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After Landslide Vote, Washington State’s Liquor Privatization Will Begin To Take Shape

November 9, 2011

Washington voted overwhelmingly to end the state’s 78-year monopoly on liquor sales yesterday, as ballot initiative 1183 won with about a 60% majority.

The passage of I-1183 is expected to more than quadruple Washington’s spirits retailers, from the current 328 to more than 1,400. The new law will now put spirits on the shelves of Costco’s nearly 30 stores across Washington, but it does far more than that. Because retailers will now be permitted to purchase directly from suppliers, Costco can effectively act as its own distributor, circumventing the second tier. Furthermore, as I-1183 sanctions retail-to-retail sales, Costco will have the opportunity to compete directly with wholesalers on retail accounts across the state.

In the aftermath of the referendum, Washington must now sell off its Seattle-area central warehouse and inventory, and also auction off its 328 stores. About half of those stores are state-run and half are franchised. Contractors operating the franchised stores must buy back their inventory in order to continue in business. The state’s plan to sell off liquor distribution rights to a single wholesaler is now moot. Private sales of liquor are set to begin on June 1, 2012.

“The citizens of Washington have clearly spoken,” said Chris Underwood, chief executive officer of Young’s Market Co., which operates in the state as Young’s Columbia of Washington, a 50-50 joint venture with Columbia Distributing Co. “We’ll be combining spirits distribution with our current wine platform. This bill leaves a lot of options for suppliers. It will be very interesting, to say the least.”

Southern Wine & Spirits is present in Washington through its joint venture with Odom Corp. That operation sells around 2.5 million cases of wine annually. “Once we understand how the spirits end of things will look, we think we can integrate that part of the business into our existing (wine) operation,” said Southern Wine & Spirits president and COO Wayne Chaplin. “We’ll need to bring in more salespeople for spirits and for the types of programs we run for spirits in our other markets. But we believe that, once we gain an understanding of the framework for spirits in Washington, we’re well positioned to build on what we already have there.”

After two privatization initiatives (I-1000 and I-1105) failed at the ballot box last year, retailers and their supporters reworked their plan, and I-1183 received enough voter signatures to make the ballot. The revamped proposal addressed public concerns that gas stations and mini-marts would be allowed to sell liquor by requiring stores to have at least 10,000 square feet retail space in order to participate, unless located in an underserved area. Volume discounts for wine and central retailer warehousing of wine (but not beer or spirits) were retained.

The initiative also calls also for a 17% tax on gross spirits revenues for all liquor licensees, with a portion of that revenue dedicated to public safety programs. Private distributors must pay a state tax of 10% of gross liquor sales for the first two years of the new plan, and 5% each year thereafter. Standard fines and license suspensions for selling spirits to minors were doubled, and spirits retailer training requirements were strengthened.

Many small players in Washington opposed the initiative and now worry about being squeezed by big box stores. Dan McCarthy and Jay Schiering of McCarthy & Schiering, a two-location wine shop in Seattle, say that they won’t be able to sell artisan spirits because of the 10,000-square-foot requirement (each of their shops has only about 1,500 square feet). McCarthy and Schiering also believe that volume discounting on wine will force them to buy in larger quantities, driving up the cost of small wholesale purchases and limiting product availability. On the other hand, both have argued for their own central warehousing of wine in the past, which they have felt would benefit their business.

Costco allocated a record $22.7 million for the campaign, of which about $18.5 million was spent, mostly on television advertising. Opponents, including Southern Wine & Spirits and Young’s Market Co., accused Costco of trying to buy the election—although opponents spent some $12.5 million fighting the measure themselves.

Note: An earlier article on I-1183 stated that volume discounts to retailers on beer, wine and spirits would now be allowed in Washington State. Only volume discounts for wine and retailer central warehousing of wine will be permitted.

Washington State – Distilled Spirit Sales
(thousands of nine-liter cases)
Type Calendar Year Percent
Change1
Nine Months
Ending September
Percent
Change1
2009 2010 2010 2011
Domestic Whiskey 372 379 2.0% 270 282 4.3%
Scotch Whisky 123 120 -2.3% 84 85 0.2%
Canadian Whisky 630 603 -4.3% 432 431 -0.4%
Irish Whiskey 36 42 16.0% 29 32 12.9%
Gin 196 190 -3.1% 142 142 0.1%
Vodka 1,321 1,364 3.3% 994 1,068 7.4%
Rum 512 498 -2.7% 356 357 0.4%
Tequila/Mezcal 272 270 -0.7% 202 213 5.3%
Brandy/Cognac 113 108 -4.5% 72 73 0.3%
Cordials/Liqueurs 486 469 -3.4% 321 337 4.8%
Prepared Cocktails 81 75 -7.5% 54 61 12.0%
Total Spirits2 4,141 4,119 -0.5% 2,957 3,080 4.1%
1Based on unrounded data.
2Addition of columns may not agree due to rounding.

Source: NABCA

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