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A year after liquor privatization in Washington: state revenues increasing as customers are paying more

May 28, 2013

A year ago, you couldn’t buy liquor at grocery stores in Washington. Now you can, but you probably pay more for it.

June 1 will mark the one-year anniversary of the state’s departure from the liquor business, when it turned sales over to private retailers such as Costco Wholesale and Safeway. The conversion happened at the behest of voters, who approved a Costco-written initiative in the fall of 2011.

Back then, only 329 stores — all state-run or contracted with the state — sold liquor in Washington.

Now more than 1,400 retailers sell slightly more liquor than the state used to — an average of 2.7 million liters a month since privatization, compared with 2.5 million before.

Prices spiked sharply last summer, but the rate of increase has steadily declined. In March, prices were 7 percent higher year-over-year, according to the Washington State Department of Revenue.

Additional repercussions from Washington’s conversion include hundreds of former Liquor Control Board workers still collecting unemployment benefits, shoplifting concerns among law-enforcement authorities and possibly more liberal attitudes about alcohol among youth.

A key concern in privatization efforts, particularly in an earlier attempt turned down in 2010, was the amount of revenue the government would collect after the change. And so far it’s been a pretty good deal for the state.

The state Economic and Revenue Forecast Council projects that spirits taxes and fees will generate $425 million in revenue for fiscal 2013, which ends June 30. About $392 million has been collected already, more than the $309 million the liquor business generated for the state and local governments in fiscal 2011.

Legal challenges have dogged implementation, as they do many voter initiatives.

One change resulting from the litigation involved the Liquor Board’s interpretation of a provision that allowed retailers to sell only 24 liters of liquor and wine in a “single sale” to bars and restaurants. The Liquor Board decided that meant 24 liters a day, but retailers fought and won the right to buy 24 liters per transaction, with no time limit.

That puts many locally owned grocery chains at an even greater disadvantage, said Jan Gee, president of the Washington Food Industry Association, which represents most grocers, except national chains.

Prices higher

High prices are probably the most divisive issue in the new liquor system.

Large retailers, who wrote and financially backed the voter initiative, blame distributors, who fought the measure and lost.

“Distributors are taking a huge margin in the middle,” Joe Gilliam, president of the Northwest Grocery Association, said, citing what he estimates as a 30 percent markup.

“Over time there will be competition, and distillers will complain,” said Gilliam, whose organization counts Costco, Safeway and other big grocers among its members.

The distributors disagree.

“My understanding is that (distributors’) margins in Washington are as low as anywhere in the country, and suppliers are not very happy about it,” said John Guadnola, executive director of the Washington Spirits & Wine Distributors Association.

And distillers do not appear willing to step in.

“You started off with the highest level of taxation in the country and to that added two new fees,” said David Osgo, chief economist for the Distilled Spirits Council of the United States.

The voter initiatives included those new fees — assessed on retailers and distributors — to ensure the state nets as much money as it used to from the liquor business.

The retailer fee is 17 percent. The distributors pay 10 percent for the first two years they do business in Washington, then the amount drops to 5 percent. For most, fees will drop in the spring of 2014.

On top of that, the voter measure required distributors to have collectively paid at least $150 million in fees by March 2013. They were expected to miss that target all along, and the Liquor Board recently sent letters telling them how much they owe.

Southern Wine & Spirits, which sold 57 percent of the liquor in Washington in 2012, owes $59.5 million, while Young’s Market, which sold 36 percent, owes $37.7 million. (The next largest distributor is Click Wholesale Distributing, with 2 percent.) All payments are due May 31.

No one is sure what will happen after distributors pay off the shortfall and see their fee drop to 5 percent next year.

David Trone, president of the Total Wine & More chain, says prices on a lot of popular items are lower, particularly at discounters such as his company and Costco.

He has a list of 50 popular products, most in the 1.75-liter category, that Total Wine’s analysis shows are $5.72 cheaper on average than state store prices.

For example, a 1.75-liter bottle of Absolut vodka at Total Wine in early April cost $40.33, including taxes, compared with $47.95 at state stores just before they closed last year, the chain says.

A comprehensive comparison of pricing is not available because the state, with its exit from the liquor business, no longer tracks individual brands.

Net job gain

Trone also touts job creation, saying his four stores alone have hired 200 people.

Southern Wine and Young’s Market have added more than 1,000 jobs to handle the new business, some at Southern’s new 350,000-square-foot distribution facility in Puyallup.

That would offset the 902 Liquor Control Board jobs lost because of privatization. The layoffs included people who worked at the state’s liquor-distribution center in Seattle, which is being bought by Panattoni Development Co. for $23.4 million in a sale expected to close in July.

Many of the laid-off employees are still out of work. In April, 458 claimed at least one week of unemployment benefits, according to the Washington Employment Security Department.

One worker who did find a job is Pat McLaughlin, the Liquor Board’s former head of business enterprise, who also oversaw the sale of the state’s liquor stores before losing his own job.

“I consider myself blessed that my transition was surely easier than most,” said McLaughlin, who now runs the solid-waste division of King County’s Department of Natural Resources and Parks.

He still lives in Olympia and takes the Sounder from Lakewood to Seattle for work.

Concerns about crime

A concern among opponents of liquor privatization was the notion that it would make access to booze easier for minors.

The Liquor Board monitors that with store-by-store stings to see if retailers are selling to minors, and the numbers have not changed much.

Typically, 5 to 6 percent of stores under the state-run system were found to have sold to minors. Under private retailers, the range since last June is 5 to 10 percent.

It may be that youth-alcohol consumption hasn’t changed much, but a survey last fall showed changing attitudes among Washington state youth.

“Significantly fewer students in eighth, 10th and 12th grades believe their peers think it’s ‘very wrong’ for someone their age to drink alcohol,” said Julia Dilley, an epidemiologist who also teaches at the University of Washington.

That attitude change is an early warning signal, said Dilley, who received a grant from a program of the Robert Wood Johnson Foundation to study how privatization changes consumption patterns.

She also plans to study whether changes in consumption are associated with more alcohol-related consequences, such as hospitalizations, crime and traffic accidents.

Already, the Washington Traffic Safety Commission has found that the number of fatal crashes involving a drunken driver in the second half of 2012 — 53 — was lower than the same six months in the previous five years.

One crime that seems to have risen is shoplifting, possibly because retailers are not as careful about security as the state was.

“Some (police) chiefs and sheriffs have noted an increase in shoplifting related to spirits,” said Mitch Barker, executive director of the Washington Association of Sheriffs & Police Chiefs. “There’s no question organized crime is involved. Groups are taking large amounts and selling it on the black market.”

Evidence so far is anecdotal, but state Rep. Christopher Hurst, D-Enumclaw, has asked retailers to share information about which stores are experiencing liquor losses and how much.

He expects to consider those data soon as part of a working group of the House Government Oversight and Accountability Committee, which he chairs and which has jurisdiction over liquor.

Hurst is responding to Washington cities, which reported they do not have the resources to litigate all the spirits-shoplifting cases they are getting.

“It’s a lot bigger problem than people expected,” Hurst said.

Source: Seattle Times