New liquor section under wraps at Tumwater Safeway.

OLYMPIA, May 29.—Last year it looked like Washington’s liquor privatization initiative would dramatically remake the booze business and establish a new national model. Now that the state liquor stores are days away from shutdown and supermarkets are getting set to open their new liquor sections, it might be the only thing worth a toast is that you’ll be able to buy Bacardi with your bagels.

Until booze sales begin Friday, there’s no telling whether the new arrangement will bring prices down. But word on the street is that in some stores prices might even be higher than in the old state liquor-store chain. And while the public waits for the wraps to come off those supermarket shelves, all attention in the state’s capital city is on the state Liquor Control Board, which is poised to adopt rules Wednesday that will give a relative handful of distributors substantial control over the new liquor marketplace.

It’s not what the sponsors of Initiative 1183 had in mind last year when they won their years-long battle to bring booze to the private sector. And they want everyone to know: It wasn’t their doing.

“It is just a poke in the eye,” says Joe Gilliam, president of the Northwest Grocery Association, one of the organizations that promoted the liquor initiative. “It is payback for those of us that supported the initiative. The [Liquor Control Board’s] arrogance on this piece is just incredible. In 23 years of lobbying, I have never seen anything like it. They are just making this stuff up. That is the best way I can put it. They are making stuff up.”

Call it a curious leadup to one of the most dramatic changes to the culture of Washington state in recent years.

Not since Dec. 31, 1915 has it been possible to buy a bottle of hooch in a Washington market — not legally, anyway. Where Prohibition was concerned, this state was an early adopter, and when the national ban on booze was repealed Washington was among the states that restricted sales to state-managed stores. It took 78 years of political effort to overturn the old system. But these days all parties involved seem to be doing their best to reduce expectations. State officials insist nothing could ever live up to the hype, and distributors agree with them. And state policies will ensure that outcome, say furious retailers, restaurateurs, owners of former contract stores and purchasers of the soon-to-be-abandoned state liquor stores. They say regulators are adopting rules that will undermine the promise of an overwhelmingly popular initiative.

A Matter of Interpretation

Northwest Grocery Association lobbyist Holly Chisa testifies at last week's hearing of the state Liquor Control Board.

There’s an outside chance that the whole thing might be scuttled in the next day or two. The state Supreme Court is mulling a last-minute challenge from the Washington Coalition Against Substance Abuse and Violence, and could issue a ruling by Thursday. But it’s a little late to change course, and few expect an adverse decision. The state liquor stores have already been sold at auction; the supermarket shelves have already been stocked. Now the real drama is in the implementation.

The state liquor board seems to be tilting heavily toward the distributors, complains Bruce Beckett, government affairs director for the Washington Restaurant Association, another of the initiative’s sponsors. That was never the intent, he says, and his side ought to know best – it wrote the darn thing. The liquor board’s rules, adopted in temporary form in February, are now up for permanent approval, and Beckett says they “are not only anti-competitive, but they are also in clear conflict with what the voters voted on.”

Rick Garza, executive director of the Liquor Control Board, says the agency has been doing its best to settle arguments objectively and fairly – but he doesn’t buy the idea that the initiative sponsors get to tell the board how to read the initiative. “Everyone wants an advantage under the new rules, and our intent has always been to create a system that works,” he says.

Radical Changes to Business

The hottest hearing in town: Not a single empty seat.

The vision behind the initiative was dramatic, not just a simple handoff of the liquor business to the private sector, but rather a radical rethinking of the way spirits are sold. To beat opposition arguments, sponsors proposed an arrangement that aimed to generate an amount roughly the same as the old system, using an elaborate series of license-fee arrangements with distributors and retailers. Lower prices were never an explicit promise. But the basic idea was that the private sector could do the same job at lower cost, because it wouldn’t face the same overhead – and the savings might be passed along.

To accomplish that efficiency the initiative envisioned a thousand points of competition. The groundbreaking element is a change to the structure of the alcoholic-beverage business. For the first time in any state, retailers are allowed to strike deals directly with manufacturers, without going through distributors. So big buyers can seek volume discounts on liquor, the same way they do for toilet paper and potato chips. The prospect that the Washington arrangement would establish a national precedent and bring modern buying practices to the booze biz helps explain why Costco Wholesale, the Issaquah-based warehouse chain, was interested enough to spend $22 million promoting the measure. It also explains why national alcoholic beverage distributors put up most of the $12 million for the opposition campaign. Voters said yes 59-41.

