Article by Erik Smith. Published on Friday, November 11, 2011 EST.

Small Grocers Say They Want to Compete With Costco

The Bayview Thriftway in Olympia, one of the small grocers represented by the Washington Food Industry Association.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Nov. 11.—The state’s big retailers and restaurateurs probably still haven’t recovered from the celebration that followed the passage Tuesday night of I-1183, the measure that closes the state liquor stores and gets Washington out of the booze biz - but already there’s talk of amending the new law.

            Washington‘s small grocers are getting set to ask the Legislature for changes during the special session that begins Nov. 28. They were on the losing side of the fight this year. And now that the question is settled and liquor is coming to supermarkets June 1, they say they need changes in a hurry.

            “Our stores feel like they can’t compete with the big guys, but we are counting on the Legislature to make these wrongs right for us,” said Jan Gee, president of the Washington Food Industry Association.

            It’s the kind of challenge that might make any lobbyist gulp. The big interests behind the initiative say some of the changes sought by the small grocers might be considered friendly amendments. But others may strike at the very heart of the complex business arrangements they spent $23 million selling to voters. There’s an even bigger problem: It takes a two-thirds vote of the House and Senate to amend an initiative within the first two years of passage. And lawmakers are still reeling from one of the biggest rebukes Washington voters have ever delivered, a 60-40 vote for a proposition the Legislature was never even willing to give a hearing.

            “I think the Legislature is going to be in shock for a while,” said state Sen. Tim Sheldon, D-Hoodsport. “The numbers were overwhelming, and that’s a big thing to overcome with a two-thirds vote. I don’t know that the Legislature is going to want to make any big changes for a while.”

            Big Battle for Small Grocers

            The small grocers, which account for about a third of the grocery sales in this state, really were non-players in this year’s battle. While Costco Wholesale, the state restaurant association and the big grocery chains say they tried to work with the small grocers as they were drafting the measure, Gee says her group didn’t get a look at the language until after it was filed. It’s not that the independent grocers and small chains were fans of the state liquor stores – they’ve been arguing for years that the state shouldn’t be doing a job that rightfully belongs to private business. And they’re just as eager as the big chains to offer a well-stocked liquor section.

            Trouble was, the initiative was written with the big boys in mind, Gee said. “Our stores get hurt all the way around, and I just think Costco was unaware of that,” she said. It prompted one of the strangest alliances of the campaign. Opponents spent much of it demonizing small shopkeepers – they argued that gas stations and mini-marts would slip through cracks in an initiative designed to keep them out of the business, and that they would sell booze to minors so that they might drive willy-nilly on the highways. Yet the Food Industry Association joined the opposition coalition, arguing in part that the initiative was too restrictive, and that it would keep too many small grocers from selling liquor.

            That’s one of their beefs. The measure would prohibit liquor licenses for stores of less than 10,000 square feet. Gee says there are full-service grocery stores that fall under the wire. One amendment her association is drafting would establish a more flexible licensing process to allow stores of more than 7,000 square feet to sell booze if there is a competing supermarket within three miles.

            There’s also a problem with the state liquor taxes that remain on the books. The state now charges seven different liquor taxes at the retail level, and they’re supposed to be collected at the cash register. Sorting and accounting for that money will require costly changes to checkstand systems – a big burden for smaller retailers, Gee says. Her group argues that the state ought to replace those taxes with an equivalent wholesale excise tax, much like those that are levied on wine and beer.

But those issues are really the small ones.

            Complex Business Arrangements

            Most attention during the campaign focused on the central issue – whether the state ought to shutter the chain of 328 stores through which hard liquor has been sold in this state since the end of Prohibition 78 years ago. That proved the central appeal of the initiative to Washington voters. But the measure also makes big changes in the way alcohol is marketed. The most important is that Washington will become the first state to allow retailers to strike deals directly with manufacturers of hard liquor and wine – beer sales still must go through distributors.

