Inside the liquor battle: who'd win, who wouldn't

What worries Caleb Foster about Initiative 1100 is not that it would allow liquor to be sold in grocery stores and anywhere else beer and wine are available now.

He cringes at the parts of 1100 that would eliminate price controls, which currently make it illegal for large retailers such as Costco Wholesale to get better deals on wine and beer than a mom-and-pop store down the street can.

I-1100 "exclusively favors the success of massive companies whose model is discounts," said Foster, who owns Buty Winery in Walla Walla with his wife, Nina Buty.

Thousands of small players — including wineries, breweries and liquor-store managers — fear for their livelihoods if Initiative 1100 passes in November. They join a disparate group of fellow opponents, including beer makers and distributors with a financial stake in the system, and alcohol-abuse counselors and law-enforcement officials who worry the measure would lead to problems with public safety.

Others welcome a more open market, and restaurants and bars support a measure they say would mean more variety and lower prices.

The most obvious financial losers with I-1100 would be people who work in the state's liquor stores and distribution center. Altogether, 930 people are expected to lose their jobs if it or a related distributor-backed initiative called 1105 passes. About 550 of them are sales clerks making $11.35 to $15.30 an hour.

The entrepreneurs who run almost half the state's 315 liquor stores are worried, too. They do not own the inventory in their stores and are unsure whether they could afford to buy it from the state, much less compete with grocery and other stores selling liquor.

Gary Gregg, who owns a liquor store in Soap Lake in Grant County, figures he would try to get a loan for the $100,000 worth of liquor in his store. And if that failed, he might return to his old career in real estate.

"I'm not really quite sure what I would do," he said. "It would cost a lot of people their livelihoods and businesses, like what Wal-Mart has done to the retail business."

Who's behind the fight

There is big money on both sides of the I-1100 fight.

Costco Wholesale, of Issaquah, has contributed $1.9 million of the $2.3 million behind the initiative. Safeway added $325,000 and Wal-Mart tossed in $40,000.

They are opposed by a campaign against both I-1100 and I-1105 that has raised $6.1 million, a third of it from a group of large beer companies, including Anheuser-Busch and MillerCoors. More than $3 million has come from beer distributors, some in other states who fear Costco will bring the same changes their way.

Most beer distributors are ambivalent about I-1105. Because liquor is often distributed by large companies specializing in those products, beer distributors don't think they'll be much affected by it.

They vehemently oppose I-1100, because they worry about their place in a market where price negotiations — among other things — are permitted. As middlemen who warehouse and sell beer to restaurants and other retailers, they see deregulation as a way for some retailers to muscle in on their business.

"It's not even close to a leap to imagine small beer and wine retailers sourcing their liquor from Costco," said Craig Purser, CEO of the National Beer Wholesalers Association in Washington, D.C.

Distributors are joined by hundreds of wineries, breweries and convenience stores who also believe their businesses are threatened by I-1100.

Many do not care if the state is pushed out of the liquor business. They worry about deregulation, such as I-1100's plan to:

• Allow retailers to negotiate with manufacturers and distributors for volume and other discounts on liquor, beer and wine. Currently, restaurants and other retailers pay the same price for products. If a Washington retailer buys something from a California winery, the winery has to make that same product available at the same price to all Washington retailers.

• Let producers pay for shelf space in stores. Some retailers, including Costco, do not take that kind of payment in states where it is allowed.

• Permit distilleries, wineries and breweries to give gifts to retailers. Currently, only small gifts of little value such as coasters and T-shirts are allowed.

• Allow liquor, beer and wine manufacturers and distributors to extend credit. Currently, they must take payment on delivery.

• Let retailers centrally warehouse alcoholic beverages, like other products.

• Remove a law that requires retailers to pay the same price whether a distributor delivers to them or they pick up their product from the distributor.

The laws that I-1100 would dismantle protect small producers from major brands, said Anne McGrath, lobbyist for the Washington Wine Institute, which represents most of the state's 680 wineries and opposes I-1100.

Buty Winery in Walla Walla has experienced what happens without price controls.

It just entered Chicago, where Buty finds restaurants and bars that like its wine and its prices, but "know they can almost always force a better price," Foster said. "It forces us to play against really big models that can handle discounting. [Big wineries] can suffer a 10 or 20 percent discount in Illinois, because that's only 3 percent of their sales nationwide."

