In aftermath of liquor privatization, spirits everywhere, not cheap
Many expected liquor sales privatization to benefit businesses, the state and the public by creating a modern market that would make spirits cheap and ubiquitous. Now liquor is ubiquitous but remains expensive, and some businesses still struggle for a place in the new environment.
Seattle Times business reporter
George Alberts voted in favor of forcing the state to release its Prohibition-era grip on spirit sales. But the world conjured by the new law fails to live up to his expectations.
“It’s a disappointment. Prices have gone up for all spirits,” said the 64-year-old retiree during a recent visit to Costco Wholesale, the warehouse club that drove the privatization initiative, in which he bought 12 large bottles of Bacardi rum.
Nevertheless, Alberts said some good had come out of it — mainly convenience. “I’d do it again,” he said about voting in favor.
That lingering ambivalence underscores how Washington residents and businesses are still adapting to the state’s pullout from the liquor business two years ago.
Many saw privatization as a win for business, government and the public. Retailers and distributors would inherit a lucrative niche. The state would get more revenue from newly imposed fees. And consumers would get cheaper, more widely available booze.
Well, most of that happened: A nearly $1 billion business is in private hands, the state has enjoyed a short-term revenue windfall, and liquor is ubiquitous. But on average it’s not cheaper, and certainly not perceived as such.
The dust hasn’t settled after the disruption created by ballot Initiative 1183, which took effect in June 2012. It left plenty of grievances in its wake, from small entrepreneurs who bought the rights to run state-owned stores to retailers arguing over fees, including Costco, which ended up with 10 percent of the state’s spirits markets, according to its executives.
Proponents of a limited role for state government say privatization has been only a qualified success because it has come at the expense of liquor buyers. “Clearly, the taxation element is one that still leaves a bad taste in consumers’ mouths,” said Leonard Gilroy, director of government reform for the Reason Foundation, a libertarian think tank.
Gilroy added that from a national perspective, the state’s move to get out of the liquor business “was pretty significant,” as it was the first state to do so since Prohibition ended. The effort has been closely watched by the other 17 states that are still engaged in the booze business, including Oregon, where a ballot initiative similar to Washington’s was dropped this month by its proponents.
More outlets, more money, higher prices
Privatization scattered sales of spirits, which had been previously concentrated in 329 stores owned or contracted by the state, to more than 1,400 outlets, from sprawling warehouse clubs to grocery stores and pharmacies. New entrants like California-based spirits and wine retailer BevMo! and Total Wine & More have captured a chunk of the market.
That doesn’t mean sales of liquor have increased dramatically: they rose 6 percent in the first year, a bit less than state forecasters had expected, and far less than what critics feared. And the most recent data point to volumes being relatively flat from last year.
Market research firm Scarborough says that of people who buy liquor, about a third bought it at their grocery store, about 24 percent at a liquor store, and 16 percent at warehouse clubs.
Restaurants are also reaping the benefits of flexibility. Before, they had to go to an assigned liquor store to stock up. Now they can have it delivered by competing distributors, which offer discounts and more variety.
“Everything is there and more,” says celebrity restaurateur Tom Douglas, who backed the privatization initiative. He thinks it’s worked out fine. “Some prices are higher, some prices are a little lower.”
The number of distributing licenses certainly has exploded — to 103, although many are held by the same distributor and most of the market is controlled by two companies, California-based Young’s Market and Southern Wine & Spirits out of Miami.
Meanwhile, state government has enjoyed a bounty despite giving up the business.
According to the state Office of Financial Management (OFM), revenue from spirits reached $521 million in the fiscal year ended in June 2013, about $73 million more than in the same period two years prior, which was the last full year under the state system. But that windfall is past its peak, as the figure for fiscal 2013 included a one-time $105 million fee paid by distributors.
For the current fiscal year, which ends Monday, the state had as of May collected nearly $369 million in revenue. State forecasters had predicted before the initiative passed that combined state general fund and local revenues would raise an additional $402 million to $480 million over six years. OFM director David Schumacher said in a statement that “it’s too soon to say how well those initial financial-impact projections will pan out.”
