NABCA
Legal Symposium on Alcohol
Beverage Law and Regulation
Rick Garza
Deputy Director
Washington State Liquor Control Board
March 09, 2011
Privatization Efforts in Washington State
 Timeline:
2004 -2008 - Costco vs. Hoen Lawsuit
2009 - Joint Select Committee Beer/Wine Regulations
• SHB 2040 Modifications to 3-Tier and Tied House Laws
2010 –
• State Auditors Report
• Legislative Bills to Privatize
• Public Perception of State System
• Initiatives 1100-1105
2011 - Liquor Control Board Response
• Public Safety
• Revenue
• Convenience
2
Uniform Pricing Laws & Regulations
(Costco v. Hoen)
Costco's Challenge
Costco filed a federal court challenge to several key requirements of the
state’s three-tier system of beer and wine distribution, arguing they violate
federal anti-trust laws. Nine specific restraints were challenged:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Uniform Pricing (manufacturers must offer uniform prices to distributors,
distributors must offer uniform prices to retailers).
Price Posting (prices posted electronically with state and may be viewed
when final).
Price Holding (electronically posted prices adhered to for 30 days).
Minimum Mark Up (selling price at least 10% over posted price).
Ban on Quantity Discounts (no price break for volume purchase).
Ban on Credit (no distributor sales on credit to retailers).
Delivered Pricing (price to retailer includes cost of delivery, even if delivery
declined).
Ban on Central Warehousing (delivery is to licensed retail location only).
Ban on Retail to Retail sales (retailers cannot sell to other retailers).
3
Privatization Efforts in Washington State
 Timeline:
2004 -2008 - Costco vs. Hoen Lawsuit
2009 - Joint Select Committee Beer/Wine Regulations
• SHB 2040 Modifications to 3-Tier and Tied House Laws
2010 –
• State Auditors Report
• Legislative Bills to Privatize
• Public Perception of State System
• Initiatives 1100-1105
2011 - Liquor Control Board Response
• Public Safety
• Revenue
• Convenience
4
Joint Select Committee Beer/Wine Regulation
• 3- Tier and Tied House Laws
– Supports separation of the three tiers
– Prevent domination of one tier over another or exclusion of
competitors’ products
– Two aspects:
• Ownership – prohibit M and D from owning or having a
financial interest in a R.
– EHB 2040 removes prohibition in financial interest and ownership
between the tiers
• Money’s worth – prohibit M and D from providing things of
value to R.
– EHB 2040 allows manufacturers and distributors to provide
branded promotional items of nominal value to retailer with
conditions
• All other Costco related issues rejected by Legislation
5
Privatization Efforts in Washington State
 Timeline:
2004 -2008 - Costco vs. Hoen Lawsuit
2009 - Joint Select Committee Beer/Wine Regulations
• SHB 2040 Modifications to 3-Tier and Tied House Laws
2010 –
• State Auditors Report
• Legislative Bills to Privatize
• Public Perception of State System
• Initiatives 1100-1105
2011 - Liquor Control Board Response
• Public Safety
• Revenue
• Convenience
6
2010 Opinion Page Editorials
It’s time for the state liquor monopoly to go. This fall, Washington voters should support
Initiative 1100, which keeps the state as the regulator of alcohol but not the retailer.
The two tasks conflict. The state is set up to police the market, not to make money from it. Retail
trade is not what government does best.
While the board is divided on whether continued state control is preferable to privatization, it is
persuaded that liquor sales are not essential services of state government. If Washington is to
preserve its ability to provide essential educational and social services, it will need to pare state
programs – even worthwhile ones.
It’s time to shed this antique system, turn liquor distribution and marketing over to the free market,
and enforce liquor laws without a conflict of interest or well-disguised and ignored irony.
7
Impact 1100: Deregulation of Alcohol
1. Repeals Pricing Restrictions on Alcohol Beverage
Industry
Initiative 1100 deregulates alcohol and treats it like any other product. It
repeals traditional three-tier system, tied-house restrictions and price controls
on spirits, beer and wine.
Initiative 1100 allows pricing practices that are currently prohibited such as:
Uniform pricing
Retail-to-retail sales
Quantity discounts
No restrictions on financial
Purchases on credit
ownership or interest
Central warehousing by retailers No restrictions on distribution
2. Terminates State Distribution and Retail of Spirits by
December 2011
8
Impact 1105:
– Terminates State Distribution and Retail of Spirits by
April 01, 2012.
Initiative 1105 directs the Liquor Control Board (LCB) to
implement a plan to terminate the system of state liquor
stores and liquor distribution and dispose of assets.
