On Initiative 1183: Washington Liquor Privatization

Today I received an email from Keith Barnes, owner of Bainbridge Organic Distillers here in Washington. In the email he lays out some of the realities that privatizing Washington’s liquor industry will have on consumers. I am agreement with him in that this particular privatization initiative is not beneficial to us as consumers. Granted, the average individual might not really care that they will only be able to purchase Jack Daniels and Grey Goose, but for serious craft cocktail bars and aficionados this initiative is detrimental to our choices as consumers, and beneficial to large corporate giants. Ironic, considering the anti-corporate protests going on all around our country at this very moment. While I am not against privatization of liquor sales, I would be in favor of a bill that creates an extended network of specialty stores, supporting small business, local economies, and consumer choice. Below is the text of Keith’s email verbatim. I know that it is long, but it is an excellent read, and provides vital information, no matter which way you are intending to vote.

To: Friends and Supporters of Bainbridge Organic Distillers
RE: Liquor Privatization Initiative 1183

Over the past months I have been asked by almost every visitor to the distillery, and by people that know that I am in the spirits business, what I think about initiative 1183, the latest liquor privatization initiative. I’ve spent quite a lot of time reading and re-reading the text, done more than a little bit of research and have discussed my thoughts and observations with many people in the spirits industry all around the country.

In the end I decided that the easiest way to share my thoughts was to look at the promises that the initiative makes on its website and to comment on those based on what I know about the spirits industry across the country. At the end of this
document I have also written a little on what the initiative would mean for us as a distillery business, and some thoughts on Washington State’s current liquor business.

This is a big, complex initiative and it is written in such a way as to make it confusing and hard to understand. As many of you know, I’ve been in the spirits industry for 25 years. I own another company that provides marketing and strategic programming and planning on a national level for many large international distilling companies, and we work on most of the brands that you see in the liquor store. We also do work for spirits distributors and retailers in all 50 states. Being in the industry gives me a good idea where some of the new rules are headed and what their outcomes are intended to be by the writers of the initiative. I am also informed by seeing what some of the initiative’s sponsors are doing with spirits in other states where spirits are sold in grocery and club stores. The passage of i1183 would have dramatic and far-reaching effects on the residents of Washington State in many ways, and state revenues and safety are just a few of them.

As you might expect, the best way to get a feel for any initiative is to read it yourself. The text is available on both the PRO 1183 and AGAINST 1183 web sites. My apologies that this is a bit lengthy. I’ve tried to make it as short as possible.

Thanks for taking the time to read this, and for your support of our distillery and its products.

Respectfully,

Keith Barnes
Distiller/Proprietor Bainbridge Organic Distillers

I-1183 PROMISES TO DO MANY THINGS.

CLAIM: i1183 Will Make Alcohol More Convenient To Buy By Opening Sales In Costco, Drug And Grocery Stores And Mini-Marts.

Alcohol will be easier to buy primarily because it will be available at grocery stores of which there are 1428 in the state, and mini-marts of which there are 929 in the state. This promise is most certainly true since there are only 329 WSLCB stores today, and these have hours (9AM-10PM) that are shorter than most grocery stores (alcohol selling hours 6AM-2AM).

CLAIM: i1183 Will Not Increase Alcohol Consumption.

It seems a logical conclusion that an increase in the convenience of buying spirits through the addition of 2357 stores with longer operating hours will result in increases in alcohol consumption, alcohol abuse and alcohol related incidents of all types, including an increase in incidence of minors consuming spirits. There are several studies that this conclusion.

Based on its charge to identify effective disease and injury prevention measures the CDC Task Force on Community Preventive Services “recommends against further privatization of alcohol sales in settings with current government control of retail sales. This finding is based on strong evidence that privatization results in increased per capita alcohol consumption, excessive alcohol consumption and its related harms, including interpersonal violence, decreases in the ability of law enforcement to enforce regulations, and increases in underage drinking”. This study also concluded that the increases in consumption were seen only in the class of alcohol being privatized, in this case spirits. There was no significant increase in the consumption of other types of alcohol already being sold privately. A link to this report, and others cited in this letter, can be found on the last page.

Another study looked at the impacts of liquor privatization after 10 years of private liquor sales in Alberta, Canada. The report concludes that “private retailing of liquor has required greater regulation and enforcement costs. Some of these costs are incurred by the Ministry while others are shifted to local police departments. Against the trends in other jurisdictions (non privatized regions) liquor consumption has increased, wholesale costs have risen and retail prices have increased.Although retail prices have increased, the tax revenues to the government have fallen significantly”.

