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The Battle of Washington State

Costco asks voters to loosen restrictions on alcohol sales; wholesalers oppose while wineries are divided

Robert Taylor, Harris Meyer
Posted: September 27, 2010

When Washington voters go to the polls on Nov. 2, they will decide whether to fundamentally reshape their state’s alcohol regulations, shaking up a system little changed since the end of Prohibition. They’ll be asked to vote on two initiatives that would end state control of liquor sales and change how retailers and restaurants purchase and sell wine, beer and spirits.

The dueling ballot initiatives, 1100 and 1105, have sparked a furious battle between big retailers such as Costco, alcohol wholesalers and big breweries, who are all donating millions of dollars for ad campaigns. Winery owners are divided on whether the proposals would help or hurt their businesses.

Both initiatives would privatize alcohol sales, which have been controlled by Washington’s Liquor Control Board since January 1934. The similarities between the two bills end there, however.

Costco’s Crusade

Costco’s support for I-1100 can be traced back six years to when the company first sued the state, arguing that Washington’s alcohol system violated federal antitrust laws.

Costco’s main complaint was that Washington’s laws mandated inefficient business practices that made alcohol sales less profitable and hindered competition. Currently, spirits sales are only permitted in the several hundred state-owned liquor stores. And while other retailers can sell wine and beer, they’re forbidden from offering volume discounts, from storing products in a central warehouse and from paying producers cash on delivery. Costco, which has its headquarters in Issaquah, Wash., argued that all these regulations prevented them from offering their customers lower prices.

In 2006, a judge sided with Costco, declaring Washington’s distribution system in violation of antitrust laws, but a federal appellate court disagreed in 2008.

With the Supreme Court unlikely to hear its case and the state legislature unfriendly to Costco’s complaints, the company turned to a ballot initiative.

What the Initiatives Mean

Initiative 1100 would erase multiple regulations regarding the wine, beer and spirits industries and close state-run liquor stores. Under both I-1100 and I-1105, hard liquor licenses would be available to all alcohol retailers, including grocery and convenience stores, potentially increasing the number of licensed liquor retailers tenfold, according to the state Liquor Control Board.

I-1100 would also repeal laws that bar volume discounting and centralized warehousing, that require retailers to pay cash on delivery and that limit cross-ownership between the producer, distributor and retailer tiers. Costco, the Washington Restaurant Association and other supporters say they could offer consumers lower prices if they could negotiate discounts for big orders, as they do with other types of products.

In response to the muscle thrown behind I-1100 by Costco and nearly 400,000 voter signatures supporting the initiative, the Washington Beer and Wine Wholesalers crafted Initiative 1105, which would also privatize the state’s alcohol retail sales while retaining many of the other regulations and maintaining the three-tier producer-distributor-retailer system. If a majority of voters back both initiatives, it’s unclear what would happen beyond the privatization of alcohol sales.

Opposing both measures is Washington’s Protect our Communities coalition, which includes the Washington State Council of Firefighters, the Association of Substance Abuse and Violence Prevention, the state Nurses Association, the state Association of Churches and dozens of other organizations. As 1105’s poll numbers have dipped, wholesalers have begun hedging their bets, opposing their own initiative and supporting the Protect Our Communities campaign, since they maintain their position in the supply chain if both initiatives fail to achieve the required 50 percent of the vote. The coalition argues that 1100 would increase alcohol sales, driving up health care and public safety costs.

There are also concerns over tax revenue. Opponents insist the state will lose hundreds of millions of dollars in revenue from alcohol sales, while proponents insist that the state will save money by not running the state stores and gain added revenue from licensing fees for new private retailers.

Follow the Money

Costco has donated more than $1 million to the Modernize Washington/Yes on 1100 Commission since Aug. 1, with grocery chain Safeway contributing $325,000 and Wal-Mart another $40,000. Yes on 1100 has collected a total of $2.28 million.

But that number has been dwarfed by the donations made to the Protect Our Communities/Say No campaign. The Washington Beer and Wine Wholesalers have donated more than $1.1 million to the campaign opposing both initiatives, while the National Beer Wholesalers Association has donated $2 million and the Beer Institute has also donated $2 million. Fearing that I-1100 could set a precedent for states across the country, state wholesaler groups from Ohio, California, Michigan, Illinois, Louisiana, Montana, Arizona, Texas, Wyoming, Iowa, Maine and Colorado have also made contributions to Protect Our Communities.

In total, Protect Our Communities has raised more than $6.1 million, allowing it to broadcast an extensive series of TV ads urging voters to vote “no” on both initiatives.

Where Do Winemakers Stand?

Washington wine producers are split on I-1100. The state’s main wine lobby, the Washington Wine Institute, opposes it, while a smaller rival group, Family Wineries of Washington State, supports it. Some winery owners say they feel conflicted, welcoming some of the initiative’s likely effects while fearing others.

Winemakers’ biggest fear is that 1100 will hurt small wineries, because larger producers can offer aggressive volume discounts that big stores like Costco are looking for and can offer money or incentives to retailers to give their wines more prominent placement on store shelves.

The Washington Wine Institute has held meetings with winemakers around the state urging them to oppose the initiative, even though the Institute’s largest member, Chateau Ste. Michelle, is remaining neutral. At a Sept. 8 meeting in Walla Walla attended by about 20 winemakers, most spoke against the initiative, according to Caleb Foster, owner and winemaker at Buty Winery. “Most people understood the dangerous ramifications for small Washington producers,” he says. “We’d have to pay to have significant placements. And retailers would say, ‘If you don’t give me a two-for-one deal, I won’t sell your wine.’ I can’t play that game. This would leave the market to the biggest, baddest, fastest and most monied interests.”