What’s certain is that many consumers are feeling pinched. The average price per liter, after tax, from June 2013 to April 2014 was $24.39, about 11 percent higher than in the same period two years prior, before privatization.
The culprit: fees created by the privatization initiative to make the state whole after giving up its monopoly. Those include a 10 percent fee paid by distributors, which will drop by half this year for many, and a 17 percent fee paid by retailers.
Data posted by the Tax Foundation, a Washington, D.C.-based think tank, indicates that Washington residents pay about $35.22 per gallon in spirits taxes, about $8.52 more than before privatization, even though Washington already was the state that taxed liquor the most.
Oregon is a distant second, at $22.73 per gallon. The gap has been prompting some to load up south of the border. Sales at 12 border stores in Oregon from July to October 2013 were 30 percent higher than in the same period two years prior, that state’s liquor control commission reported.
Some people have also blamed distributors, but John Guadnola, a spokesman for Washington spirits distributors, points the finger at the state.
“To me, it’s not rocket science,” Guadnola said. By guaranteeing the same amount of money to the state and adding private-sector profits, “there should have been no reason to think that prices going into the system would be lower,” he said, unless distributors were somehow to buy liquor at a cheaper price than the state monopoly was able to, and that won’t happen because they have less purchasing clout.
Costco executives, who pushed hard to get the initiative passed, disagree. They say that at least part of the general price increase may be due to the fact that stores have shifted to higher-end products. Moreover, they say that at Costco, most liquor prices are lower than at state-owned stores under the old regime.
A recent visit to the Kirkland warehouse backed up their price claims — provided you pay for a membership and are fond of very large bottles.
A 1.75 liter of Johnnie Walker Black Label scotch retailed for $69.25. At a state store in May 2012 it would have cost $81.95. At a downtown Seattle liquor store formerly owned by the state, it retailed for $109.99.
Costco executive John McKay said the company expects prices to come down as liquor manufacturers continue to jostle for sales and the free market works its magic.
“We’ve seen some of that, but not all of that,” McKay said.
The short stick
The free market, though, is crushing the former state stores auctioned off on the eve of privatization. Of 61 state stores in King County before the change, 34 remained open as of April, according to the liquor board.
Many entrepreneurs thought the stores would fill a unique niche in the new landscape — small neighborhood locations with established clients and no competition from other small businesses because the new law would allow spirits sales only in stores larger than 10,000 square feet, with few exceptions. In April 2012 they bid $30.75 million for the stores.
But restaurants began buying from more convenient, and cheaper, distributors. Some owners were crowded out by neighboring grocery stores, which have more wiggle room for liquor prices because they make their profit on other items.
Many were saddled with leases for more space than they needed as a big part of their sales disappeared, said David Cho, a former hedge-fund manager who left New York to run a liquor store in Tacoma, dubbed Liquor & Liquor, in which he had invested.
Cho says it had seemed to be a good location, far away from big shopping centers. Now sales are down 70 percent from the $4 million they amounted to annually before privatization; to survive he’s had to diversify into beer, tobacco and wine, but so far the store is still bleeding money.
“I haven’t paid myself in two years,” he said. “It’s the worst decision I’ve ever made.” Store owners didn’t get “what was promised” from the state, he added.
Brian Smith, a spokesman for the liquor board, says in response that it’s the fault of the invisible hand. “The market went from a controlled one where costs were equal to a free-market system where they are unequal,” giving larger players an edge.
Some local distillers are also feeling pinched, both by higher fees, which prompt consumers to buy less or to prefer cheaper products, and by competition from big liquor manufacturers that can better afford discounts.
Those factors have hurt the sales of Sound Spirits, a Capitol Hill craft distillery. “We had to go outside of Washington and find markets,” owner Steven Stone said.
But not all about privatization was bad: Private distributors offered better customer service to manufacturers than the state monopoly. Also, some distillers can themselves distribute to clients if they can’t find a distributor. “You get to skip the middleman,” Stone said.
Researcher Gene Balk contributed to this story.
Ángel González: 206-464-2250 or email@example.com. On Twitter: @gonzalezseattle