To understand the linkage between increased alcohol consumption (by all ages) and liquor store privatization another study was conducted in British Columbia, where the liquor system was partially privatized in 2002. Looking at 89 local areas of British Columbia, the researchers found that the number of private alcohol retailers rose by 40 percent between 2003 and 2008, while the liters of alcoholic beverages sold at those stores each year shot up 84 percent. And for every extra private store per 1,000 people in a community, the study found, the local alcohol-related death rate rose by 27.5 percent. The findings, reported in the journal Addiction, do not prove that privatization is to blame. However, “there is a strong, robust relationship between the increase in private retailers and alcohol-related deaths”, said lead researcher Tim Stockwell, of the University of Victoria in British Columbia. “The implication”, he told Reuters Health, “is that Canadian provinces should “think twice” before going further down to the path of privatization”.

The initiative sponsors dismiss these findings on the grounds that no one can predict the future. What i1183 sponsors DO know is how to spur alcohol sales at grocery stores. The sponsors of i1183 operate club, grocery and drug chains in out-of-state markets where spirits are sold at grocery retail, and they understand fully what tactics to employ to spur impulse buying of spirits from their consumers. A review of their lobby displays during key spirits selling periods will show this observation to be true. Why? The profit margins associated with the spirits category make it a favorite source of high-profit revenue in areas of the country where spirits are sold at grocery.

Additionally, i1183 sponsors expect that the initial novelty of finding spirits on display in the lobby of grocery and drug stores in Washington State, especially around key selling periods (all major holidays, national sporting events, change of seasons) will elicit an impulse buying response from a high percentage of consumers, and their alcohol category sales figures in other states bear this out. Further, the Point Of Purchase Institute, an group that tracks the success of display and sales activity on alcohol sales in the nation’s grocery stores, has research that supports that sales of spirits go up by as much as 60% when it is displayed in prominent locations outside of the spirits aisle.

CLAIM: i1183 Will Not Increase Alcohol Abuse and Underage Drinking.

Most people seem to doubt the validity of this claim on its face as being unrealistic. And residents that grew up in Washington State know from personal experience, if they drank as teenagers, that it is much easier to buy or otherwise obtain (steal or get an adult to buy for you) alcohol from a grocery or convenience store than it is from a state run liquor store, the later being nearly impossible.

The high proof, small size, ease of concealment and “quick buzz” available with hard liquor make it a natural target for underage drinkers. Statistics indicate that beer is the alcohol of choice among underage drinkers right now, primarily because beer is what is available to steal at stores where alcohol theft is considered easy – grocery stores, mini-marts and convenience stores. Several studies conclude that in areas where alcohol is more readily available to minors there are higher incidences of underage drinking and driving, higher numbers of traffic fatalities involving underage drinking and driving, and higher levels of health and safely issues involving underage consumption of alcohol.

A U.S. Dept. Of Justice report for The Office Of Juvenile Justice and Delinquency Prevention report states “survey studies on alcohol and young people consistently indicate that children and adolescents who are exposed to alcohol advertising have more favorable attitudes toward drinking, and are more likely to be underage drinkers”. The proliferation of in-store advertising that will result from the passage of i1183 will shift our children’s attitudes on alcohol and spirits for decades to come.

The U.S. Dept. Of Justice report also finds “restricting the density of alcohol outlets and their location is one way of decreasing consumption and related problems. Several studies have demonstrated the connection between the density of alcohol outlets in a community and the rates of violence, particularly among youth. Alcohol outlets can be restricted through limiting the number or density of outlets or through limiting the types of locations where alcohol may be sold.” Clearly the addition of spirit sales in 2357 new locations around the state puts Washington State on the wrong side of the evidence and statistics.

CLAIM: – Helps Small Wineries By Creating New Distribution Opportunities, And By Making Pricing More Competitive.

