Privatized liquor sales: what will happen?

New state law unlikely to usher in low booze prices

By Cami Joner, Columbian retail & real estate reporter

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Court will hear challenge to liquor initiative

The state Supreme Court will hear arguments May 17 aiming to throw out I-1183, the voter-approved initiative privatizing the state’s liquor business.

The lawsuit is one of two that assert the measure addresses more than one subject and is therefore unconstitutional.

In March, a Cowlitz County judge reversed his earlier decision and said I-1183 has just one subject.

The biggest proponent of I-1183 is Issaquah-based Costco Wholesale Corp., and the biggest opponent is the Wine & Spirits Wholesalers of America, based in Washington, D.C.

— Cami Joner

Liquor sales have helped round out business for Ridgefield merchant Scott Hughes since he opened a state-contracted store next door to his small-town hardware shop in 2005.

But the steady revenue from liquor sales is about to shrink with a seismic change in Washington’s liquor law coming June 1. The voter-approved law that ends Washington’s 80-year monopoly over the $1 billion liquor industry will likely test vendors like Hughes, who were groomed on a captive market of steady sales and state control of every aspect of operations. Now they’re about to be tested by Clark County retailers ranging from corporate giants to local chains to entrepreneurs from India.

In addition to facing the new competition in over-the-counter sales, Hughes and his business partner-wife, Cathy Hughes, will no longer have the benefit of state-assigned liquor sales to local bars and restaurants. Those sales now account for about one-third of their liquor business.

“That’s going to be a challenge,” said Hughes, who hopes his remote site in Ridgefield and a strategy of stocking more hard-to-find items will allow him to survive.

In approving Initiative 1183 in November, voters put an end to Washington State Liquor Control Board control over liquor sales that had existed since the end of Prohibition in the 1930s. Beginning in June, assuming the law survives a legal challenge now before the state Supreme Court, any store 10,000 square feet or larger in size can sell booze like any other product. The mandate is poised to drench Clark County in a sea of 69 new booze-selling applicants that include grocery, pharmacy and big-box variety stores armed to compete for sales with location, advertising and price.

The law also created a new layer of fees that, with all things being equal, would raise the retail price of booze from today’s costs. What’s unknown is whether price competition and volume sales discounts to retail distributors will drive prices down to today’s levels, or lower.

That’s not the only mystery in the approaching Wild West-like bedlam of retail-based bottled booze sales. Among other questions to be played out in the months and years ahead:

• How many new players will enter the market, and who will survive?

• Will consumers choose convenience over price?

• And will liquor prices, burdened by high taxes and new fees, be low enough to attract customers to Clark County from Portland, where the state still controls liquor sales, or will Washington’s liquor prices be so high that county residents will head south to buy booze?

Big players

In Ridgefield, Hughes said his 1,000-square-foot store has room to carry about 600 hard-liquor products and sizes. Despite its small size, the store will be allowed to operate under a grandfather provision of the new law. The nearest competitor, based on applications filed to the state, will be miles away.

Hughes thinks the big retailers will bank on volume, but not variety or selection. That doesn’t mean he won’t face tough competition from retailers in the county’s abundant shopping malls and commercial strips.

No-frills grocer WinCo Foods, discounters Wal-Mart and Target, and pharmacy chains Walgreens and Rite Aid are also preparing to compete fiercely for Clark County’s hard-liquor business, which the state expects to grow by at least 5 percent with the increased accessibility to product. And the new law is attracting Washington newcomers, such as California-based wine, beer and spirits mega retailer BevMo, which is opening three stores in the Puget Sound area. The 115-store retail chain’s search for other sites could include Clark County, said Kris Mulkey, a company spokeswoman.

“We’re looking at a lot of different Washington cities,” she said.

Located in retail strip centers near malls, BevMo’s 10,000-square-foot stores carry selections of mixers, sodas, snacks, craft beers, about 3,000 varieties of wine and of course, hard liquor.

“We’ll have all of the latest beverages, like infused vodkas. Whatever the latest trend is, we make sure we have it,” Mulkey said of BevMo. The chain now operates in California and Arizona, states where hard liquor is available at most grocery stores. Its website features a pop-up banner with the words, “Hello Washington.”

Possible price hikes

Nevertheless, the giant liquor-selling chains likely will have the bulk-buying advantage that can lead to price breaks, said Toni Ketrenos, a wine, beer and spirits buyer for Portland-based New Seasons Market, which operates one Clark County store.

Ketrenos expects Costco will be among the toughest competitors to beat on price, along with other big-box warehouse stores and chains that buy will liquor in bulk direct from the distilleries. However, she said New Seasons would continue with its approach of buying locally. The company plans to support local distilleries, of which there are about 300 in Washington and Oregon, in much the same way it carries locally produced meat and produce. Ketrenos hopes the selection will draw hard liquor customers who already shop in the store.

