Privatizing the Wrong Half of the State's Liquor System

So set 'em up, Joe. I've got a little story you ought to know.

There are two challenges to the state liquor monopoly this summer, one from an unproven private proposal, the other facing huge odds to demonstrate public support. Let's start with the one that the legislature passed, SB 5942, and which Governor Gregoire signed on Wednesday.

Down in Olympia, late one night during the special session, a couple of legislators snuck a bill into the hopper to privatize the supply side of the state's liquor business. That's right, to lease the big distribution center in SODO to a Tacoma consultant financed by a New York private equity firm.

Why'd they do that? After all, the centralized warehouse is the crown jewel in the state's antiquated liquor distribution system, the only part that's properly computerized and automated. Ah, follow the money. The consultant says he'd pay the state $300 million. That's a big piece of the amount the state needs to balance its budget.

It's not a done deal by any means. The bill, SB 5942, names no names, but it does direct the Liquor Board and the State Treasurer to investigate the possibilities of a long-term lease. But it's got an emergency clause, making it take effect immediately, with a fast track for bids and contracts, assuming the governor signs it. (The names, in case you're interested, are 33-year-old Tom Luce, a former district director for Rep. Norm Dicks, and Sandeep Kaushik, a political consultant who formerly wrote for the Stranger; the financing would come from Lindsay Goldberg, the firm that bankrolled a similar deal in Maine in 2004.)

The bill carries a clause declaring what the Seattle Times calls a "liquor emergency," though the Liquor Board takes no official position on the matter since it hasn't been signed yet. Officially, the Board's only input was to insist that the jobs of state employees be protected.

As it happens, it costs the state about $3.25 to receive, inventory, warehouse and deliver a case of booze to a state-owned or state-franchised liquor store, and it's hard to see how any private party could perform the same service for less, especially if the new operators have to protect the existing workers' jobs. A second warehouse east of the mountains would be helpful, but no outfit that provides logistics services exclusively can do much to increase its customer's business.

One is left with the feeling that there's got to be a catch somewhere.

I got the routine, So put another nickel in the machine ...

And sure enough, Joe, here's the catch. It's called Costco, the Issaquah-based, big-box giant who sells more booze than any other retailer in the United States.

Governor Gregoire''s action was called "unfortunate" by Joe Gilliam of the Norhtwest Grocery Association. "It would trade a state monopoly on liquor distribution for a private monopoly held by a single company, and would keep the state-owned liquor store monopoly in place," The result, contends Gilliam, is actually less revenue to the state. But then, Gillian has a dog in the fight: he's the spokesman for I-1183, the so-called Costco initiative.

Costco sponsored a bill during the regular session that would have privatized liquor sales (like the defeated I-1100) but made licenses more expensive (providing more revenue for the state) and limiting liquor sales to larger premises (no gas stations, no mom & pop grocery stores, for example). But the Costco bill died in committee.

Now Costco has returned to the initiative process we've become all-too-familiar with. The attorney-general has yet to certify a ballot title, and opponents have a week to appeal in court before signature-gathering can begin. Then, by July 8th, Costco has to come up with nearly 250,000 valid signatures to quality for a spot on the November ballot. That's not a lot of time.

Under the language of the initiative, private liquor stores must have at least 10,000 square feet of retail space. So no gas stations, no mom & pops, no convenience stores. Retailers would pay 17 percent of their gross revenues on spirits to the state. Most important for Costco, it would allow wineries and wine distributors to give volume discounts to restaurants and retail stores. (Costco says it's not interested in getting into the liquor business unless it can negotiate discounts, which wouldn't be possible under ESSB 5942.) The initiative would allow retailers to buy directly from wineries and distilleries but wouldn't completely eliminate the existing distribution network. (Beer distributors poured millions into a competing initiative last year to preserve their share of the pie). Finally, the intiative would double the penalties for selling liquor to minors.

Costco has learned that going it alone, as it did with the I-1100 campaign, is not a good political strategy. Its allies this time around are the Northwest Grocers Association and the Washington Restaurant Association, two powerhouse lobbying groups with tens of thousands of members who would benefit from the opportunity to buy booze at lower costs.

(The state may be efficient when it comes to distributing cases of liquor, but it charges a 34 percent markup before adding taxes; Costco typically operates on a 2 percent margin.).

Privatizing the liquor business would raise money by immediately selling off existing facilities, then paying increased tax revenues to the state.

But there's that pesky "competing" measure, SB 5942. Says Kaushik, who wrote that bill, "Costco wants their initiative to be the only thing out there. They didn't want the public to have a chance to see the bids that would come in through a competitive bidding process."

But others disagree and think the only purpose of SB 5942 is, once again, to muddy the waters. "Cities and counties don't lose a penny under the Costco initiative," says beverage-industry consultant Bob Stevens, "and the state gains revenue."

So make it one for my baby and one more for the road.