The initiative will make it easier for restaurants to increase their wine lists by being able to shop for their wines at Costco and grocery stores, but an unfortunate by-product of i1183 is that the selection of wines sold in Washington State’s 2357 grocery, drug and mini-mart stores will go down dramatically. Space is at a premium in grocery stores and there simply is no “extra” space readily available to slot in the spirits authorized by i1183. Something will have to be discontinued to make room – in the vast majority of cases this will be wine. Import, specialty and local products will be removed from shelves to make room for the limited selection of national brand spirits favored by grocery chain buyers. National wine brands usually can maintain their shelf placements as they deal with chain buyers on a national level. An examination of out of state stores owned by the initiative’s sponsors will support this line of thought – wine and spirits share the same spaces, and a limited selection of national brands and store brands overwhelmingly dominate the shelves.

In fact, spirits selection will be limited as well as grocery stores do not have the room to display more than 150-200 different packages, where the current WSLCB stores offer 750-1200 different packages. A review of grocery stores owned by the initiative’s sponsors in states where alcohol sales at grocery are allowed bears this out. Grocery stores also avoid stocking high priced specialty products, and making special orders that have case minimums associated with them. This means that upwards of 75% of the products available to Washington State residents right now in WSLCB stores will no longer be available.

Note also that by having restaurants buying their wines from Costco and grocery retailers, the initiative also weakens the distributors that currently sell wine to restaurants – and that it is these distributors that must stay in business to be able to pay the $400 million expected by the state and defined in the text of the initiative.

CLAIM: New Fees On Liquor Distributors And Retailers Will Generate New Revenue For The State.

Under i1183 the state would be guaranteed to receive $150 million for the first two years, and $50 million for another 2 years from new spirits distributors paying a tax of 27% on sales, which is nearly 3X the tax that the initiative sponsors have assigned to themselves. The initiative’s promise here is that there will be a number of distributors here to collect and pay these taxes. Under i1183 this is by no means a certainty.

Currently there are no private spirits distributors in Washington State. Odom/Spirits West, owned by multi-state spirits distributor Southern Wine and Spirits, and Young’s Market Company, also owned by a multi-state spirits distributor, act as brokers to 90% of spirits brands found today in Washington State. But they do not engage in wholesaling spirits to retailers. i1183 floats the promise that the spirits companies that employ these two brokers will want them to expand their services to include wholesaling their brands to retailers – BUT – the key feature to i1183 is that it allows Costco and grocery chains to buy directly from the distillers/manufacturers, cutting out the distributor middle man.

Costco assumes that the 929 mini-mart sized stores will purchase trade-discounted spirits from them, which is a driving but unspoken element of the initiative. So whom are these distributors supposed to sell wholesale spirits to, and whose spirits are they supposed to sell? The reality is that under i1183 spirits wholesaler/distributors will be replaced by the initiative’s sponsors, distributors will not be needed. The chances are very high that there will be no distributors in place to pay the $400 million promised by the initiative.

Further, the conditions spelled out in the initiative regarding the $400 million in question almost guarantee that there will be no small distributors stepping up to do business here in Washington. Distributors must commit to pay any revenue shortfall on the scheduled 2X %150 million and 2X $50 million payments to the state. As the OFM currently estimates the first year’s shortfall alone will be $90 million it is unlikely that any small distributor will have the ability to play this high-stakes game of Russian Roulette.

CLAIM: Doubles Fines for Violations, Dedicates New Revenues To Increase Funding For Local Police, Fire And Emergency Services.

While i1183 does allow for tough fines on stores violating liquor laws, it also allows liquor retailers selling alcohol to minors one “free pass” per year, before these fines kick in. After a violation offenders are directed to participate in a self-monitored retraining program.

Many people accept as reasonable the assumption that an 85% increase in the number of stores selling spirits will increase the consumption of alcohol, and an outcome of this increase will be an increase in the money needed to deal with the problems created by alcohol consumption, over-consumption and abuse, and to enforce state laws over 2357 new spirits licensees. The initiative accepts and promotes income predictions made by the Washington Research Council that $443 million in new revenue will be generated by the implementation of i1183 over the next 6 years. But it does nothing to dedicate specific funding to deal with the many outcomes that most likely will be brought about by increases in spirits consumption and abuse. Further i1183 does nothing to try to estimate what these increased costs, that taxpayers will be paying for, will be.

It seems reasonable to expect that the costs to provide enforcement and public services of all types related to alcohol will increase, and that the increases in revenue projected by the initiative’s sponsors will not be enough to pay for it all.

