Economic Effects of Washington Liquor Initiatives

This is the third in a series on initiatives to liberalize Washington’s alcoholic beverage laws  (click here to read the first and second segments). How would Washington Initiatives I-1100 and I-1105 affect wine makers and wine consumers? Let’s look at wine makers first.

Wine producers in Washington are not united either in support of or opposition to the initiatives. One industry group, The Washington Wine Institute, publicly opposes both initiatives, for example, while the Family Wineries of Washington State supports I-1100 but opposes I-1105.

Winners & Losers

Both initiatives would create more avenues of competition for wineries by removing state restrictions that prevented discounted prices, negotiated payment schedules and so forth. Based on my conversations it seems that some wineries would welcome the opportunity to compete  using a fuller range of business strategies. They would like to be able to go after the business they want and to reward retailers and restaurants that carry the full range of their products or who make long term commitments.

Other wine makers are concerned that they may be disadvantaged in this new environment because they lack the resources or expertise to compete effectively. Interestingly, it is not just small wineries who want to avoid competition and not just large ones who embrace it. Obviously it is a complicated matter.

One wine maker candidly told me that it is hard to know if the gains will outweigh the losses.  This person saw obvious areas for new business expansion but realized there would be negative effects on margins and the need for more capital to accommodate extended payments. I sensed a very pragmatic attitude:  wine is a business and business people have to cope with whatever is thrown at them whether it is Mother Nature (a late harvest) or a change in state liquor laws.

My conversations reminded me of Olivier Torres’ discussion of the difference between French and American business strategy in his book The Wine Wars. American entrepreneurs, Torres says, look for new opportunities, taking risks, while the French business strategy is more about fending off threats. This is an oversimplified stereotype, of course, but it does seem to capture a bit of the wine war raging today in Washington state, where those with “French” attitudes are not necessarily from France.

Will Small Wineries Get Squeezed?

Television ads like the one I have inserted above suggest that small wineries would be especially hard hit by the new laws. A local news analysis of this ad raises some doubts about this claim (see  this King5 report). Will small local wineries get crowded off the shelf? Here’s my brief analysis.

I do think that large wine companies will have an advantage if the law is changed, but they have obvious economic advantages now, so this is nothing new. I would not be surprised to see big companies (Constellation Brands, Gallo, etc) increase their relative share of retail shelf space since they have the resources to offer discounts and incentives.

It is also possible that spirits companies and distributors will bring associated wine brands with them as they rush to fill their newly opened retail market niche if the initiatives pass, adding to the “crowding out” effect.  Retailers are trying to streamline their operations and reduced the number of suppliers they deal with, giving “drinks” companies that can supply wine, beer and spirits an advantage.

This effect will differ by type of retail account, of course, and be different for fine dining versus casual dining restaurant sales. In the supermarket segment, for example, you can already see differences in the relative incidence of the big producer portfolios in Fred Meyer (Kroger) and Safeway stores compared with regional chains like Metropolitan Market.

Although small wineries might get somewhat less shelf space, they certainly will not disappear from wine shelves and restaurant lists. Wine enthusiasts value diversity and smart sellers fill their shelves accordingly. That’s why a typical upscale supermarket offers 1500-2500 wine choices, at least ten times the number of options in any other product category. Retail wine margins are high and sellers profit by catering to their customers’ desire for a wide range of choices.

I think the competition among smaller winemakers will be more of a factor than between the big corporations and the small family wineries. There are hundreds of small wineries in Washington state all seeking a place at the retail table. Right now it is pretty difficult for the maker of a $40 Walla Walla Syrah to get shelf space (or distributor representation) and many producers are sensibly reconfiguring their business plans to focus more on direct sales. This will remain a good strategy if the initiatives pass, but makers who want to compete for shelf space will have more tools at their disposal.

And That’s A Good Thing?

Bottom line: small wineries will get squeezed by the big boys, but other small wineries are the real competition (hence the lack of a consensus among wine makers) and the initiatives will make this competition much more intense.

