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Washington Wine Consumers Could Get More Choices and Lower Prices, Maybe

The state considers a bill to ease restrictions on wine sales, but wineries, retailers and wholesalers are fighting over it

Harris Meyer
Posted: February 27, 2009

Washington state wine lovers could soon have access to a wider range of wines at potentially lower prices, if the state legislature can agree on sweeping reforms to the state's archaic wine and beer laws. Wineries, retailers, and wholesalers were sharply at odds but appear to have reached agreement on more modest changes. It's anticipated that the players will be back next year for another scrum over broader reforms.

Washington is the second-largest wine-producing state, home to 600 wineries. But it also has strict alcohol control laws left over from Prohibition's repeal. Big-box retailer Costco, based in Washington, challenged the rules in a multiyear lawsuit, arguing the state is unfairly hampering competition, but failed to win many changes. The case helped spur a legislative effort to reform the rules, however.

In early February, the state's Liquor Control Board drafted an attempted consensus bill that would soften some of the restrictions of the three-tier system, ease some pricing rules and let producers and distributors provide retailers with branded promotional products. But it still would not allow volume discounts, which big retailers like Costco say would enable them to lower consumer prices, or allow wholesalers to sell to retailers on credit, which many wineries and wine boutiques say would increase wine sales.

While many of Washington's wineries argue that less regulation would boost sales, the Liquor Control Board and distributors contend that it could lead to dangerous increases in alcohol consumption. The battle is pitting big retailers like Costco, which want more pricing and operating freedom, against the Washington Beer & Wine Wholesalers Association, which is fighting to retain its legally protected distribution and pricing role.

But it also features an unusual face-off between a new group representing smaller wineries, Family Wineries of Washington State, and the Washington Wine Institute, the well-established lobby that represents wineries that produce 95 percent of the state's vino, most notably Chateau Ste. Michelle. The family wineries are seeking more sweeping deregulation than the Wine Institute favors.

"Right now we have a system benefiting a few established wineries and distributors," said Paul Beveridge, proprietor of Wilridge Winery in Seattle, who heads the family wineries group, which claims 76 members. "The only time the small wineries get the [Wine Institute] to do anything is when they scream and yell."

"We take a more comprehensive and considerate approach for the best interest of the entire industry," said Jean Leonard, executive director of the Wine Institute. "I can't answer why those wineries have joined the other group. They may not be aware of our accomplishments."

Last year, the state legislature's Joint Select Committee on Beer and Wine Regulation asked stakeholder groups to develop a consensus on recommended changes to the regulations. Family Wineries complains it was not included. Drawing on industry recommendations, the committee filed a bill in February that for the first time would allow cross-ownership between the producer, distributor and retailer tiers. Such cross-ownership was banned across the country after the repeal of Prohibition in the 1930s to prevent organized crime or large manufacturers from dominating the alcohol industry. Most states continue to outlaw cross-ownership.

But in recent years these rules got in the way of many budding Washington winemakers, who had to win special exemptions to make wine if they also owned an interest in a business that served alcohol or if they wanted to open a tasting room. The Wine Institute favors easing these restrictions.

The wholesalers association initially rejected the proposed changes. The bill would bar cross-ownership arrangements that result in "undue influence" on business decisions or an adverse effect on public health and safety. Such undue influence would be impossible to prove, said John Guadnola, the association's general counsel and executive director. But the language was modified and the association dropped its objections to that portion.

The proposed bill also would ease rules that limit price competition and would repeal a mandatory 10 percent markup at each level of distribution. But Costco is unhappy that the bill would not allow discounts for volume purchasing, and would not allow retailers to receive wine and beer shipments at a central warehouse location. Costco and the Wine Institute favor volume discounting, while the Liquor Control Board and distributors oppose it.

"Other than protecting [distributors'] self-interest, we're not sure what the policy rationale is for opposing quantity discounts," said John Sullivan, Costco's associate general counsel.

But Guadnola says his group will continue to fight it. "Allowing anyone who can buy more to get it for a lower price … would increase consumption, and that carries social costs," he said.

Anything that lowers retail prices would increase consumption, agreed Karl Storchman, associate professor of economics at Whitman College in Walla Walla. But he said fine wine costs significantly more in Washington than in other parts of the country he's visited. Reducing regulation, he argued, would boost Washington's wine industry.

Beveridge said the Family Wineries of Washington State support broad deregulation. He blasts the attempted consensus bill as "two steps forward and five back."

The family wineries are pushing an alternative bill, the Craft Winery Development Act, which would repeal economic regulation for Washington wineries producing less than 10,000 cases a year. Deregulating only fine wine production, he argues, would alleviate concerns about boosting consumption of street wine and beer. Most small wineries in Washington are struggling, and need more freedom to compete, he said. The bill appears dead this session, and Beveridge said his group will consider a ballot initiative to deregulate wine.

Out-of-state retailers weigh in

Meanwhile, a separate bill pushed by online retailer Wine.com would license out-of-state retailers to sell wine and beer to Washington consumers. The retailers would have to pay excise and sales taxes. Similar bills are pending in eight other states. At least a dozen states already license out-of-state retailers.

Bill Tomaszewski, general counsel for San Francisco-based Wine.com, said up to 20 out-of-state retailers already are shipping wine into Washington. His company has an in-state location so it can legally sell wine there. He predicted that if out-of-state retailers are legalized and taxed, they would no longer be able to underprice in-state retailers. But consumers would have a bigger choice of wines.

The Liquor Control Board supports the bill, which didn't make it out of committee but could still be tacked on to budget legislation. "The reality is that there's all kinds of beer and wine sold over the Internet and it's impossible to regulate," acknowledged Rick Garza, the board's deputy director. "We need to be realistic and give them a legal avenue. Then the state gets taxes it's not currently getting." The wholesalers association, however, firmly opposes licensing out-of-state retailers.

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