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Washington Voters Dismissal of State Liquor Monopo...

Washington Voters Dismissal of State Liquor Monopoly Having Unintended Consequences


This November, voters in the State of Washington pretty overwhelmingly decided to take away the state’s socialist system of liquor sales, 59-41. Don’t like the word “socialist”? Sorry, I’m not sure what else to call state control and ownership of all distribution and retailing of liquor products. I doubt that reliably Blue Washington rose up and took away the state’s gravy train because of a sudden surge of Reaganomic thought, however.

Government does a bad job of just about everything it does, including defense and policing. Government operations are simply inefficient and wasteful, at their best. For most bureaucracies, this isn’t obvious to most citizens. In most cases, it is because they have no interaction with that agency’s work in their everyday lives. In some cases, it is because there is no obvious private sector operation for them to compare as a reference. People don’t understand how badly operated even winning armies are, because private armies are so rare and so small.

They also tend to be run by blond dudes with crewcuts and foreign accents named Gunther…
Hey, I watch TV!

But liquor sales are different. Every time a Washington consumer walks into a profitable retailer of other products, he or she sees how things can and should be run. A look at Washington’s system, and the contrast becomes obvious. This is the outfit that recently installed a brand-new, much ballyhooed automated distribution warehouse that cost umpty million dollars and caused the state to run out of booze.

Across the country, voters are demanding an end to state ownership of booze sales and distribution. In some areas, they are getting it. In others like Pennsylvania, where Republican lawmakers are reneging on a pledge to voters, not so much. In Washington, all is well….

Or it will be eventually. For now, the transition is creating lots of problems and disruptions. Most government action carries unintended consequences, after all, even when that government action is simply stopping a previously on-going government action.

First off are taxes. Governments do not take kindly to having their revenue taken away, and won’t let it happen without a fight. The State Liquor Control Board has “interpreted” the ballot initiative to give the state the highest liquor taxes in the country…. Long term, Washington will have to continue its discussion of this issue to ensure that the restaurant and distilling industries can remain profitable enough to keep providing the citizenry with the vibrant and thriving product they now do.

More acutely to the specialty cocktail community, the transition to private enterprise is causing disruption in supply for consumers and some severe financial hardship for many small distillers.
The LCB is getting out of the distribution business in six months, and is thus understandably gun-shy about taking on unproven, low-volume, or slow-moving inventory. And the entities which will arise to replace the state’s operation are not yet up and running. Further, the LCB has issued regulations in response to the initiative that won’t allow distillers to sell their product to bars or restaurants either! This leaves smaller distillers in a life-threatening bind, with nowhere to sell their wares except their own distillery tasting rooms. (And they are fortunate in that. In states like Ohio, most of them would not be allowed to sell their own product in their own facilitiy!)

Washington has been, and will be again, a great place to be a craft distiller. The sophisticated market has been able to support about 40 small distilleries in recent years, most of which probably survive and perhaps thrive with sales only in state.
But it will be hard, if not impossible, for these small distillers to get through the market disruption brought on by the transition. How many startup manufacturers can expect to weather a six month drought in revenue? Those who have established sales outside Washington will likely make it through the hardship, though the ordeal will not be good for their long-term success. Of those that chose to cultivate their own fertile home market only, most will likely fail before things stabilize, unless some kind of distribution regulation relief isn’t found.

And there are far wider, though less dire, consequences for others in the the cocktail scene in Washington. Bars which have carefully crafted menus and drinks with boutique liquors (from in and out of state I imagine) will have to go without product, disrupting operations. And Washington consumers will have to muddle through shortages, too, though my sympathy for them is limited. They’ll still be able to drink well. It’s not like a redux on the Great Angostura Bitterlypse of 2009.