Washington’s current laws allow small producers, who make up more than 90 percent of the state’s 700 bonded wineries, equal access to the marketplace, says Jean Leonard, director of government relations for the Institute, which represents 200 of those producers. “If all the laws are crossed out, that would allow retailers to force wineries to pay for the best shelf space and for advertising and promotional materials. That will tip the scales against small wineries.”

But other winery owners argue that passing I-1100 would create a more competitive marketplace that would benefit entrepreneurial, high-quality producers. “This would give me the ability to work deals and reward people for picking up volume,” says Chris Sparkman, owner and winemaker at Sparkman Cellars in Woodinville. “Yes, there’s going to be some fallout, but we have a market economy in the U.S.A. What other product is protected?”

Being able to give restaurants a volume discount could help substantially in marketing, says Brett Isenhower, owner and winemaker at Isenhower Cellars in Walla Walla. “If people have dinner at a prestige restaurant and my wine is available by the glass, it increases the chances of them coming to my winery the next day,” he says. “You have to look at it as an opportunity, not as, ‘Hey, I’m going to get hammered by the big wine shops.’”

One likely benefit, Isenhower predicts, is that if the measure passes and private liquor sales are legalized, big-box stores will sprout up, as in California and other states, that stock a broad range of wines, including those of small producers like himself. “Liquor, with its higher profit margins, subsidizes wine, so they can carry more wine. It gives you a shot.”

Even if retailers attempt to engage in predatory practices like slotting fees, federal and state alcohol and antitrust laws prohibit them, said Paul Beveridge, proprietor of Wilridge Winery in Seattle and president of Family Wineries of Washington State, which claims nearly 100 winery members. “The way to combat that is to sue the retailers, rather than having the state meddle in the free market,” he says.

Taking to the Airwaves

During the summer, there was an initial groundswell of support for I-1100. But since then its poll numbers have dipped as confusion and insecurity over what it would mean for consumers, producers, retailers and even the state’s coffers have grown.

An Aug. 20 poll conducted by SurveyUSA, a non-partisan firm, found that among more than 600 Washington voters, 57 percent supported I-1100 while 54 percent supported 1105.

But in early September, Protect Our Communities began running campaign ads across the state. One particularly effective spot features Washington Firefighter and EMT Craig Soucy and scenes of car accidents. “I urge you to vote no on Initiatives 1100 and 1105,” Soucy tells viewers. “These initiatives mean more than 10 times as many stores selling hard liquor.” Another ad features Washington winemaker Darby English of Walla Walla’s Darby winery. “I’m voting no on initiatives 1100 and 1105 because they put our jobs at risk,” says English. “Protect Washington wine and jobs: Please vote no on 1100 and 1105.”

Just days later, an Elway Research poll of 500 voters found that support for I-1100 had fallen to 45 percent, while 1105’s was at 42 percent. (The Elway and SurveyUSA polls have different methodologies, however.)

With time running out before the Nov. 2 election, the ad war will only intensify. But the debate has brought increased scrutiny of Washington’s alcohol sales system. If 1100 fails, will voters ask their legislators to change a system that forces consumers to pay state-mandated mark-ups on all forms of alcohol?

Richard Stockton
Nevada —  September 27, 2010 5:33pm ET
I have a few comments:

First: If 'Protect our Communities' and Mr. Soucy desire fewer stores, why don't they simply introduce a bill to re-create prohibition within the State of WA? If you think about the message in that car-crash scene (more stores == more deadly car accidents), then the "solution" is really to have no stores at all. Bring back the WCTU, and the 21st Amendment?

Preventing retail stores at locations where a market exists forces people to drive longer distances to the State-run retail outlets. If these people have drinking problems, and they're desperately driving DUI because of their addiction, vastly fewer locations may actually be CAUSING (rather than "preventing") a significant number of these horrible accidents.

Second: If WA desires to make the measure "revenue neutral", or even revenue enhancing, then the right way to do that is increased license fees and taxes -- not to keep a geriatric, government-run Bureaucracy running an inefficient Monopoly of stores, together with their "You-scratch-my-back, I'll-scratch-yours" Distributors also sucking up large amounts of wine-drinkers' money.

Third: It's not about the winemakers, really: Look where all the ad campaign money came from-- it's about preserving, even extending, the price-fixing and selection-limiting power of Wholesalers. If they win this, then they'll probably try to do away with mail-order next.

That's what the Wholesalers are going for in the US Congress. They want unlimited pricing power, and they don't want to bother with offering anything they can't buy in truckload quantities from Blanco. ("You want Red? Sure, we got '47 lb Rooster'. Take it or leave it, that's all we got.")
Christopher Hills
Seattle, WA —  September 27, 2010 7:35pm ET
As a WA resident, I would add that the WA Legislature's perpetual unwillingness to consider reforming the State's outdated delivery system is the reason we have not one, but 2 initiatives on our ballot.
Since nothing got done by the Legislature, we now have 2 different interpretations.
I'll vote for 1100, which will at least close down the state monopoly (really, should a state govt. be the distribution vehicle for liquor?). While it may not be perfect, it will at least force the Legislature to deal with the issues next session. Or, maybe they'll just sit on their hands again... They're good at that.

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