To insulate themselves from these costs the sponsors of the initiative have gone to lengths to make sure that whatever the financial hardships might be as a direct result of increases of alcohol consumption and abuse they will be minimally impacted because low rate of tax they pay (10%) dramatically minimizes their exposure and risk. Because of this low rate of tax, state and local entities will most likely not see increases in the monies they receive through taxes. State residents will pay any increases in costs for providing all of the services required to deal with the increased alcohol consumption and abuse brought about by i1183.

CLAIM: i1183 Will Lower The Price Of Alcohol To Consumers Through Competition, Letting The “Market” Determine Pricing Through Open Competition.

The claim to lower the price of alcohol, on its face, seems to be contradicted by the initiative’s claim that it will drive $443 million in new revenue to the state. To be clear, revenue to the state under this new system would come in the form of taxes collected on the sale of spirits, and IF alcohol consumption will not be increasing, as the initiative contends, and IF open competition and market-driven pricing will be lowering the price of alcohol to consumers as is suggested, it begs the question where will this new tax revenue be coming from? The answer is simple – it will be coming from increases in the price of alcohol to consumers and increases in consumption driven by new retail availability. It seems clear that the claims being made by the initiative sponsors do not add up.

While the sponsors of the initiative claim that its implementation will increase competition and lower the cost of spirits in Washington State, it has the opposite effect. i1183 demands that new liquor retail stores have at least 10,000 square feet of retail space. This square footage does not include secure storage space that is a mandatory as well. This size limitation ensures that Costco and grocery stores will have a monopoly on the sale of liquor in Washington State for many years to come, as the high taxes here will keep out most large format liquor chains (BevMo) and the size requirements will keep out most local businesses that want to open smaller format specialty shops, similar to high end wine stores.

The initiative also claims that it will lower the price of alcohol to Washington’s consumers, but a 10/2/11 Seattle Times article calculated that at the state’s 28 Costco stores the cost of a $15.95 bottle would decrease by only 36¢. The cost for that same bottle at the state’s 2329 grocery, drug and mini-mart stores would increase by $2.00. It is important to note here that the structure of the liquor business proposed by i1183 exists nowhere else in the United States. Also the liquor mark-up figures used by the Seattle Times in their report are low by national standards. In the case of the 36¢ savings per bottle at the states 28 Costco stores, Costco does not charge a margin low enough to arrive at this savings in any of their out-of-state stores that sell spirits. Under i1183 the prices of liquor in the vast majority of retail locations will be going up substantially.

While promising open competition, the initiative actually decreases competition as it pushes the vast majority of taxation and fees onto new beverage distributors acting as liquor wholesalers in Washington State. Any new retailers that manage to open will have to obtain their spirits from these distributors who are paying a tax to that state that is 60% higher than the one paid by Costco and the sponsor grocery stores. These higher costs would need to be reflected in their pricing to consumers, effectively giving them the highest priced liquor in the state.

CLAIM: Prevents Alcohol Sales At Mini-Marts, Convenience Stores And Gas Stations.

While the sponsors of the initiative make the claim that it will not allow sales from mini-marts and convenience stores, the actual text of the initiative shows otherwise. The language is so vague that its interpretation by the WSLCB and the courts will almost certainly allow any mini-mart or convenience store that sells beer and wine today to begin selling spirits. The key is the lack of definition of the term “grocery store” in the initiative, and a lack of a universally accepted legal definition for “grocery store” in the courts. i1183′s omission of the definition for “grocery store” forces the WSLCB to decide if an applicant meets the definition, and thus makes the WSLCB the target of any lawsuits arising from their reasonable rejection of any license application. Under i1183 it will be very difficult to prove that any mini-mart is not a “grocery store”.

The costs to the state to interpret and litigate the vague terminology in this initiative has not been calculated, and the sponsors of the initiative have included no provisions to fund any such need, so the cost will fall to the state.

It is important to observe here that in its previous failed attempt at privatization of Washington State’s liquor business, mini-marts and convenience stores were the cornerstone of the initiative’s sponsor’s business plans, and that Costco had made known its plans to supply spirits to mini-marts and convenience. By leaving the definition of “grocery store” open to interpretation it is reasonable to assume that mini-marts and convenience stores still figure prominently into the business plans of the initiative sponsors, no matter what the safety implications might be.

