This is a series, check out Part I if you haven’t seen it yet!

DISCLAIMER:  I am NOT an expert in either law or the liquor industry.  Anything I write here could be inaccurate, especially due to the varied and changing interpretations of the law as it goes into effect. I will try my best to get things right, and make corrections as need-be, but I make no guarantees as to the accuracy of what I write here.

Resources:

The Current 3-Tier System:

Currently, the country operates on a “3-tier system”.  The gist of this is that an alcohol producer cannot sell directly to the public (except in special cases such as brewery/winery/distillery gift shops and bars, which we will talk about another day).  See the following diagram:

This means that there is a built-in middle-man in almost every alcohol purchase you make.  Obviously, this goes against the ideal of a lot of companies that emphasize low prices – they’d love to get that product to you at “wholesale” costs and take that middle-man’s profit margin for themselves.  Not to say that I don’t want lower prices; I think that the 3-tier system is broken.  I just don’t know that 1183 fixes it (or even helps us get better prices).

The details:  right now only the state (or state-selected contractor) is allowed to act as the final distributor (for example, a restaurant cannot buy liquor directly from a sales representative, but instead has to ask the state to order that product through their distributor, and then buy it from the state).  Only the state can warehouse liquor for future sale.

The New 3.5-Tier? System:

1183 passes, and now things get muddled.  Look at that pretty diagram up there again.  We don’t have to worry about warehouses – only the state can sell from them.  Suddenly, warehouses are a big deal, as are things called “endorsements”.  Take a gander:Yikes!  Ok, let’s say a distributor did all his/her distribute-y things, and a case of sumpn’-sumpn’ shows up at the doorstep of your friendly local grocer (now legally authorized to sell liquor).  Said grocer has some options: he can

  1. sell it to you at the retail tax rate, or he can
  2. tell the delivery guy “no, no, it goes to our warehouse down the street!”, at which point, it can
  1. be delivered to another store in the chain that is authorized to sell liquor, it can
  2. be sold to that restaurant or bar down the street (if the case is wine and the grocer has a “wine retailer reseller endorsement”, or if the grocer is operating under a spirits retail license instead of a grocery store license), it can
  3. be sold to another warehouse registered by a licensed seller, or it can even
  4. be sold to a legal purchaser out-of-state.

To make it even more confusing, every time a retailer sells to another retailer for resale (not consumption), the first retailer is considered a distributor.  Why?  An item can only be taxed at the distributor rate once (this guarantees that a case that makes the circuit among 50 sellers is taxed pretty much the same as a case that goes from producer-distributor-retailer-you directly).  [See sections 103 and 104 of 1183 to see this for yourself.]  What are the perks of this?  Your favorite savvy local businesses can form a group to warehouse their own stock, allowing them to make (or split) bulk purchases and save money.  Warehouses are legal for “associations, cooperatives, or comparable groups of retailers”, so long as there is “at least one retailer licensed to sell spirits” [103.3d].

This is a mess, and it actually increases the middle-men!  Why would we pass this?!  Well, because Costco threw a lot of bucks at it.  And they did it because they plan on being that first retailer and registered warehouse that sells to other retailers (like all those mini-marts that just might have their loophole to get in on selling liquor – we’ll discuss that later).  Chances are, Costco will probably go for a distributor license in some way or other as well, so they can distribute their private label, removing the middle-man on some products and winning their customers with bottles that are a few bucks cheaper.  Meanwhile, we can expect prices to go up in boutique locations that don’t deal directly with distributors because they don’t do bulk business.  (Many distributors have something  called a “broken case fee” that can add a buck or two per bottle for any purchase less than a whole case.  This makes small, diverse purchases very expensive.)  And of course, the wine clause in 1183 will make that even more visible, as bulk purchases of wine can now be discounted (though beer bulk discounts are, sadly, still illegal).

Next Up:

Taxes!

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I have refrained from politics on my blog, but I have a lot of friends asking me what will happen now that Washington (a notoriously strict control state) has passed what is possibly one of the loosest liquor laws in the country.  The following series is my best attempt at a summary.

DISCLAIMER:  I am NOT an expert in either law or the liquor industry.  Anything I write here could be inaccurate, especially due to the varied and changing interpretations of the law as it goes into effect. I will try my best to get things right, and make corrections as need-be, but I make no guarantees as to the accuracy of what I write here.

Resources:

Initiative Summary:

Initiative 1183 (1183 from here on out) primarily affects liquor distribution, retail and pricing, but it also changes a few rules on wine distribution.  The objective is to maintain the so-called “sin tax” for  2 years at its current level, while taking the state out of the business of sales and placing it firmly into enforcement, thereby allowing a free market system with non-uniform pricing and increased variety based on demand.  Nothing in 1183 should affect beer production, distribution, or sale.

Why You Should Care:

If you live or drink in Washington, you obviously are somewhat vested in this initiative.  If you don’t, you may see similar initiatives to privatize liquor or remove the 3-tier distribution system come to your state soon (thanks to that friendly giant, Costco). Oregon, I’m looking at you.  Here’s what may happen:

  • Prices.  Changing the system to a free market has the potential to increase or decrease prices from store to store.  There may be a change in the distribution system, allowing certain retailers to cut out the middle man, which would create much more affordable hooch.  This means we have the possibility of bargain-bin liquor, but it also means we get to hunt for the best deals.  One-stop-shopping?  Maybe.
  • Tax Revenue.  Our state is already in the red; they’ve depended on the liquor sin tax for years.  Now we’re messing with it, and we could see some serious funding issues crop up as the state tries to find new sources of income.  1183 addresses the tax income to a certain extent, but will it play out well?
  • Selection.  Availability of your favorite liquors may change.  Big box and major grocery chains may not have much incentive to stock more than 20-100 of the major brands, which could make it more difficult to get that Maraschino, Buffalo Trace, or even Dolin vermouth.  (And don’t even ask about amaros like Cynar or Fernet Branca.)  On the flip side, we will probably see private labels pop up.  Costco’s line of Kirkland Select is known for being top-shelf product in cheap 1.75 l bottles.  Kroger tequila anyone?
  • Local Economy – Distillers.  1183 could leave local distillers out in the cold.  While they may be able to directly supply local bars and restaurants, the [recently-legalized] craft distilleries have been highly dependent on exposure and shelf space in state stores for the last few years.  Now they may be required to select highly limiting distributors, which is a considerable risk for a new and vulnerable company.
  • Local Economy – Bars & Restaurants.  No matter how it turns out in the end, we’re up for a rough transition in a bad economy.  For some establishments, this transition could be the straw that breaks the camel’s back.  Good news?  Multiple establishments may be able to form groups to own centralized warehouses and gain access to bulk discounts.
  • Local Economy – Liquor Stores.  I’m pretty sure most Washingtonians know about the 900 jobs lost out of the state-run stores.  (Costco has generously offered to hire them, but I’m skeptical about whether the benefits compare.)  Some store managers will work hard to raise the money to buy their stores and separate liquor on the auction block, but many won’t have access to that kind of scratch.  Meanwhile, anyone that wants to open a store has 6 months to do so.  In all likelihood, grocery stores will be the majority provider for liquor in that time, as they will already have a license to sell.  I don’t expect they’ll be hiring a whole lot of new people to man a rearranged beer and wine section.
  • Internet Sales.  No one I’ve spoken to has any idea what happens here.  It depends a lot on  federal interstate commerce laws, so I have no doubt that the WSLCB has a crack team of lawyers assigned to this one.  We just get to wait until they tell us more.

Next Up:

  • The 3-tier system.
  • How 1183 messes with the 3-tier system.