Once it gets a toehold in Chicago, Buty could make as much as a fifth of its sales there, Foster said.

The Washington Brewers Guild also opposes I-1100, which is "being marketed as just [letting retailers sell] spirits, but also deregulates our industry entirely," said Heather McClung, president of the guild, which has 68 brewery members. She also owns Schooner Exact Brewing in Seattle.

The guild prefers "slow, steady growth in modernizing those laws," she said.

Some small retailers worry about I-1100, too.

"It's wide open and means volume discounts for Costco and other large stores, which makes it very competitive for the smaller stores," said T.K. Bentler, executive director and lobbyist for Washington State Neighborhood Stores, a group of 500 independent convenience stores.

I-1100 supporters

Not all small businesses are afraid.

Mike Hale, of Hale's Ales, a brewery between Fremont and Ballard, figures he would do well in an open market, and said the laws that I-1100 would nix are easily circumvented now.

"There are many loopholes and exceptions and shenanigans," said Hale, who has brewed for 27 years and served on a state task force in 2006 with other industry representatives and the Liquor Control Board.

Hale's Ales and others create products for Costco and other retailers that no one else buys — for example, beer on pallets without cardboard separations — and sell them at prices that might as well be volume discounts.

Some breweries pay consulting firms to place their beer at eye level in grocery stores, a service cheap or free to the grocers and therefore a gift in exchange for shelf space from breweries, Hale said.

"No one could enforce these silly laws," he said. But the result is "supporting the middlemen culture [distributors], who have a guaranteed sweet spot."

Brian Smith, spokesman for the Liquor Control Board, said most companies play by the rules.

"The way we do a lot of our enforcement is by following up on complaints we get from industry members themselves," Smith said. "They kind of police each other by telling on each other."

Ashley Bach, spokesman for the Yes to 1100 campaign, said many small businesses welcome the competition and an end to Prohibition-era laws.

"Wineries and breweries are worried about the unknown, but the wine and beer industries are very well established in Washington and consumers are among the most sophisticated in the country and will seek out good products no matter who's selling liquor in Washington state," he said.

The Washington Restaurant Association represents nearly 5,000 restaurants that like the idea of a more open market — including lower prices — for alcohol.

Similarly, the Seattle Nightlife and Music Association's 100-plus nightclubs, bars and restaurants want more variety, lower prices and greater convenience, and wholeheartedly support I-1100.

Some expect to give more business to their current distributors if it passes.

"I already have a good relationship with the distributors who deliver my beer and wine, and it would be a lot more convenient to order spirits from those same companies," said Pete Hanning, co-owner of The Red Door restaurant in Fremont and president of the association.

The other initiative

Initiative 1105, another measure on November's ballot, has not drawn as much fire as I-1100, possibly because it keeps most regulations in place.

Backed exclusively by two large liquor distributors who ponied up $2.2 million, it would allow retailers to receive volume discounts on liquor, but not beer and wine.

What bothers the state's small grocers about I-1105 is that it would prevent them from buying liquor directly from manufacturers. Small stores often buy from small wineries and breweries that are too small for distributors.

"It [1105] basically says no one can touch a bottle except liquor distributors," said Jan Gee, CEO of the Washington Food Industry Association, which represents almost 600 independent stores.

Bob Stevens, a spokesman for the I-1105 effort, said it's a tax-collection issue. "It sounds self-serving, but there's a practical side of it," he said. "If there's not that kind of monitoring of the transaction, there's going to be tremendous cheating, because the tax dollars involved are huge."

I-1105 actually removes current liquor taxes but calls for new ones to be put in place.

If both initiatives pass, differences can be resolved in the courts or by a two-thirds vote of the Legislature, according to the Secretary of State's Office.

While the small grocers oppose I-1105, they're neutral on I-1100, partly because they disagree about whether price controls are fair. They don't love either measure.

"We would have preferred an initiative that just came out and said, private retailers may sell liquor," Gee said. "Leave all the taxes and everything in place, and over time what the Legislature believed needed to be reformed could be done in a thoughtful process."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

Information in this article, originally published Sept. 21, 2010, was corrected Sept. 23, 2010. A previous version of this story said Costco had contributed $1 million to the Initiative 1100 campaign. It failed to include non-cash contributions for items like signature gathering, which total $888,486. Altogether, Costco has contributed $1.9 million of the $2.3 million behind I-1100.