NABCA Legal Symposium on Alcohol Beverage Law and Regulation

NABCA Legal Symposium on Alcohol Beverage Law and Regulation

Rick GarzaDeputy Director

Washington State Liquor Control BoardMarch 09, 2011

Privatization Efforts in Washington State Timeline:

2004 -2008 - Costco vs. Hoen Lawsuit2009 - Joint Select Committee Beer/Wine Regulations

• SHB 2040 Modifications to 3-Tier and Tied House Laws2010 –

• 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 ChallengeCostco filed a federal court challenge to several key requirements of thestate’s three-tier system of beer and wine distribution, arguing they violatefederal anti-trust laws. Nine specific restraints were challenged:1. Uniform Pricing (manufacturers must offer uniform prices to distributors,

distributors must offer uniform prices to retailers).2. Price Posting (prices posted electronically with state and may be viewed

when final).3. Price Holding (electronically posted prices adhered to for 30 days).4. Minimum Mark Up (selling price at least 10% over posted price).5. Ban on Quantity Discounts (no price break for volume purchase).6. Ban on Credit (no distributor sales on credit to retailers).7. Delivered Pricing (price to retailer includes cost of delivery, even if delivery

declined).8. Ban on Central Warehousing (delivery is to licensed retail location only).9. Ban on Retail to Retail sales (retailers cannot sell to other retailers).

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2011 - Liquor Control Board Response• Public Safety • Revenue • Convenience

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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






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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.

2010 Opinion Page Editorials

Impact 1100: Deregulation of Alcohol1. 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:

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Uniform pricingQuantity discountsPurchases on creditCentral warehousing by retailers

Retail-to-retail salesNo restrictions on financial ownership or interestNo restrictions on distribution

2. Terminates State Distribution and Retail of Spirits by December 2011

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

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BackgroundImpacts of Initiative I-1100 I-1105

Scope of Initiative Spirits, Beer, Wine Spirits

Closes State/Contract Liquor Stores 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

Major Proponents Large Retailers Large Distributors

Major Opposition In State Distributors, Unions, Law Enforcement, and Prevention Community

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Privatization Efforts in Washington State

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Timeline:2004 -2008 - Costco vs. Hoen Lawsuit2009 - Joint Select Committee Beer/Wine Regulations




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

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Courtesy, Cleanliness Got Highest Grades; Wine Selection, Value, Prices Scored Lowest

60%60%

56%54%53%

45%41%

38%35%

28%20%20%18%

16%

29%32%

29%31%32%

36%39%

31%32%

39%19%

26%31%

31%

8%6%

8%11%11%

14%16%

20%12%

21%7%

17%24%

21%

7%

12%11%15%

27%6%6%

6%

7%

4%

18%

53%

Courtesy of staff

Cleanliness of the store’sinterior

Safety in the store’s parkinglot

Adequate supply of product

Professionalism of staff

Selection of liquor offered

Number of staff members tohelp customers

Visibility of outside signs

Level of staff knowledge

Outside attractiveness of thestore

Helpfulness in getting specialorder items

Selection of wines offered

Value for the money

Store’s prices

A B C D F DK

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

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… .

56%

53%

49%

42%

31%

36%

38%

35%

10%

9%

10%

14% 5%

Convenience of thestore’s location

Speed of checkout

Convenience of theinterior layout

Convenience of thestore’s operating hours

A B C D F DK

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Most Customers Support Most Suggested Changes; Most Non-customers Oppose

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.

69%

61%

59%

55%

54%

30%

5%

8%

3%

7%

3%

5%

3%

5%

8%

10%

2%

3%

26%

36%

38%

41%

38%

67%

37%

41%

23%

26%

17%

12% 85%

73%

69%

72%

55%

52%

Allow order on-line, then pick up at store

NON-CUST

Expand items available to include non-alcoholic

NON-CUST

Open liquor stores inside other stores

NON-CUST

Sell gift cards for redemption at stores

NON-CUST

Extend the hours of operation

NON-CUST

Allow sample tastings

NON-CUST

Good Idea 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

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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

$15.95

Standard Bottle Cost$6.50

State Tax$5.06

State Profit$1.63

LCB Operational Cost$2.76

Washington Pricing


New Gallon Tax$0.65

New Sales Tax$0.87


$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

Current Revised

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CA Gallon Tax$0.65

Distributor &Retailer Mark-Up

$3.58

CA Sales Tax$0.93

$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.

$15.95


State Tax$5.06

State Profit$1.63


California ComparisonWashington California

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Questions

NABCA Legal Symposium on Alcohol Beverage Law and Regulation

Documents

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