Washington’s privatization of liquor distribution and sales is a good thing. It will eventually results in a smoother-functioning, more reliable marketplace for liquor, with greater selection for consumers… assuming the state doesn’t tax it so hard it stunts the whole market. The transition to the new system is a bad thing. As with the marketization of every other socialized industry throughout the world, good people who adjusted their plans to a bad system will feel the pain unjustly. In a well-run government, the legislature would pass a temporary enabling act, allowing direct sales of product to bars and restaurants by in-state producers during the next six months. Since it usually takes legislatures six months to pass a non-binding resolution saying that they like puppies, I doubt this is in the cards. But if you live in Washington, a call to your state legislator would not hurt, and it might help.
What you can do, people of the Northwest, is buy local. If you are giving booze at Christmas, give a craft distiller’s product you’ve tried and liked. And stock up for yourself on bottles you like. It doesn’t spoil, you know. Every bottle sold for these guys will help them make it through this, or at least make the end less painful if they don’t make it. If you are interested in helping out, SeattleMet.com has a Guide to Washington’s Craft Distilleries that lists a number of these small manufacturers. They need every retail sale they can get right now.


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  1. DJ HawaiianShirt

    15 December

    Once again, Doug, you provide a better explanation on the situation than I can find anywhere on the interwebs.

    Oh, and I love your hot nuts. Thanks for giving them to me again.

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  2. Jordan

    15 December

    Interestingly, I was actually having a conversation last night about this very topic with an employee of one of the Portland distilleries. In her view, the privatization was a) a bad idea all around (especially for local distillers) and b) probably not going to happen because of legal challenges to a poorly written law.

    Her argument, which was mostly coming from the perspective of a small distiller, was that the state systems have done an excellent job of making sure that the craft distillers’ products get distribution and shelf space, which is a lot less likely under a privatized system.

    That doesn’t seem too unlikely, as the state has an incentive to increase the sales of their own distilleries. But, by the same token, any shelf space taken by a Washington product is space that’s unlikely to be given to an Oregon product or an Ohio product, etc. I see pretty much the same thing here in Oregon, that there’s always a lot of Oregon products on the shelves, but not so many from further afield. Admittedly, some of that may simply be that the distiller’s don’t have enough volume to move yet, so they’re focusing on their home markets where the cost of shipping and so forth will be lower.

    As far as prices go, I’m not sure they’re going to change very much. The math I’ve seen allows the privatized stores exactly the same markup as the state controlled stores have been charging. Admittedly, that means they can still compete on price and hope to make it up in volume, but I’m guessing that’ll mostly apply to lower end stuff that gets sold in large volumes anyway. There’s a good reason Costco fronted so much of the money.

    As far as the law itself goes, it doesn’t seem to have been written very well. The 10,000 sq. ft. requirement for new stores is especially galling and slanted towards big businesses, even if the argument is that this will prevent small liquor stores from popping up on every corner.

    As an additional wrinkle, I was talking with a family friend who is a port rep about the imminent change. She’s less pleased because it means that grocery stores will probably nix a lot of the shelf space that’s currently being given over to wine for a small selection of popular liquor. Whether that’s a good or a bad thing depends on your perspective.

    All in all, I’m conflicted. I can see how there are some significant downsides, even though in principle I think it makes the most sense for liquor stores to be private rather than state run. Time will tell how it all shakes out.

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  3. DJ HawaiianShirt

    16 December

    Interesting take, Jordan.

    It’s nice to hear that Washington takes its small distillers so serious, so much so that the state system might actually be preferable, in terms of distribution.

    It’s not always like that, though. Here in Virginia, the state controlled system is very exclusive, with small distillers fighting tooth and nail just to get a bottle or two on a shelf somewhere. I hear it’s even worse in Maryland. There’s also talk of privatization here, but I’m sure the legislative sausage-making and transition (if any) will be just as painful as it has been on the west coast.

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  4. Doug

    16 December

    Both of these are good points, guys.
    It should certainly be obvious that government agencies in different states will do some things “better” than in others. And private enterprise tends to be rough, hard, and dangerous for all involved. That’s the point. It’s what makes a private distribution system better in the long run for both producer and consumer.

