Costco Wins Ballot Fight in Washington; Now What?

New law ends state-controlled liquor sales and some wine-retail rules; wineries assessing impact
Nov 10, 2011

Washington state voters have overwhelmingly approved a ballot initiative to privatize state-controlled liquor sales and loosen rules on wine sales. But the new law, supported by Washington-based wholesale-giant Costco, has many wineries, distributors and retailers concerned about the long-term impact.

While many voters are hoping for a better selection of wines and spirits at better prices, no one really knows how the changes will impact the nation’s second-biggest wine-producing state. Meanwhile, industry groups in Oregon and in other states with similarly restrictive rules are bracing for possible ripple effects.

The campaign for Initiative 1183 was funded by $22 million in contributions from Costco. The new law will replace state liquor stores next year, allowing liquor sales in stores of at least 10,000 square feet. Smaller stores in rural areas may also qualify. When it comes to wine, the new law allows volume discounts, central warehousing and retail-to-retail sales for both wine and liquor, starting Dec. 8. None of these practices were allowed under Washington’s previous rules, which were crafted in the years following Prohibition.

Costco executives, who allied with supermarket, retail and restaurant groups in the fiercely-fought campaign, savored their victory after suffering a narrow defeat last year with a more sweeping initiative. The company has long argued that rules in Washington and other states were archaic, anti-competitive and prevented large businesses from providing better choice and prices to consumers. The company previously lost a federal legal battle to roll back Washington regulations, and struck out in the legislature as well. Governor Christine Gregoire and public safety advocates opposed 1183, arguing it might increase underage drinking. Alcohol distributors also opposed it, funding most of the anti-1183 efforts.

“By doing away with the state monopoly and inefficiencies, I think the initiative is going to modestly lower prices for consumers,” said Joel Benoliel, Costco’s senior vice president and chief legal officer. “On wine you’ll see a more open marketplace, more selection, and better pricing.”

The wine community is divided on 1183's impact. The Washington Wine Institute, the state’s main lobbying group for producers, did not take a position on the initiative, while Family Wineries of Washington State, a group of smaller producers opposed to state regulation, supported it.

Some winemakers and retailers predict the new law will hurt smaller wineries by reducing the amount of retail shelf space available to them and forcing them to cut discount deals. All but a few of the state’s more than 700 wineries produce less than 3,000 cases a year. “Wineries that make good wine will find a way to be successful,” said Marty Clubb, owner of L’Ecole No. 41 in Walla Walla and president of the Washington Wine Institute. “But these changes clearly will create a more challenging economic environment for small wineries, and some wineries won’t make it.”

The new law, his group argues, could help out-of-state wineries increase their market share at the expense of in-state producers by letting them ship to retailers’ central warehouses, thus reducing distribution costs. Previously, wine had to be shipped directly to each individual store or through a distributor.

Chuck LeFevre, owner of Esquin, one of Seattle’s biggest wine retailers, said that the new law will hurt smaller wine stores. “We’ll expand and get into the liquor business," he said, "but a lot of small stores can’t do that and they’ll be less competitive.” In addition, he believes the law will narrow consumer selection because it lets producers and distributors charge retailers higher prices for ordering less than a case. “We carry 5,400 wines, but with higher prices for split cases, some of that selection will go away.”

Benoliel said Costco has no plans to run similar initiative campaigns in other states with state liquor stores or highly-regulated alcohol sales. But Paul Romain, a veteran lobbyist for the Oregon Beer & Wine Distributors Association, expects the Washington initiative to trigger efforts to privatize liquor sales and allow volume discounts and central warehousing in Oregon. Industry groups there are discussing strategy. “Everyone was waiting to see what would happen in Washington,” he said. “A lot of Oregon folks have great concerns about the initiative.”

John Guadnola, executive director of the Washington Beer & Wine Wholesalers Association, said I-1183 is vulnerable to a legal challenge because it addresses both liquor privatization and wine and thus violates a state law limiting ballot initiatives to a single subject. But he said his group isn’t planning to file a lawsuit. Benoliel said he’s confident the initiative can withstand such a challenge.

Meanwhile, Clubb is plotting how his winery can benefit from the new law, by offering volume discounts to prestigious restaurants that pour his wines by the glass, for instance. “This opens the door to opportunities we haven’t had before,” he said.

Legal and Legislative Issues News

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