Getting liquored up

At liquor stores throughout the area, empty bottom shelves, lightly stocked displays and customers chatting with employees about the impending closure are some of the signs harkening the end of state-run liquor stores in Washington.

Last November, voters overwhelmingly passed Initiative 1183, ending the state’s monopoly on spirit sales. But what does this new privatization bill truly mean for the government, distributors, retailers and citizens? 

Brian Smith, communications director for the Washington State Liquor Control Board, said that while the state will continue to receive revenue from liquor sales — thanks in part to a 10- and 17-percent tax on distributors and retailers, respectively — everyone else will most likely see a rise in prices.

“A lot of people thought that the cost of liquor in Washington was high because the state was involved and the liquor board was inefficient, but that’s not the case,” Smith said. “What it was is that Washington has the highest liquor taxes in the country.”

Making up for lost revenue

Under I-1183, state taxes on spirits will not change, but the state markup (at 51.9 percent) will be eliminated. This markup was originally instituted to operate the Washington State Liquor Control Board and its business enterprise of selling spirits and to provide funding for additional state and local government programs like education, health care and research.

Removing the state markup may sound promising for lowering the cost of your average bottle, but Smith said that’s not the reality: “1183 also institutes some new fees, which are there to replace the lost state markup.”

Smith said that the initiative was written in a manner to keep local governments from fighting the legislation. The new law states that local government must be “held harmless” in the transfer of spirit sales. This means that Washington’s governments cannot lose money in the move to privatize sales.

To ensure this, Costco and the bill’s sponsors wrote in a permanent additional tax — the 10 percent for distributors and 17 percent for retailers — that will cover the lost state revenue. In 2014, the 10-percent tax on distributors will permanently drop to 5 percent, while the retailer’s tax will remain at 17 percent. Smith said these fees mean that both distributors and retailers must, in turn, raise their prices to make a profit.

“How the initiative is set up may not necessarily translate to lower prices. It will be at more locations — you’ll be able to buy it at Safeway — but that’s not necessarily going to drive down the prices.”

Market competition

So why did voters decide to pass this bill last fall? Costco’s main argument when pushing I-1183 to the voter population was that the state monopoly on liquor sales was unfair to consumers in Washington. 

Costco co-founder Jim Sinegal, in a Seattle Times interview, said that passing I-1183 was a victory for Washington consumers: “There was no justification for that type of system — certainly no justification for the state being in the business of selling alcoholic beverages, and no justification for all the price-fixing that was going on relative to the distribution — and the consumer was paying the price for that.”

A majority of citizens agreed with Sinegal and felt that, by introducing market competition, spirit prices would inevitably fall over time. 

Ballard resident Toni Eco, who voted for I-1183, said that she knew prices would rise initially, but she though that, over time, the competition would make it worth her while.

“Prices will eventually go down, but it may take a couple years,” she said. “I was aware that there would be a spike to begin with, but I am happy that it passed because there is no reason for the state to be involved in the liquor business.”

Reduced selection

If competition is what Costco wanted, then competition is what they are getting. 

Since the induction of I-1183, 15 new distributors have applied to the Liquor Control Board for licenses — many of these being large, national chains.

Spirit retailers like Total Wine & More have already begun leasing space in Washington. Other companies applying for licenses include many large stores like Albertsons, Safeway, Rite Aid and Kmart, which are already licensed to sell wine and beer.

National companies like BevMo and Liquor Depot have also expressed interest in setting up shop in Washington, according to commercial real-estate firm Kidder Mathews vice president Andy Robinson, but they have not yet applied for licenses or gone public with finalized plans.

But Patrick Golden, a liquor-store manager, said that consumers have traded a monopoly for a competitive market that will not offer anywhere near the variety or options.

“People are going to be in for a very rude awakening when they walk into their local grocery store,” Golden said. “They are going to realize the price has not dropped because of the taxes and retail markups, and they will see that variety has dropped exponentially.”

Golden’s store currently offers more than 1,500 different varieties of spirits, everything from major labels to local distilleries. Golden said that the only stores he can see being able to offer lower prices under privatization would be the Costcos and the Walmarts: “Stand-alone liquor stores will have higher prices. And grocery stores will most likely offer under 200 different varieties, while Costco will maybe stock 30 to 40.”

The little guys

While major retailers like Costco may not be concerned with the increase in competition, local distilleries and smaller distributors are another story. 

In 2008, the state began a campaign to encourage the proliferation of local distilleries by setting up preferred agreements and carrying their products in local liquor stores. 

However, under I-1183, no preferential treatment will be given to local distilleries, making their small-operation products more expensive than big-name brands.

Smith said that concerns of local distilleries have been heard. The Liquor Control Board is allowing distilleries to procure distributor licenses and sell directly to restaurants. The board hopes this will help make up for some of the difficulties local distillers may have when trying to get their products in big-chain stores.

“We’ve worked a satisfactory plan, as to when the fees apply and what they’re able to do under their licenses. In March, they’ll be able to sell directly to restaurants, and they’re looking forward to that.”

But still, smaller distributors are also worried about their ability to compete with the Costcos and Safeways of the market. When initially reviewing the bill, the state Office of Financial Management (OFM) assumed a $130 million shortfall in the state budget over the next two years from ending state liquor sales. Though the 10- and 17-percent taxes are meant to cover that gap, the OFM estimates that revenue raised from liquor sales taxes will still come up short. 

At the end of two years, distributors will cover any missing money, but the board has yet to decide how to impose this financial burden.

“A decision should be coming sometime this spring,” Smith said. “It’s probably going to be distributors paying proportionate to their market size, so the bigger places will be on the hook for more. That’s a hot-button issue that’s going around right now.”

The remaining question is how much of a budget shortfall distributors will have to make up for after March 31, 2014, when the additional $130 million is due. While the OFM estimates that the gap could be as much as $90 million, it admits that it is too early to tell how everything will work out.

Prices down, jobs up?

Distributors, retailers and consumers alike are still confident that the market will eventually dictate a price low enough in the long run to keep the average consumer paying the inflated price for now. 

As Ballard resident Eco put it: “Even if the price goes down a few bucks a bottle, that’s still better than it is now.”

And while the state does anticipate some new job creation due to the influx of distributors, Smith said that it will be like any other market in the area: difficult.

“We’re looking at a little over a thousand jobs lost. Just the same way most people are anticipating finding a job in this market, former state liquor employees hope that they will be able to find work. But it’s uncertain.”