    In the socialized system, there is a push mentality to distribution. The state decides what will be available. If the agency likes you, whether it be superior quality, political considerations (support Washington small business!), or even a bit of the old graft, you will get distributed, and you’ll get at least some sales out of it. If the state doesn’t like you, because you are not politically useful, say, you won’t get a chance to sell.
    In Ohio, the state is very good to MiddleWest and Watershed. But try to find much of any craft product from out of state. The success each is enjoying is politically useful to the ODLC, so they have given great support early on. From that standpoint, my buddies probably benefitted from our socialist system. But when they look to get distribution outside of Ohio, you can bet they will be looking to states with private distribution, for the same thing that helps them in Ohio, hurts them in every other politicized environment.

    In a system of private, competitive distribution, you will get your product distributed if people want to buy it. It is (effectively) that simple. If you are locked out of distributor A, distributor B will do the job. If not him, then C. There is a pull action at work, and the customer is ultimately king.
    I simplify of course. There is still a lot of work to be done, and no guarantee of success in the private system. And the state must allow enough ability to have direct sales to allow somebody to try a new product. But it becomes a huge advantage when you try to grow beyond your home, politically advantaged market.

    And the real winner is the consumer. I can’t legally have a real Aviation in Ohio. Period. The state won’t sell Creme de Violette. I know there is demand for it here. How? Let’s just say I do, m’kay? But it’s diffuse and unorganized. Diffuse and unorganized voices aren’t heard by government agencies. They are heard by aggressive competitors in an open market. Also, if someone makes a crappy product (You know there are many who do) they will fail faster in a privatized environment, leaving more room for quality competitors. It sucks when it happens to you, but the creative destruction of the open marketplace always results in a net long-term improvement for the consumer.

    Finally, I can easily see that the Washington initiative may be quite flawed. Voter initiatives often are. They usually only happen when a government’s self-interest or capture by special interests leads it to do things not in the interest of the people. As I said in the post, all governmental action, even repeal, ends up with unintended consequences. And voter initiatives are one of the most blunt-force of all government actions. The destruction being wrought by the transition in Washington is not the creative destruction of the marketplace. It is the crushing destruction of regulatory inertia!

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  5. Anthony

    5 January

    Excellent write-up, Doug. I was a big advocate for the initiative, in spite of the fact that it was horrible legislation. The fact is, however, that privatization has been discussed for 25 years and we’ve had the chance to do it right by utilizing our elected officials and they’ve flat out refused to do it. They’ve taken polls about liquor store customer service that included 30% of respondants who don’t even buy liquor. They’ve run out of product (like you mention in 2009). They only carry a decent selection in Seattle, so all these claims from the micro-distilleries are a bit overblown. I can’t find their products in Tacoma, Washington’s third largest city. I have to drive to Seattle. If I want something transferred from another store, it takes 6 weeks for a transfer of 30 miles.

    I agree with you that the WSLCB is dragging its feet and deliberately interpreting the rules to inflict as much pain as possible. That’s the MO in WA. I’ve heard from some of the distillers, however, that the board is being most gracious and professional through the transition. I suspect we suffer from different sets of expectations. No doubt that things will suck for the next six months, but two years from now I suspect my fellow citizens will kick themselves for having waited so long.

    While I find a number of little things problematic in the initiative, the biggest concern is actually the $150m guarantee clause. I haven’t seen a rational and non-emotional interpretation of 105.3.c which states “By March 31, 2013, all persons holding spirits distributor licenses on or before March 31, 2013, must have paid collectively one hundred fifty million dollars or more in spirits distributor license fees.” I believe this was done as a courtesy to the state and its revenue problems, but it puts distributors on the hook for a significant burden. I can only imagine where that interpretation is going to take us.

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  6. Doug

    6 January

    Anthony,

    Nice comment. I’m not sure how much of the WSLCB’s action is enemy action, and how much is incompetence. I do know that whenever a government of any level is FORCED to cut itself, it always pretends the only cuts to be made are in its most high-profile and useful services. i.e. No tax levy approved, cops and firemen seem to be the only thing that can be cut….

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  7. Jimmy

    20 April

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