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State Liquor-Store Buyers Want Their Money Back – Dreams Turn to Dust

The former state liquor store in Tumwater, facing competition within three blocks from a Costco, a Fred Meyer, an Albertson's and a Walgreen's, closes its doors for good.

The former state liquor store in Tumwater, facing competition within three blocks from a Costco, a Fred Meyer, an Albertson’s, a Wal-Mart and a Walgreen’s, closes its doors for good. Prices were highest in town.

OLYMPIA, Dec. 2.—One by one, Washington’s old liquor stores are going dark, and the poor schnooks who bought them want their money back. They have been hammered by competition from supermarkets and big-box stores, hamstrung by distribution deals that give them the worst prices around, and they say their leading product has become buyer’s remorse by the case. Normally this wouldn’t be the Legislature’s problem – people make dumb business decisions all the time.

The trouble is that it was the state that sold the stores. So now lawmakers have to decide whether the naïve entrepreneurs deserve a break, or whether it was their own darn fault for trusting government in the first place.

The big liquor-store bonanza of 2012 is proving to be one of the state’s biggest policy embarrassments, and it is a tale that really doesn’t make anyone look good. A year-and-a-half ago, Washington auctioned off its 167 liquor stores. That was a requirement of the 2011 initiative that got the state out of the liquor business and put Johnnie Walker and Jack Daniels on the shelves of virtually every supermarket in the state. But no one expected starry-eyed entrepreneurs to bid prices into the stratosphere. One Tacoma outlet went for $750,000. The state reaped an unexpected $31 million windfall.

Today many of those stores sit vacant. Exactly how many have closed is hard to say — the liquor-store operators say 60 percent either have closed their doors or never were able to open. The state Liquor Control Board says it is closer to 40 percent – its records indicate 97 stores are still paying taxes. But that might be a distinction without a difference. Few, if any, are turning a profit, owners say, and most of the stragglers will be hanging up going-out-of-business signs the moment they can break their leases.

Faring just as badly are the state’s former contract stores – the privately owned shops that used to be the only places to buy booze in towns like Waterville and Forks. Of 162 contract stores, only 98 are still paying taxes. The main difference is that their owners didn’t pay tens and hundreds of thousands of dollars for licenses. Owners of both types of stores say they are being squeezed out by the free-market dynamics Initiative 1183 was designed to unleash. Said commercial real-estate broker Byron Roselli, who advised many of those purchasers, “What has happened in my opinion is inexcusable, and the harm that has been done to many of these families and individuals is a travesty.”

Lawmakers are trying to figure out what, if anything, they ought to do about it. The remaining small-store operators say they want a bill that would exempt them from the 17 percent retail tax on hard liquor, while leaving the tax for the supermarkets and chain stores. That idea meets a fair amount of resistance in the Legislature – it is a matter of tax discrimination and a hit to state revenues. Another measure might have more traction, and this one gets more to the point. It declares the sale to have been a horrible mistake, gives the liquor-store owners their money back, and allows them to sell their remaining inventory to other stores without paying additional taxes. Then they could quietly turn off the lights and go home. Lawmakers say it is a tough call. “You have to do your due diligence,” said state Rep. Cary Condotta, R-East Wenatchee. “They made a lot of mistakes, too, but there’s a lot of blame to go around. The whole thing wasn’t handled very well.”

Driven by Tears

Liquor store owners gather for Nov. 22 House hearing.

Liquor store owners gather for Nov. 22 House hearing.

The refund measure, HB 2026, was introduced last session by state Rep. Liz Pike, R-Camas. It seems to be a proposal driven by tears. At a hearing of the House Government Accountability and Oversight Committee just before the Thanksgiving break, lawmakers were treated to such an outpouring of grief and anger from liquor-store owners that none dared ask whether they should have known better. Many were immigrants who spoke with heavily accented English; they told of their dreams of opening a corner store with a ready-made customer base. “It is incomprehensible to understand why this is happening,” said Romanian refugee Julian Mart, who bought the right to open a liquor store in Chelan. After working seven-day weeks, racking up losses and watching his savings dwindle, he faces a back-tax debt of $15,000. “Nothing happened like this back in my country. …It never sold me like this state sold me over here. It never occurred to me that the state would promise something and deliver something totally worthless.”

Biniam Habte, who owns two former state liquor stores in Seattle, said he works 12 hours a day without compensation, though he takes the occasional break to pray for divine intervention. His savings have been wiped out, his family’s investment is gone, and if he closes the doors, he is stuck in a five-year lease for which he signed personally. “Like any prudent businessman, I had done my research and consulted with my retail lawyer, but most importantly I believed the official word of the Liquor Control Board spokesmen who on repeated occasions stated that this was a financially viable business. I come from a culture where I believe the word of the government.”

Sardonic smiles broke out across the room.

Doomed From the Start

Lacey liquor store remains open for business.

Former state liquor store in Lacey, equally encircled by competitors, remains open for business.

Anyone paying close attention to I-1183 might have been able to guess this wasn’t going to end well. The initiative was written and backed by big chains, Costco, Safeway and others, as well as the Washington Restaurant Association, as a way to bring modern retailing practices to the selling of spirits. Its focus was on the big picture. The state’s orphan stores seem to have been an afterthought. The initiative said simply that they had to be sold.

