Booze Privatization Means Business for Big and Small

Thanks to an initiative passed last year that ends the states monopoly on the sale of hard liquor, large retailers are preparing to plunge into this lucrative business. Virtually every major grocery chain store from Fred Meyer to Safeway has applied to the Washington State Liquor Control Board for the new spirits retail license and expects to begin liquor sales on June 1, when the revised regulations take effect. (Distributors were allowed to begin selling on March 1.)

But small stores that are permitted to sell liquor in some circumstances under the terms of Initiative 1183 are grumbling that the liquor boards delays in approving their licenses are costing them money. Meanwhile, some distributors and local distillers worry that these rules put them at a significant competitive disadvantage.

Wine and beer sales are already an important profit center for retailers. But its rare that a product sector worth $1 billion opens up overnight. Thats about what the state liquor monopoly was doing in annual sales before the initiative opened the business to competition. No wonder Costco spent more than $20 million backing the initiative.

Costco is just one of hundreds of retailers that intend to jump into the game. Supermarkets and national liquor chains such as Total Wine & More are preparing to enter the sector. Total Wine & More is looking for locations in Vancouver, Seattle and Tacoma for liquor superstores that typically comprise 20,000 square feet and offer as many as 3,000 selections of spirits.

A significant beneficiary of the privatization of the hard liquor business will be small groceries in rural areas that are often the only retailers for miles around. Many of these stores, devastated by the recession, could use the profits from liquor sales. At Glenwood General Store, about 35 miles north of White Salmon in Klickitat County, owner-operator Claude McKenzie says he gets lots of traffic in summer and winter from hunters, hikers and other outdoor recreation enthusiasts interested in purchasing liquor. He says that if he gets his license he will hire two or three of his neighbors in this economically depressed area near Mount Adams.

Kenney Noguera, owner and operator of the Conconully General Store in Okanogan County, has had three tough years trying to make ends meet. For him, a permit means being able to keep on one or two of his six summer employees when the tourist season comes to an end. But there remains a great deal of uncertainty over which of these small stores will receive their licenses. The new initiative states that stores under 10,000 square feet must show [t]here is no retail spirits license holder in the trade area that the applicant proposes to serve before the liquor board will issue them licenses.

The liquor board has determined that it will wait until after June 1 to determine how many spirits retail licenses there are statewide, then it will decide what constitutes a trade area. That sounds absurd to storeowners like Noguera, who is 20 miles from the nearest retailers and points out that there are some state liquor stores that are only five miles apart.

Tom Thumb Grocery in Lake Stevens, Newman Lake Food & Grocery in Newman Lake, Kh Grocery Market in Otis Orchards, Whitley Fuel Grocery in Waterville (The Highest Incorporated Town in Washington) and more than a dozen other small stores have filed spirits retailer applications. As small retailers, they know that high-margin liquor sales will contribute to keeping low-margin food prices for their neighbors under control.

Retailers who have operated liquor stores under contract with the state during the old monopoly system can continue to sell liquor under the new system. But the going will be tough. Johnson in St. John, Big Wallys in Coulee City and Chew-N-Butts in Cle Elum have all applied for licenses to continue selling liquor. But Ken Johnson in the Palouse town of St. John says the combination of competition from big-city stores and higher prices resulting from new taxes will actually hurt sales. The initiative institutes a 10 percent fee on distributors that drops to 5 percent after two years. In addition, there is a new 17 percent fee on retailers.

Local distillers, many of whom charge higher prices for their specialty products, also worry that the higher prices resulting from these taxes will drive customers to cheaper brands. There is already a 20.5 percent spirits sales tax and a separate 3.77 percent-a-liter tax. If you add the new fees, a bottle of vodka that now sells for $29.95 could end up selling for $40, says Kent Fleischmann, cofounder of Dry Fly Distilling in Spokane. Weve done a great job building a loyal customer base over the past four years, but if the price goes up another $10, I dont know if they will find that acceptable.

Smaller distilleries like Dry Fly typically work through distributors, which institute their own markups. Even if we sell in Costco, we would be at a disadvantage against large brands that ship directly to Costco, says Fleischmann. One possibility, he adds, is that Dry Fly could try to reach its own deals to work directly with large retailers.

That approach, of course, could mean tough times for small distributors. Not only do they face the possibility that distillers could work directly with retailers, but also the new Wine Retailer Reseller Endorsement, which was passed as part of the initiative, will permit big retailers like Costco and Fred Meyer to become wine distributors to businesses including bars and restaurants. Small distributors could find themselves cut out of that side of the business as well.

Not everyone is champing at the bit to sell booze. Mampreet Singh, owner of the Newman Lake Food & Grocery between Spokane and Coeur dAlene, Idaho, is just happy to have the chance to expand his stores selection of goods. He expects that liquor sales will actually increase his food sales and that he may increase his total employment, but he has no concern that the liquor board is taking its time issuing small-store licenses to make sure trade areas arent saturated.