            It doesn’t just apply to the big boys. Provisions in this year’s initiative also allow grocery distributors to warehouse liquor, meaning that small grocer associations might be able to negotiate volume discounts themselves. But Gee’s association says the language isn’t clear enough. It all depends on how the state Liquor Control Board interprets the new law, but Gee says it is possible that grocery distributors might run afoul of old rules still on the books. Those rules prohibit distributors from selling alcohol to stores in which they have more than a 10 percent ownership interest.

            Gee says that’s a big problem for U.R.M., which owns the Rosauer’s chain in Spokane, and Supervalu, which owns Albertson’s. Either they can’t sell to their own stores, or they have to stay out of the business.

            And then there’s a technical detail the small grocers contend could create an artificial price difference. Another provision of the initiative aims to generate $150 million the first year for state and local governments. The money comes from license fees that will be charged to retailers and distributors, and to manufacturers when direct sales are made to retailers. The trouble is that if money runs short – and the state Office of Financial Management predicts it will, by about $60 million – it is supposed to be made up by a surcharge on distributors.

            That surcharge won’t be levied on direct sales. So if small grocers can’t buy the same way as the big chains, Gee’s association says that for the first year, at least, liquor prices at the Thriftways and the Red Apple markets will be considerably higher than at the Costcos and the Safeways. Gee’s group maintains the surcharge ought to apply to direct sales as well. “Costco wants to sell liquor,” she said. “We’re just saying that they ought to do it on a level playing field.”

            And if the big chains have a problem with that, Gee’s association has a second proposal. With a two-thirds vote, the Legislature could restore the old three-tier system.

            No Intent to Discriminate

            Let’s just say that the latter idea is a non-starter with the folks who brought you 1183. Ending the old three-tier system was one of the big reasons they pushed it in the first place. For years Costco battled in the Legislature and in the courts to eliminate what it considers an archaic business arrangement, and it explains why the Issaquah-based discount warehouse chain by itself spent an unprecedented $22 million on the campaign. It also explains why national spirits distributors spent $12 million to defeat the measure – Costco’s victory here might lead to similar efforts in other states, thus undercutting a business whose favored position depends on restrictions embedded in law.

            Costco senior vice president John McKay said those new business arrangements are essential to creating a competitive market for hard liquor. “Our model essentially survives on bringing efficiencies to the marketplace, and we pass that along. So that is really a core issue for us. We don’t want to gain advantage by law, by we-can-do-it-and-they-can’t, by an arbitrary square footage requirement or [the idea that] we can use a distribution center and they can’t, that sort of thing. We are not interested in trying to restrict competition really at all in that regard.”

            Costco is still analyzing the small grocers’ arguments, McKay said. The company tried to make sure that grocery distributors would be able to do their own warehousing when the initiative was drafted, he said, and isn’t convinced there’s a problem – but certainly it doesn’t want to stand in the way. The tax proposal has merit, he said, and a change to the square footage rules doesn’t bother the company.

Of course, the Legislature might see that one differently, because the 10,000 square-foot restriction became a central argument in the campaign.

            ‘The Most Ludicrous Argument in Ages’

            But there’s a bigger political problem here. What the small grocers’ association is really suggesting is a rewrite of an initiative that prompted the most expensive campaign in state history, which was approved by a landslide, which touches a subject the Legislature has proven unwilling to address in the past, and which hasn’t even taken effect.

            You have to be kidding, says state Rep. Cary Condotta, R-Wenatchee. “I find it ridiculous,” he said. “I’m not saying the initiative is perfect; it may need some modification, but it isn’t going to happen now. The elements were very clear, and it is ludicrous to think that we should change the voters’ package right after they voted on it. I will be thoroughly against any changes and I will encourage my caucus to do the same. It is the most ludicrous argument I have heard in ages.”
            If the small grocers have a problem with the language of the initiative, Condotta says it’s their fault for not getting on board with the campaign from the start. “Tough,” he said.

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