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Privatization battle in Pennsylvania: lessons learned from Washington privatization

A year ago, if Tom Dieker wanted to pick up a bottle of Stolichnaya vodka, he had to drive to one of the small state stores near his suburban Seattle home.

Now, almost eight months after Washington state sold off those stores, chances are he can find it at his local Safeway supermarket, one of roughly 1,700 private retailers now selling liquor in the state.

“If you want just sort of a popular brand, you can find it at grocery stores now,” said Dieker, 46, vice president of sales for a consulting firm. “If you want a really nice bottle of scotch, something not so run-of-the-mill, there are some nice wine and liquor stores.”

It’s a level of convenience Pennsylvania consumers can only imagine, but not one without drawbacks. Average liquor prices have increased in Washington, small business owners have struggled to compete with large retailers, and reports of shoplifting have law enforcement officials calling for better liquor theft tracking.

As Gov. Tom Corbett seeks to end Pennsylvania’s wine and liquor monopoly, both sides in the debate have placed Washington in the spotlight.

Prices tick up

According to the Washington State Department of Revenue, the average retail price of a liter of liquor was up $2.64 in December compared with a year ago, when the state stores were the only game in town. The higher prices have prompted some residents to go over the border to Idaho and Oregon.

With an average price per liter that is more than $5 lower than in southern Washington, the 12 Oregon liquor stores on Washington’s border, operated by private contractors paid a commission by the state, have seen a 34 percent increase in sales since Washington privatized, said Oregon Liquor Commission spokeswoman Christi Scott.

That hasn’t dampened sales in Washington. With the number of liquor outlets more than quadrupling, overall liquor sales are up slightly, said Liquor Control Board spokesman Brian Smith. It’s a matter of availability, he said.

“You have more volume, you went from 329 to 1,700-plus stores,” Smith noted.

That has meant increased liquor tax revenue to supplement the $31 million the state raised by auctioning off the rights to operate its state stores to private owners. Smith said the state expects to more than break even.

Privatization supporters attribute the higher average prices to Washington’s high liquor taxes, which were left untouched, and a combined 27 percent in new fees levied on gross sales at the wholesale and retail levels. Those fees will drop to 22 percent in two years.

Washington’s privatization push began in 2010 but faltered when voters — worried about the potential loss of state revenue and the prospect of Jack Daniels bottles displayed next to the Ruffles at every 7-Eleven — defeated a privatization initiative at the polls.

The plan was reworked by Costco and food retailers in 2011 to limit liquor sales to stores with 10,000 or more square feet of retail space. It was put back on the ballot and coupled with a massive ad campaign funded primarily by Costco. The new plan left the state’s liquor tax structure in place and added surcharges of 10 percent at the wholesale and 17 percent at the retail level to prevent a decline in state revenue.

Voters passed the new initiative in November 2011, and by last April, the state had auctioned off the rights to operate its 329 state liquor stores and issued more than 1,000 additional licenses to retailers like Costco, Safeway and Trader Joe’s to sell liquor at their locations. In June, the system went live.

There are some key differences between Washington and Pennsylvania. While Washington once controlled the sale of spirits like whiskey and gin, residents in the state that is home to Starbucks and Microsoft have been able to buy wine and beer at supermarkets and other retailers for decades.

Liquor in Washington is taxed at a rate of 20.5 percent, plus $3.77 per liter. Its state stores collected a 51.9 percent markup on liquor before privatization. Now the state imposes 27 percent in new fees at the wholesale and retail level to recoup those profits. Retailers and wholesalers tack on their profit on top of that amount.

In Pennsylvania, consumers pay an 18 percent Johnstown Flood Tax in addition to a 6 percent sales tax and various smaller levies. State stores collect a 30 percent markup that contributes to an annual profit the system contributes to state revenues each year.

Unlike Washington, Corbett has no plan to impose new fees on wholesale and retail dealers to make up for that profit. Instead, his plan proposes making up for the revenue with flat annual license renewal fees.

Corbett took Washington’s experience and that of other states into consideration in putting his plan together, said spokesman Eric Shirk.

plan would replace the state stores with 1,200 licensed private wine and spirits retailers. It would also expand beer and/or wine sales to convenience stores, drug stores, supermarkets and big box retailers. Legislation implementing the plan is expected to be introduced in the House in March, and would need to pass the House and Senate.

Privatization is working for Washington consumers, said Ed Cooper, spokesman for Total Wine & More, a national chain that has opened three superstores in Washington and plans to open 10 more. If they shop around, they can find cheaper prices, he said. Like any other product, liquor is offered at different prices by different retailers, making the average price somewhat irrelevant.