Protection for Distributors

No one expected big changes right away. Two big distributors, Young’s Market Co. and Southern Wine & Spirits, have exclusive rights in this part of the country to about 85 percent of the national brands, industry sources say, and distribution contracts typically run 10 years. So even if distillers wanted to break with tradition and sell direct to the Costcos and Safeways of the world, it might be years before they could do it.

But the retailers and restaurateurs who backed the initiative say they were caught by surprise when the Liquor Control Board began interpreting the initiative and writing regulations that lean the distributors’ way. Max Mesmer, a restaurant manager from Mason County, told the board at a hearing last week that the rules are allowing a handful of distributors to gouge buyers on price. Current price quotes are running an average 14 percent higher than the prices offered by the state. “What we’ve done is taken the state monopoly and given it to Young’s and Southern,” he said.

A Special Role

Though the initiative aimed to reduce the power of distributors, the liquor board maintains it also clearly intended to grant them a special role and maintain them as a separate “tier” in the marketplace. Under I-1183, distributors have to make an enormous $150 million balloon payment next March 1, in a sense purchasing the business from the state. If their license fees don’t cover it, and no one expects they will, the distributors will have to come up with the rest. The deficit is estimated at $90 million. Which certainly might explain why they are demanding higher prices as the new system clicks into place. Since they control the product, they have the ability to do it.

If distributors have a special burden, it’s also fair for them to have a special status, argues board member Chris Marr. “You have a group that is being assessed $150 million in year one and has certain responsibilities under their license. So I do think the idea of fairness is important.”

Once the board makes the assumption that distributors deserve special treatment, a series of decisions naturally follow. The initiative says, for instance, that most retailers may only sell 24 liters of hard liquor at a time. The board has decided that means 24 liters a day. Nowhere does the initiative say it’s a daily limit, but the board maintains a limit makes no sense otherwise. The upshot is that restaurant buyers won’t be doing their bulk buying at Costco. They’ll have to turn to distributors.

The initiative makes one exception. Bulk sales also are permitted at the state’s former contract stores. But another board interpretation appears to cut the contract stores and other retailers out of the restaurant business. That’s because retailers will be buying from distributors. All retailers have to pay a 17 percent license fee on gross sales, and the board says the initiative makes no exceptions for products sold for resale. Yet the fee doesn’t apply if a restaurant buys direct from a distributor. So if a restaurant buys from a retailer, the cost will be 17 percent higher, again shunting the business to distributors. Restaurants still are liable for the 17 percent fee when they make their own retail sales, and initiative sponsors say that amounts to a form of double taxation they never intended.

And finally, suppose those chains start buying direct from distillers. That’s what the Liquor Control Board considers self-distribution. It maintains that distillers are then liable for the new distributor license fee of 10 percent, even though they aren’t required to obtain licenses. There still might be savings because the sale doesn’t pass through a third party, but it’s not as great as it might have been. Initiative sponsors say that fee was never contemplated by their measure.

Store Owners Furious

There are legal justifications for every position, and every player in the state’s new liquor marketplace seems to be armed with another legal opinion that disputes it. Gilliam says lawsuits are certain. “I wonder if I’m reading the same initiative,” he says.

Perhaps the most plaintive complaints come from the small business owners, the moms and pops who own the contract stores, and their counterparts who purchased the former state liquor stores at auction. Many obtained financing with the idea that their customer base would remain intact. The restaurant trade accounts for about a third of their business, and without it they say they will have trouble making ends meet. “A business model based on zero class-H sales simply doesn’t work,” testified Rob Kauffman, a Lincoln County commissioner and contract-store owner from Wilbur.

The only interest that seems not to be raising a fuss at the moment are the distributors. John Guadnola, executive director of the Washington Beer and Wine Wholesalers Association, says the Liquor Control Board seems to be following the law pretty carefully – though he argues direct-selling distillers ought to pay part of that $150 million. The initiative singles out distributors for an enormous bill, and while the rulemaking might give them a few advantages, he says, “I didn’t hear any of the contract liquor stores offering to step up for their share of that.”

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