Is this a good thing? Well, it will probably be good for many consumers who will benefit from lower wine prices. They will likely have more (but different) wines to choose from too. Whether the new choices will be better is bound to be a matter of taste. If, as some have suggested, big box drinks retailers Bevmo and Total Wine open outlets in Washington it will change in significant ways the market terrain.

At the Ballot Box

How am I going to vote? The issue is complicated enough that I honestly haven’t decided yet. I am unlikely to vote for I-1105, however, since it seems like a stumbling half-step towards market liberalization.

I find the wine market aspects of I-1100 appealing and, as an economist, I am programmed to believe in the benefits of competition, but I am still concerned about the liquor law changes. I don’t know how making spirits cheaper and more readily  available will help solve the public health and safety problems associated with liquor consumption. Many will disagree with this view and I respect their opinions.

I guess I’m going to have to weigh the pros and cons before I cast my ballot just like everyone else.

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10 responses

  1. Good work Mike! I am voting ‘no’ on both. Mostly due to the fact that the profits now going to the State will have to be made up by the taxpayers in some other way.

    With the likelihood that Eyman’s Initiiative will pass as well this year I do not believe that the State Legislature will be able to make up the revenue short fall.

    Did you see Wilson’s piece in the Seattle Weekly several weeks ago? He talks about the revenue issues abit

    I think that all of the campaigns in these matters have not been accurate about how the State’s revenues will be impacted by passage of either of these….

    • Sorry it is Rick Anderson I was referring to, not a Wilson… the link is here:

      http://www.seattleweekly.com/2010-07-28/news/battle-of-the-booze/

      Remember it isn’t just taxes that the State and Local Governments lose if either of these passes. It is also the profit derived from the gross margin. Even this article doesn’t delve deeply into the revenue loss to the State but it does note $60 to $68 million in lost revenue to the Cities and Counties.
      The 2/3’s requirement to pass new taxes from Eyman’s Initiative (which is leading in the polls when I last looked) is the same thing that has bollixed up California’s Legislative process for the last few decades. A strategic voter who supports this State’s programs has to consider how this will impact the State’s revenue.

  2. Hi Mike,
    Will there be less tax revenue if 1100 passes? I see the Costcos of WA selling more alcohol and the possibility of more tax revenue. Am I wrong?

    • Hi Karen,
      Yes, I think the potential is there, but I don’t have the data to run the numbers to make a projection. I-1105 leaves the revenue question open by removing the taxes and not saying what would replace them.

  3. Mike,
    Thanks for doing this great three-part series on I-1100 and I-1105. Just as you, I have been agonizing over this myself for quite a while, and did a post on the subject last month [ http://winepeeps.com/2010/09/24/agonizing-over-and-analyzing-washington-ballot-initiatives-i-1100-i-1105/ ]. In that post I said that I was leaning toward voting YES on I-1100 and NO on I-1105. Your series has helped me solidify my leanings in that direction. While no initiative or legislation is ever perfect, and you raise some legitimate concerns on the spirits side, I believe the benefits to the consumer by ending the 80 yr old state-controlled , middle-man driven, dysfunctional system outweighs any tweaking I might have made if I had written it.
    And, unlike Jerry, I would not vote against one initiative because I believe another one might pass. I believe they all need to stand or fail on their own merits.

  4. Mike: I would like to clarify that Family Wineries of Washington strongly supports 1100 but does not support 1105. 1105 replaces the existing state spirits monopoly with a distributor oligopoly, repeals the alcohol tax at great cost to the state, and does nothing to fix our archaic wine and beer laws. 1100 does not repeal any taxes or public safety laws and would free Washington wineries, breweries and craft distilleries to compete in a free and fair market to the benefit of Washington consumers.

    YES on 1100; NO on 1105!

  5. I haven’t seen any credible discussion about the revenue issues involved here — some say revenue to the state will go down if they state no longer has a monopoly in the sales/distribution chain. OTOH, increased sales from expanded channels of distribution would gain additional tax revenues to the state, not to mention the reduction of operating cost and fixed asset valuation that could be eliminated.

    Any worthwhile discussion about the tax side of things, with believable analysis from any party?

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