I-1183 TV ad on lower liquor costs mostly true
A television spot for Initiative 1183, a measure backed by Costco Wholesale that would privatize the state liquor system, says it would "bring more competitive prices to consumers." To borrow an idea from Bill Clinton, that depends on what you mean by "competitive."
Seattle Times business reporter
The claim: A television spot for Initiative 1183, a measure backed by Costco Wholesale that would privatize the state liquor system, says it would "bring more competitive prices to consumers."
What we found: Mostly True
To borrow an idea from Bill Clinton, it depends on what you mean by "competitive."
I-1183 would get the state out of the liquor business and open it up to stores measuring at least 10,000 square feet, with exceptions for underserved areas and existing state stores. Currently, 328 state-run and -licensed stores sell liquor; the state estimates that number would jump to 1,428 if I-1183 is approved by voters in November.
So, liquor would be available in more places. No one disputes that.
The question is whether "more competitive prices" means consumers paying less for booze. The I-1183 campaign says they would, although it has not said that explicitly in ads.
The pro-campaign is basically right. Some prices would fall, and maybe a lot of prices, given how heavily skewed the state would be toward large chains with big buying power.
Currently, the state buys spirits from distilleries, marks it up by 52 percent and adds taxes and surcharges. On a 750 milliliter bottle of liquor that sells for $15.95, those costs total $9.45. The Liquor Control Board uses the proceeds to finance its enforcement and liquor sales, and sends money to the state and local governments.
If I-1183 were to pass, the markup and surcharges — in this case, $4.39 — would die. In their place, the state would impose fees on retailers and distributors totaling 27 percent — 10 percent of distributors' gross revenues and 17 percent of retailers' gross revenues. The distributor fee drops to 5 percent after two years.
The distributors and retailers would add their own markups to cover their costs and make money.
At the low end, those markups would average 25 percent, according to an analysis the state's Office of Financial Management did on I-1183.
Using that scenario, the new fees plus markups on the same bottle of liquor total $4.09 — and the bottle's total price becomes $15.59, which is 36 cents below what it costs now.
Using the state's high-end scenario — a 45 percent average markup by retailers and distributors — those fees and markups would equal $6.05, and the final price would be $17.95.
Of course, even that range will not hold true at every store.
Costco's margins on almost any product are below national averages because of its tremendous buying power and unusual business model. The Issaquah-based chain says publicly that it marks up branded products no more than 14 percent and private-label items, which include Kirkland Signature wines, no more than 15 percent.
That would put it roughly even with the state's low-end scenario, if Costco uses distributors.
But I-1183 would make Washington one of the few states, and perhaps the only one, to allow retailers to buy directly from distilleries. If Costco did that, the bottle's price tag would be no more than $12.74.
The price could go even lower, if Costco were to persuade distilleries to absorb the cost of I-1183's distributor fee. (Distillers have to pay that fee if the distributor is cut out, the Liquor Control Board said.)
For a lesson in Costco's bargaining power, consider its 2009 tiff with Coca-Cola. The chain took the unusual measure of pulling Coke products from its shelves after learning it wasn't getting the best price; within weeks the companies reached an undisclosed agreement, and Coke was back in Costco.
The state's Liquor Control Board said it has bargaining power with distilleries, too. Washington is among the top 10 buyers of many major liquor brands, said Pat McLaughlin, director of business enterprise for the Washington Liquor Control Board.
If a 750 milliliter bottle of Jose Cuervo tequila that costs $17.95 under Washington's higher tax and markup structure were subjected instead to California's taxes, its price would drop to $13.95, he said. McLaughlin found the average price among a few private retailers in California was $13.99.
"We do have some leverage," McLaughlin said.
Still, many retailers think they could get better prices from distilleries than the state does.
"I'm not going to let them get away with the margin that they sell it to the state," said Chad Mackay, whose family owns the restaurant chain that includes El Gaucho, the Inn at El Gaucho and Waterfront Seafood Grill. The Washington Restaurant Association endorses I-1183.
Big grocery stores say competition would force them to bargain hard with distilleries and whittle their markups, pushing liquor prices down.
"The price isn't going to go any higher," said Joe Gilliam, president of the Northwest Grocery Association, which represents Costco, Safeway and other big food retailers.
The state budgeting office's estimates are based on national averages, which skew higher because they include small stores, he said. With some exceptions, I-1183 allows only large stores to sell liquor.
National averages also include states like California, where liquor taxes are so low that retailers can take a large markup on liquor and still keep prices to consumers low, he said. I-1183 does not change Washington's liquor taxes.
The state's low-end markup estimate of 25 percent is a conservative take on U.S. Internal Revenue Service data that show grocery, beer, wine and liquor stores — which make more than 75 percent of all liquor sales nationwide — mark up all their products by about 32 percent.
Gilliam says that average could be skewed by wine markups, which are higher than beer and liquor.
The state's high-end markup estimate of 45 percent (25 percent for retailers and 20 percent for distributors) came from a 2007 report by the Distilled Spirits Council of the United States.
Gilliam figures some distribution costs are already built into Washington's current liquor prices.
Although the state is in charge of liquor distribution, some distilleries pay distributing companies to be here. They promote liquor products to restaurants and bars, and some hold the liquor here for distilleries and deliver it to the state's distribution center in Seattle.
Melissa Allison: 206-464-3312 or firstname.lastname@example.org
Information in this article, originally published Oct. 1, 2011, was corrected Oct. 2, 2011. A previous version of this story contained an editing error that understated the markup on a 750 milliliter bottle of liquor.
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