• LCB policy, enforcement and licensing functions
remain (unfunded)
• Creates general licenses for retail and distribution
• Over 930 state employee jobs eliminated
• Over 155 small businesses impacted
9
Background
Impacts of Initiative
I-1100
I-1105
Spirits, Beer, Wine
Spirits
Yes
Yes
Date of Mandatory Closure
December 31, 2011
April 1, 2012
Date Private Stores May Sell
June 1, 2011
November 1, 2011
Allows Private Parties to Sell & Distribute
Yes
Yes
Eliminates Board Mark-up
Yes
Yes
Repeals Existing Liquor Taxes
No
Yes
Distributors & Stores Subject to B&O taxes
Yes
Yes
Distributor License Fee
$2,000
$4,000
Retailer License Fee
$1,000
$2,000
Large Retailers
Large Distributors
Scope of Initiative
Closes State/Contract Liquor Stores
Major Proponents
Major Opposition
In State Distributors, Unions, Law Enforcement,
and Prevention Community
10
11
12
13
Privatization Efforts in Washington State
 Timeline:
2004 -2008 - Costco vs. Hoen Lawsuit
2009 - Joint Select Committee Beer/Wine Regulations
• SHB 2040 Modifications to 3-Tier and Tied House Laws
2010 –
• State Auditors Report
• Legislative Bills to Privatize
• Public Perception of State System
• Initiatives 1100-1105
2011 - Liquor Control Board Response
• Public Safety
• Revenue
• Convenience
14
Washington State
Liquor Control
Board
Survey of Customers & Non-customers:
Satisfaction & Potential Changes
DECEMBER 2010
KEY FINDINGS
46% of all respondents shopped at a state liquor store in the last year
•Frequency of shopping went down as age went up
Stores got high marks from customers
•Highest grades were for staff, cleanliness, safety, and supply
•Lowest marks were for prices, and wine selection
•7 in 10 were satisfied with selection
High ratings for convenience
•A’s and B’s for location, checkout speed, store layout and operating hours
2/3 said there were the “right number” of liquor stores
•2/3 Customers said “right number”
•4/10 Non-customers said “right number”
Majority of customers supported suggested changes
•On-line order
•Expand items to include non-alcohol items
•Open liquor stores inside other stores
•Sell gift cards
•Extend hours of operation
Most Non-customers opposed every change
Courtesy, Cleanliness Got Highest Grades; Wine Selection,
Value, Prices Scored Lowest
A
B
C
D
F
DK
Courtesy of staff
60%
29%
Cleanliness of the store’s
interior
60%
32%
Safety in the store’s parking
lot
56%
29%
Adequate supply of product
54%
31%
Professionalism of staff
53%
32%
45%
Selection of liquor offered
Number of staff members to
help customers
Outside attractiveness of the
store
20%
Selection of wines offered
20%
Value for the money
18%
Store’s prices
32%
28%
Helpfulness in getting special
order items
16%
11%
14%
16%
31%
35%
Level of staff knowledge
11%
39%
38%
Visibility of outside signs
20%
12%
39%
19%
21%
7%
26%
7%
18%
6%
53%
17%
31%
31%
6%
8%
36%
41%
8%
7% 4%
24%
21%
12%
27%
11% 6%
15%
6%
Q8: Now, I’d like to ask about your impression of the liquor store you shop most frequently. As I read a list of things about the store, I would like you to rate
each one. We will use a letter grade system, like they use in school, where “A” is Excellent, “B” is Good, “C” is Satisfactory, “D” is Unsatisfactory and “F” is
Failing.
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Convenience Factors Mostly Graded A or B
A
Convenience of the
store’s location
Speed of checkout
Convenience of the
interior layout
Convenience of the
store’s operating hours
B
C
D
F
DK
56%
31%
10%
53%
36%
9%
49%
38%
42%
35%
10%
14%
5%
Q10: Next, I’d like to ask you a few questions about customer convenience. Using the same grading scale as before, how would you rate… .
18
Most Customers Support Most Suggested Changes; Most
Non-customers Oppose
Good Idea
69%
Allow order on-line, then pick up at store
37%
NON-CUST
41%
23%
26%
Allow sample tastings
NON-CUST
69%
38%
8%
73%
10%
30%
12% 3%
38%
41%
3%
5%
54%
17%
3%
72%
55%
Extend the hours of operation
NON-CUST
52%
7%
5%
Sell gift cards for redemption at stores
36%
3%
59%
Open liquor stores inside other stores
NON-CUST
55%
61%
NON-CUST
26%
5%
8%
Expand items available to include non-alcoholic
NON-CUST
Bad Idea
67%
2%
85%
Q13: The state is considering some changes in the operation of its liquor stores. As I read a few of these, tell me whether you think that is a good idea or a
bad idea.
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Modernization Initiatives 2011-13
• 15 Stores and New Models
– 8 new stores
– Pilot up to 5 co-located within grocery stores
– Open 2 new specialty “super stores” in dense,
urban markets
• Standardize store hours
• Gift cards
• Online ordering for pickup at store
– Customer
– Restaurant
20
Modernization Initiatives 2011-13
• Delivery to licensees
– Contracted out to private sector
• Liquor-related merchandise such as ice,
corkscrews, and barware
– Stocking contracted out to private sector
• Sampling in liquor stores
21
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Washington Pricing
Revised
Current
$15.95
State Tax
$5.06
State Profit
$1.63
LCB Operational Cost
$2.76
Standard Bottle Cost
$6.50
$10.78
• Applying the California
pricing model in Washington
would reduce the average
retail bottle price by 32% or
$5.17 per bottle.
• Annual revenue distribution
would be reduced by 76% or
$224 million
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New Sales Tax
$0.87
New Gallon Tax
$0.65
LCB Operational Cost
$2.76
Standard Bottle Cost
$6.50
Washington
California Comparison
$15.95
State Tax
$5.06
State Profit
$1.63
LCB Operational Cost
$2.76
Standard Bottle Cost
$6.50
California
$11.66
• LCB business operational
expense is 32% less than
average private sector.
• Washington State
distributes more than 4
times the money per
bottle than California.
24
CA Sales Tax
$0.93
CA Gallon Tax
$0.65
Distributor &
Retailer Mark-Up
$3.58
Standard Bottle Cost
$6.50
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Questions
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