Washington State Alcohol Intiative Takes on Three-Tier Mandates

Action this Election Day in Washington State may send tremors across America by cracking open the anti-consumer, anti-competitive alcohol regulations in that state.

Initiative #1183 strikes at the heart of a government-enforced three-tier system for distributing alcohol, which is common in most states. This system requires alcohol producers and importers to sell only to wholesalers, who in turn are the only source from which retailers may purchase their inventory. Most states also ban “vertical integration,” preventing any single company from owning and operating businesses in more than one tier.

These mandates benefit the middlemen — alcohol wholesalers — by ensuring they get a cut in the profits on every sale. But it’s bad for everyone else from consumers to small wine, spirits, and beer producers.

But cracks have emerged within the three-tier system during the past decade. A major blow came in 2005 with the Granholm v. Heald U.S. Supreme Court decision, which barred protectionist state alcohol laws.

Now Costco Wholesale Corp. is leading the campaign for change in Washington State. A number of Washington state laws that enforce the three-tier system prevent Costco from effectively implementing its wholesale model, which involves direct purchasing of large volumes of product at discounted prices, central warehousing, and eventually delivering to its retail outlets where cost savings are passed on to members of its wholesale club.

Costco had already won the right in court to buy alcohol direct from both in-state and out-of-state wine producers, skipping wholesalers altogether. But laws barring them from buying direct from the spirits industry and against central warehousing of alcohol undermine their model.

Specifically, the initiative would do the following: sell off government-owned liquor stores to the private sector; allow private ownership of the former government stores; grant licenses to sell spirits in retail outlets with 10,000 or more square feet (i.e., large box stores and supermarkets); allow producers of spirits and wine (not beer) to sell directly to retailers; and allow retailers to centrally warehouse alcohol. It also imposes some hefty taxes on spirits to make the initiative revenue positive in a state that is suffering budgetary imbalances. Jason Mercier, offers more details in a publication for the Washington Policy Center.

Overall these changes are a big step forward not only for Costco, but for consumers.

Of course, political considerations mean the initiative isn’t perfect. First, the excessive taxes on spirits are hard to swallow. And the limitation of spirit sales to only big box stores and privatized formerly government stores limits the number of liquor retailers. Perhaps most egregious is the fact that the initiative doesn’t cover beer. Because of the very strong beer distributors’ lobby, beer producers must sell all their products through the three-tier system.

The first two of these drawbacks were introduced to help make the initiative more appealing to voters. A similar 2010 initiative failed because it posed a negative cost to government coffers and because of arguably unfounded social/temperance concerns about allowing mini-marts to sell alcohol. With these concessions, polling suggests that Costco may eventually win. The prospects for change elsewhere are better if they do. Joe Gilliam of the Northwest Grocery Association and Costco’s representative in Washington told the press that if the initiative succeeds, “I think there will be an initiative in Oregon” to attack its liquor monopoly.

A longer version of this article is available on Michigan Capitol Confidential.