WHAT INITIATIVE 1183 MEANS TO US AS A DISTILLERY:
We think that the passing of i1183 will have a neutral to slightly negative effect on our business. Our distribution model will change from channeling the majority of our production to Washington State to opening up markets in different states. The products that we distribute in Washington State will most likely yield us the same amount of profit, and the production that we ship outside the state will deliver slightly higher profits. We have pending requests from several states to take our products, but up until now our preference has been to focus on Washington State. It will take some time to get our products approved for sale by the liquor boards in other states – every state in the US has a liquor control board that determines what products can legally be sold in that state, just in case you thought our own WSLCB is an anomaly of Washington State.

Our products will not be as available to Washington State consumers, as the liquor business will be dominated by retailers that focus on large national brands and have very limited shelf space, but there will be a few store managers that will make room for local products. By speaking out on this initiative we have been told/warned that our products will be blacklisted, and won’t be considered for inclusion in any “local products” sections that out-of-state grocery chains might put together. The likelihood that existing liquor stores will re-open under private ownership is still very much in doubt, as the provisions for this in i1183 allow this only under a set of very tightly defined, and difficult to achieve, conditions. We will engage online interstate retailers that will make our products available to residents of certain states, where legal. The profitability of this business will be about the same as our existing Washington State business. Our products will still be available for purchase through our distillery tasting room. Tasting Room sales equal about 10% of our sales at this time.

JUST A THOUGHT: LOOKING AT WASHINGTON STATE’S LIQUOR BUSINESS AS A STATE ASSET.
While it is not usually described as such, I consider Washington State’s liquor business a state asset. The business unit drives revenue, collects taxes, secures products from manufacturers, has employees, manages retailing and distribution and makes profits just like every business hopes to do, with the key difference that the profits from the business go into the state’s fund instead of into the accounts of a private enterprise. This makes every resident in Washington State a de facto stakeholder in the business, as all profits are used to fund vital state services.

If the WSLCB were privately owned and wanted to sell off its liquor business it would place a value on that business in the accepted manner – a multiple of earnings over a number of years with debt and hard assets figured in. Under i1183 the state is expected to simply walk away from the free-standing business enterprise that it has spent 77 years building, one that makes consistent high profits that benefit all stakeholder-residents, while effectively managing the public safety concerns around alcohol within the top 5% in the nation.

If a cabal of timber companies including Plum Creek Timber, Weyerhaeuser, Temple-Inland and MeadWestvaco were trying to take over state owned timberlands, and deciding amongst themselves where they were going to cut timber and who was to profit most by exploiting these state-owned assets, residents would not stand for it. Likewise, if a coalition including Exxon Mobil, Chevron and Royal Dutch Shell were trying to take over control of state owned oil and mineral rights and devising their own extraction and profit plan there would be demonstrations in the streets.

In reality, an alliance if unlikely bedfellows including Costco, out-of-state grocery giant Kroger (owner of Fred Meyer, QFC and Food 4 Less), out-of-state grocery giant Safeway and out-of-state grocery giant SuperValu (owner of Albertson’s), Wal-Mart and others, have come together to take over the state’s liquor business, and to direct the proceeds and profits where they want them to go. In doing so they have assigned themselves the lowest level of liquor tax (10%) since before WW2 and have closed off competition from smaller stores by mandating that new stores be at least 10,000 square feet and assigning the distributors that must serve stores other than themselves a liquor tax that is 66% higher than the one they have given themselves and 30% higher than the liquor mark-up in Washington State today.

To walk away from this business, and to hand over the liquor concession in Washington State to private businesses, without due compensation to state residents, is not in the best interests of Washington State or its stakeholder-residents. If it is the desire of the residents of Washington State that the state exit the liquor business it should do so on its own terms, and to the benefit of the stakeholder/residents. By meekly allowing itself to be forced out of business without being compensated for the value of the liquor concession the state would not be living up to its responsibility to always work in the best interests of the state’s residents.

INITIATIVE 1183 FULL TEXT

CDC TASK FORCE REPORT:

ALBERTA LIQUOR PRIVATIZATION STUDY

BC PRIVATE LIQUOR STORES IMPACT

U.S. Dept. Of Justice Report

2 thoughts on “On Initiative 1183: Washington Liquor Privatization”

  1. I do not see anywhere in this that the tax increase would be 20.5 % and a liter fee of $3.80 per bottle. What did I miss?

    1. Chris,
      Those taxes were in place and existed before I-1183 went into effect. They were just bundled into the price rather than being listed separately. The price changes are all due to distributorship monopolies and retail mark ups.

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