“I think the main customers will be people who are already buying beer and wine from us,” she said. “It’s people who appreciate good, quality products, like locally produced wines. So, we’re going to expand that to people who enjoy cocktails or a good sipping whiskey.”

Like others, Ketrenos suspects liquor prices will rise with private liquor sales, in part because of two new layers of fees.

“A bottle currently retailing for $35 at a Washington liquor store could be about $45 and change with the new 10 percent distributor tax and the 17 percent retail spirits tax,” she said.

Since Washington’s liquor prices are already higher than Oregon’s, Ketrenos does not expect the new state law to draw Oregon consumers or “booze tourists” to cross state lines into Washington for alcohol.

“It could even get people to head to Oregon to buy,” she said.

That’s just one reason it will be hard to compete as a stand-alone business, said Suzanne Goedert, owner of a state-contracted liquor store in the remote Clark County town of Amboy.

Although her tiny store also would be grandfathered in by the law, Goedert said the voter-approved initiative prompted her plans to close the store at the end of May. That’s because Goedert’s business, like the Hughes’ store, will lose state-assigned contracts to sell liquor to nearby restaurants and taverns.

Those sales amount to about 40 percent of her sales, Goedert said. But she wouldn’t blame her clients who might decide to buy from lower-priced bulk distributors.

“We’re all watching our dollars. I would not expect my friends to buy from me when it’s going to be cheaper somewhere else,” Goedert said.

Entrepreneurs fill void

Longview businessman Shamsher Singh knows he took a risk as the winning bidder on two Vancouver liquor stores auctioned off by the state this month through an online bidding process. But Singh, who owns a grocery store and two convenience stores in Longview and Centralia, thinks it is worth a try to keep alive the liquor stores he won in the state auction.

Singh estimated 60 percent of Clark County’s liquor business would go to the warehouse stores and chains after June 1. Shoppers who want convenience might not necessarily want to navigate the crowds or giant parking lots of a Costco.

“What’s going to be left for us is only those customers looking for convenience,” said Singh, who paid $202,000 for a store at 11717 N.E. 78th Way, Vancouver and $75,600 for the second location in the Safeway-anchored Four Seasons Place commercial center at 2612 N.E. 114th Ave.

“They can easily get in and out of the smaller stores,” Singh said.

Singh said all six of the winning bidders of Vancouver’s seven state stores are businessmen who emigrated from northern state of Punjab in India.

“People follow each other. We know the convenience store business,” Singh said. Like Hughes, the bidders who purchased the smaller state stores have won the exclusive right to apply to sell liquor from a space that is smaller than 10,000 square feet. The state has also agreed to sell each store’s inventory to the winning bidder at a discount.

Singh expects to spend about $400,000 to buy up the inventory at the two state stores he purchased. His plans also hinge on the ability to renegotiate the store leases. Singh believes each of his operations will need less than half of the space being leased by the state -- about 5,000 square feet per liquor store.

“With the business gone by at least 60 percent, that means you need 60 percent less space at the start,” he said.

Law adds new fees

The initiative appealed to voters who assumed, logically, that deregulation and retail competition would lead to lower liquor prices. But with the law’s effective date less than five weeks away, the shelf price of bottled spirits remains the biggest mystery of the new law.

The state’s 20.5 percent spirits sales tax and a fixed per-bottle price remain unchanged in the new law. It currently adds a markup of 51 percent per bottle. That markup goes away under the new law, but to offset the loss of revenue, the initiative attached two new state fees -- a 17 percent retail spirits license fee and a distribution fee that will be 10 percent through March 31, 2013, then reduced to 5 percent. Retailers will set their own markups for profits and expenses, which the state predicts will be between 52 percent and 72 percent per bottle.

The question is whether retailers will drive the costs to consumers higher or be able to offer reduced prices through volume wholesale purchases and lower profit margins.

John Guadnola, executive director of the Washington Association of Beer and Wine said retailers are certain to push prices higher.

“If the state gets the same amount of money and a retailer and a distributor also make money there’s no way it won’t add to the price,” said Guadnola, whose organization opposed I-1183, which was heavily bankrolled by Costco Wholesale Corp.

Some retailers don’t think customers will balk about price, but instead expect store patrons to be thrilled by the convenience of accessible liquor.

“The prices will be about the same,” said Melinda Merrill, a spokeswoman for Portland-based Fred Meyer, owned by Cincinnati-based Kroger Co.

She said preparations are under way to carry liquor at all eight of Clark County’s grocery and variety stores.

Merrill said liquor sales will fall right in step with her company’s “one-stop shopping” model, a program Kroger repeats throughout its chain of similar stores in other states that allow retailers to sell liquor.

“This is a great opportunity and the (Washington) voters voted for it,” Merrill said. “They wanted it to be more convenient. It’s a great business model in other states and we’re thrilled.”

Cami Joner: 360-735-4532, cami.joner@columbian.com.

Columbian Web editor John Hill assisted with this story.