody else it is just wrong,” says executive director Jan Gee.
Gee’s small grocers oppose lifting the 24-liter-a-day limit, but they’re on board with eliminating double taxation. Same goes for the Liquor Store Association, an 80-member group of former state liquor stores and contract stores represented by veteran lobbyist Tom Dooley. President Sangha says the mom-and-pops are getting it from all sides – big retailers can price liquor as a loss leader, but small retailers can’t, because 80 to 90 percent of their sales are hard liquor. The initiative didn’t impose the 24-liter limit on former contract stores; Sangha says that if it is retained for big retailers and the double taxation is eliminated the small stores might have a chance. “With this one bill Costco is engineering our demise,” he says.
Then there’s another faction represented by veteran lobbyist Trent House; it doesn’t have a name as he has a single client, Clearview Spirits, which owns two former contract stores. But he may speak for others. House says the former contract stores have a distinct set of interests, because the 24-liter limit doesn’t apply to them. The position on the two issues is the same – end the double taxation, keep the limit for the big boys. The contract stores, he says, “are just trying to stay alive.”
Think of the bill as a conversation-starter, says state Rep. Cary Condotta, R-Wenatchee, who has signed onto HB 1161 with Reps. Chris Hurst, D-Enumclaw and Gary Alexander, R-Olympia. Prime sponsor is House Appropriations Chairman Ross Hunter, D-Medina. “It’s just a starting place, and there’s a lot of work to do before final passage,” Condotta says.
Big question: With so many voices, will it be a civil conversation?
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