“If they are after convenience, they may pick it up in their grocery store,” Cooper said. “The products may be more expensive in a grocery store than they would be in a specialty store like ours. It’s all about understanding retail prices.”

The chain is one of several eyeing Pennsylvania as a potential market if the state stores are eliminated.

University of Washington graduate student Colin Sowder said his buying habits have changed dramatically since privatization. He now buys most of his liquor at Fred Meyer, a combination supermarket and general merchandiser whose products include televisions, lawn furniture, breakfast cereal and now, Bacardi rum.

If he’s looking for something basic, Sowder, 27, of Seattle, said he typically buys whatever is on sale. That’s new because before privatization, the state had uniform pricing.

If he’s looking for something special, chances are Fred Meyer doesn’t stock it, so he’s still forced to make a special trip to a smaller, privately owned liquor store.

“If I went to my store — the old state store — and was looking for Four Roses bourbon, they generally had it,” Sowder said.

Selection varies. While the old state stores carried about 1,500 products, supermarkets, drug stores and all-purpose retailers will stock several hundred varieties while retailers like Total Wine stock a few thousand.

Specialty products, especially those produced by local distilleries, have become more readily available in some areas of the state, said Noriko Kaji, a 36-year-old entertainment company worker from Seattle. “The local stuff you can get at supermarkets,” she said. “A lot of the Seattle grocery stores, the high-end grocery stores, have focused on the local distillers.”

But small liquor store owners who paid tens or hundreds of thousands of dollars for licenses to take over the old state stores say they can’t compete with large grocery stores and chains like Costco, which sells liquor the way it sells everything else, discounted and in large volumes.

Dieker’s local state store in the small town of Sammamish, for example, was taken over by private owners, who won the right to open Plateau Wine and Spirits at the same address.

But they, like many shop owners, are struggling to compete with supermarkets and big box stores, said Michael Cho, co-founder of the Washington Liquor Store Association, a newly formed trade group that looks out for small store owners. “It has been an absolute disaster for local liquor store owners who bought their licenses from the state,” Cho said.

They are losing money because customers have turned to more convenient options for their everyday purchases, he said, and many are talking about shutting their doors.

Some 25 closed within the first six months, Smith said.

They’re also facing competition from liquor superstores like Total Wine & More and Bev-Mo, mega-retailers that offer volume pricing along with a huge selection of wine, beer and liquor.

Reviews on websites like Yelp show these adult beverage theme parks are wowing customers. “Every superlative word applies here. Pick your jaw off the shiny clean floor,” gushed Sharon H. of Seattle about Total Wine’s Bellevue, Wash., store.

Easier to steal

Anecdotal evidence that bottles of hard liquor have been walking out of supermarkets and into the hands of teenagers was enough to prompt the Washington Association of Sheriffs and Police Chiefs to push for a law to force retailers to report liquor theft losses. Supermarkets have balked at the request.

Wine and beer have been in supermarkets for years, said Mitch Barker, the association’s executive director, but they’re less attractive to shoplifters.

With liquor now displayed on the end of supermarket aisles, near exits and at self-service checkout kiosks, the association would like to know how much is being shoplifted.

“Sliding a bottle of hard liquor up your sleeve is a lot easier than boosting a couple of cases for the high school party,” Barker said. Organized rings of thieves have popped up in some places, shoplifting liquor for sale to teenagers at a sizable markup, he said.

Shirk pointed out that under Corbett’s plan, grocery stores would not be permitted to sell hard liquor in Pennsylvania.

Spokane resident Daniel Hall, a 38-year-old father of two small children, doesn’t like that the supermarkets are full of heavily promoted hard liquor that draws his kids’ curiosity. His wife, who works at a local supermarket, says they’re having a huge problem with shoplifters.

Hard liquor is suddenly ubiquitous, appearing in supermarket circulars and beckoning across the store as you pick out a steak for the grill, he said.

“Every grocery store has it. Now there are all these independent liquor stores that are popping up,” he said. “It is just more readily available now. I’m just not sure that is a good thing or a bad thing.”



30 percent state store markup

18 percent Johnstown Flood Tax

6 percent state sales tax

Miscellaneous smaller taxes

Washington state (post-privatization)

20.5 percent liquor tax

$3.77-per-liter tax

10 percent wholesaler fee

17 percent retailer fee

Washington state (pre-privatization)

51.9 percent markup

20.5 percent liquor tax

$3.77-per-liter tax

Source: The Morning Call