Privatized liquor losing proposition for small-store owners
Pitfalls for a former state store surprise even alcohol-sales veteran
Friday, December 21, 2012
Don Sidhu got into the liquor business to follow his dream of owning a successful business.
Raised in an entrepreneurial culture, the 39-year-old Vancouver businessman has helped family and friends operate liquor stores in other states. The experience made Sidhu confident he could make a decent living selling booze after Washington's switch from a state-operated liquor system to private store sales.
His supporters also were certain, backing Sidhu up with $2.1 million in seed money that he used to purchase four liquor store businesses formerly run by the state.
But the dream began to unravel on the first day of business in June. Sidhu's customers balked at higher check-stand prices on liquor; a 17 percent retailers' fee and a 10 percent distribution fee were added to the price of every bottle at ring up. Customers told Sidhu that they would buy their booze at Oregon's lower-priced, state-operated stores.
"They were just shocked when all of those taxes added up," said Sidhu, who said he suffered many sleepless nights when the full extent of his business troubles dawned on him.
In addition to the fees, Sidhu found out the big-box stores and chains were getting much lower prices on booze from Washington's new distribution businesses. Prices in Oregon ran as much as 22 percent lower than his. The uneven competition was sucking the life out of Sidhu's business.
He spent a lot of time apologizing to customers.
"They said, 'Don't be sorry, you're the one who's going to lose your business,'" said Sidhu, a Woodburn, Ore., resident who closed his stores in Kennewick and Kirkland and plans to shutter his remaining two stores in Vancouver some time next month.
Sidhu isn't alone in facing a quick, devastating business failure in Washington's new free-market liquor sales environment. Of the 167 former state-run liquor stores that Washington auctioned off, Sidhu estimates only 60 or 70 remain open. He said he had a disadvantage in being a small store. The lack of volume discounts from distributors, competition from Oregon, and the loss of commercial sales that were a key profit center for the former state-run liquor stores have all contributed to the demise of the former state-run stores.
On the other side of the state border, Oregon's state-run system benefited greatly by Washington's change. For example, liquor sales in the southern state increased 9.4 percent year over year for the month of October. At its 12 border stores, sales increased by 34 percent collectively. That included the Jantzen Beach store, just across the Clark County line on Interstate 5.
That store has continued to be among the top-selling Oregon stores.
Washington's hard-liquor sales, by contrast, increased by 2.9 percent from a year earlier during the first four months of privatization, the state reported this month.
But it was unclear whether the Washington's $263 million in booze sales was a trend followed by Clark County, with its borderline proximity to Oregon's cheaper system. Washington's state Department of Revenue does not track spirit sales by county, according to Mike Gowrylow, the agency's communications director.
Meanwhile the Oregon Liquor Control Commission reported Oregon's 12 border stores alone grossed an additional $3.2 million in revenue since 1183 went into effect June 1.
And it's only going to get worse for Washington booze sellers, according to new plans to license three additional liquor stores in the state.
Approved by Oregon's liquor board, the three sites will be in Beaverton, Ore., Damascus, Ore., and just across the state line off Interstate 205 at Portland's IKEA-anchored Cascade Station on Airport Way.
Oregon also has launched a temporary pilot project allowing a limit of four corporations to apply to be liquor store agents.
"So in that (Cascade Station) area, if one of those existing businesses, say, if Target wanted to, it could apply along with everyone else," said Christie Scott, a spokeswoman for the Oregon board. "It would still have to be a separate store, sort of like the jewelry stores inside Fred Meyer."
But Oregon stores aren't his only competition, according to Sidhu. In Washington, distributors in many cases charge the smaller stores between 25 percent and 35 percent more than they charge to volume discounters, such as Costco, Fred Meyer and Safeway.
That's because the delivery companies are set up for volume distribution to warehouses, said John Guadnola, of the Washington Beer & Wine Distributors Association, a 23-member group of distributors. The group includes the state's two largest hard-liquor distributors, Miami-based Southern Wine & Spirits, which operates a Kirkland office, and Young's Market Co. of Washington, a Kent subsidiary of the California-based company. The new state initiative encourages volume discounts, Guadnola said, although he could not verify Sidhu's claim that the price differences are between 25 percent and 35 percent. State law that remained in place even with the initiative prohibits the small stores from forming a purchasing cooperative.
This gives larger stores that have regional warehouses a huge advantage.
"It's so much cheaper to deliver a truckload to one place and have the customer break it up and deliver it out to the individual stores," he said.
Guadnola isn't surprised. His group contends 1183 was set up so that Issaquah-based Costco -- which spent $22 million backing the initiative -- would emerge a clear-cut winner.
"In the old system, everybody in the state paid the same price, and now, if you're not close to a Costco or big box, you're paying a whole lot more for the same product," he said.
Byron Roselli, a vice president and commercial real estate expert with Eric Fuller & Associates Inc. in Vancouver, is sympathetic to Sidhu and other small-business owners who tried to make a go out of the former state liquor stores.
Roselli represented many of the landlords and some of the bidders who purchased the state liquor stores in an online auction in late April. He said many bidders were sold on the opportunity to be among a select few that could operate in a smaller, 10,000-square-foot or less store, a privilege afforded only to the new owners of former state stores.
"It's impossible for any of them to buy liquor at a price that's competitive with Costco, Fred Meyer, Safeway or any other chain," he acknowledged. In addition, the transition from state sales to private sales was less than smooth, Roselli said. He added that instead of getting the auction going right away, the state held off until late April, which delayed some store openings as the new owners scrambled to renegotiate leases for the spaces.
In some cases, the state space was owned by corporations, such as Cincinnati-based Kroger Co., which planned to sell liquor through its Fred Meyer chain, and would not renew the leases for the new private owners.
Roselli said it also took the Washington Liquor Control Board time to pay the bidders a refund for the liquor they bought from state stores in June, based on February's inventory numbers. Bidders overpaid the state by thousands of dollars, due to a surge in liquor sales just before privatization.
"The bidders had to pay cash for everything, so they were out all of their personal savings," Roselli said.
He added that the most of the bidders were immigrants, so there were language barriers.
But Brian Smith with the state's liquor control board said his agency bent over backwards to explain the bidding process and the nuances of the state liquor business.
"They were entering into an entirely new market in Washington state, so there was a lot of uncertainty and unknowns," Smith said.
He said the state held a number of bidders' conferences and webinars attended by liquor licensing officials and other state personnel. "I feel for anyone who bought something that didn't work out, but we communicated everything we were doing," he said.
All six of the winning bidders of Vancouver's seven state stores were businessmen who emigrated from the northern state of Punjab in India.
Don Sidhu arrived in the United States in 1992. His fiancée and five-year-old twins have provided comfort through his business failure.
"I will keep my head up high and move forward," he said.
But Sidhu said he has learned a valuable lesson.
"Never buy anything from the state of Washington, or anything from the government," he said. "They set a very, very good trap for people to get caught up in."