The central feature of the initiative – the one voters noticed — was that it ended the exclusive state-store system that had existed since the end of Prohibition. But just as important, it made big changes to the back end of the business, permitting volume discounts and allowing sellers to deal directly with manufacturers for the first time. In this state, as in all others where private liquor sales are permitted, the bulk of the business goes through distributors because they have sewn up national distribution contracts. Two large companies, Young’s Market Co. and Southern Wines & Spirits, control 93 percent of sales. But even though distributors dominate the market, I-1183 gives the biggest buyers the ability to drive the best prices distributors are willing to offer. Mom-and-pop stores never can compete at that level, explains Rick Garza, director of the Liquor Control Board. “If the distributors want to give you a lousy price, they can give you a lousy price.” Uniform pricing went out the window with 1183, and if some consider it unfair, he notes no one ever claimed 1183 was supposed to create a level playing field.

Nor can small stores selling hard liquor alone match the slim profit margins possible at supermarkets and big-box stores. Where once there were 329 outlets for the entire state, today there are 1,680, most of them supermarkets of more than 10,000 square feet. If supermarkets don’t make much on booze, they can cover their overhead by marking up sugary breakfast cereal. The liquor stores can’t — they don’t sell Captain Crunch. More important, Garza said, is that there are now five times the number of stores selling booze. Even if the small stores were able to match the big-store prices, how could they expect to achieve the same level of sales? “I think they got caught up in the moment, thinking that this was going to be profitable,” he said. “I just feel sorry for them because I don’t think they were thinking straight.”

Last year lawmakers passed a bill that attempted to offer some relief, allowing the small stores to sell to restaurants and bars without imposing the 17 percent retail tax. The big stores still have to pay it. But that hasn’t done anything to boost small-store sales to that market, small-store owners complain, because the distributors offer restaurants better prices. At the hearing, they presented figures showing Young’s charges them $27.38 for a two-liter bottle of Cazadores tequila. It sells to restaurants for $23.35. For Tanqueray gin, restaurants pay Southern $19.67 and the small stores pay $23.11. The distributors also are probably giving volume discounts to the big chains, they surmise, though that is a matter of proprietary information. The small store owners say big markups for one class of customer is unfair. Not that the potential for channel pricing and volume discounts was a secret: It was spelled out in the initiative, and one might argue that was one of the goals.

What Did They Expect?

Jas Sangha, president of the Washington State Liquor Store Association.

Jas Sangha, president of the Washington State Liquor Store Association.

It is one of the troubling questions about the case – does the state bear any responsibility? In a legal sense, probably not. A Thurston County judge two weeks ago rejected a suit against the Liquor Control Board from 14 contract-store owners. They raised many of the same issues and argued they ought to be compensated for damages stemming from the way the agency implemented I-1183. As for moral responsibility, Garza notes that no one strongarmed the liquor store purchasers into bidding, and the auction was forced by the initiative, not by any state decision. But at the House hearing, Roselli argued the state should have warned purchasers; it should have made the transition easier. Instead it yanked point-of-sale systems from the stores, it saddled some with expensive and hard-to-sell inventory that purchasers were obligated to buy, it closed some stores weeks early and made it difficult to rebuild clientele. Some 23 of the 24 stores he advised have already closed, and the 24th will shut down when its lease expires in January.

“The state has profited off the backs of hardworking people who happen to be mostly immigrants, looking for the American dream or an opportunity to be a business owner,” he said. “Most don’t possess a command of the English language, and all who I’ve spoken to have asked me, ‘how could this happen? – how can the government lie to people?’ “

A look back at the record shows the state actually did offer a warning, albeit an extremely muted one. When I-1183 was on the ballot, the state Office of Financial Management issued a fiscal impact statement for the measure that said it couldn’t estimate the amount the liquor stores would bring at auction. The implication was that they didn’t have much value. It didn’t get into the back-end business issues that are pushing the small stores over the brink. But it noted that 124 locations were within one mile of an existing grocery store, dimming their competitive prospects. And it pointed out that the state didn’t actually own any bricks-and-mortar stores. All 167 locations were leased, no leases could be transferred, and so anyone purchasing the right to operate a store would have to negotiate a new agreement with a landlord. Which implied, of course, that landlords could raise prices or just say no. That’s exactly what happened in shopping malls where state liquor stores and supermarkets shared quarters. Non-compete clauses came into play. After the auction was over and money had changed hands, many purchasers got a rude surprise: Some 24 former state liquor stores sold at auction never opened.

Jas Sangha, president of the Washington State Liquor Store Association, found himself in that position: He paid $75,000 for a Belfair store, but couldn’t reopen at the same location because it was in a mall anchored by a Safeway. Sangha, perhaps savvier than other purchasers, had an idea of the challenge he faced; he owns Wendy’s franchises in Lewis and Pierce counties, and until recently was a board member of the Washington Restaurant Association. As he scouted for a new location and the problems with the business fundamentals became evident, he decided not to pull the trigger. Now he can count himself lucky. “The government told us it was a once-in-a-lifetime opportunity, people got their friends and family involved – it’s pretty nasty.”