Initiative 1183 – Privatizing the Liquor Industry – Part II – Distribution

November 17, 2011

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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