This Changes Everything? The Washington Costco Initiative

Everyone knows that the wine business is highly regulated. In France, for example, very restrictive appellation regulations govern how wine can be made and even more restrictive laws limit how it can be advertised and promoted.

French winemakers sometimes must feel they are fighting a battle with one arm tied behind their backs.

America’s Long Hangover

But they have an advantage over many American producers, who could be excused for thinking that both their arms are immobilized. The American appellation system is not as restrictive as Europe’s, but the complicated web of federal, state and local regulations makes selling wine, especially across state borders, costly and cumbersome. (HR 5034, which would impose additional barriers to interstate wine shipments, would make this problem even worse.)

In my forthcoming book I call this mess the American Hangover. The U.S. wine market has a hangover, but it isn’t from too much wine. It is still recovering from Prohibition. Most of today’s regulations can be traced back to the repeal of Prohibition, when the federal government retained some regulatory powers, but turned others over the states (and in some cases, to local jurisdictions, too) thus creating a mess that is difficult to untangle.

The Swedish Solution

Here in Washington state, the end of Prohibition coincided with two important initiatives. First, the state government seized control of liquor sales under a modified version of the Swedish system.

Sweden instituted a state liquor monopoly in the 19th century (which lives on today in the form of Systembologet) based on the logic that people want alcoholic beverages (and will find a way to get them if they are banned outright), so Prohibition isn’t really feasible. But if liquor sale is in private hands it will be actively promoted because of the money it spins off, leading to increased alcoholism and public health and safety concerns.

A state alcohol monopoly can provide wine, beer and spirits as a sort of public utility – people get the product at a high price  and at some inconvenient to simultaneously discourage but facilitate consumption. No profit incentive encourages marketing and promotion of alcohol. The state has a monopoly on off-premises spirit sales in Washington; beer and wine are sold both in state stores and by private retailers.

At the same time the Washington state spirits monopoly was put in place, so were laws meant to protect state wine producers from out-of-state (read “California”) competition.  Incredibly, the number of wineries in the protected market actually fell as the industry collapsed. Without outside competition to discipline local producers, Washington wine became a least-common denominator product. The typical wine was sweet and fortified (Thunderbird-class wine, if you know what I mean) and early attempts to produce quality wines were hampered by the lack of an active fine wine culture.

This Changes Everything

The bad old days of Washington wine.

Much changed in 1969 with the passage of House Bill 100, otherwise known as the California Wine Bill. This law allowed out-of-state wines more or less equal access to the local market. Cheaper California wines flooded in and people naturally bought them.  Unable to compete in the low end wine market because of their higher production costs, Washington wine makers were forced to turn up market.

The California Wine Bill didn’t destroy Washington’s wine industry, as many expected it would. It redefined it. The result (to skip a few steps) is the industry you see today, where even large scale wine producers (think Columbia Crest) make wines to a high standard and the best wines compete successfully with the finest wines in the world.

The California Wine Bill changed everything … or nearly everything. This market liberalization remade the competitive landscape in Washington and set up the growth we have seen in recent years.

Now Washington voters are being asked to consider another set of potential market changes in the form of two initiatives on the November ballot. You might call them The Costco Initiative (I-1100) and The Distributor Initiative (I-1105). Costco is the largest backer of I- 1100 ($1 million according to a Seattle Times article). Liquor distributors Young’s Market and Odom Southern Holdings are reported to have contributed $2.2 million to back I-1105 (and oppose I-1100).

Pros and Cons

Are these proposed laws a step in the right direction in terms of the wine industry in Washington state? Will they “change everything” like the California Wine Bill and in a positive way? Since so many people have asked me this question I thought I would devote some space here to considering the issues.

Both proposals would eliminate the state monopoly on spirit sales. State liquor stores would close and private retailers would be permitted to sell spirits along with beer and wine. Costco has an obvious interest in this as do Safeway (which has contributed $325,000 to support the initiative campaign) and even Wal-Mart (a $40,000 contribution).

The move from public liquor utility to private market is a big change, since it substitutes American capitalism for Swedish socialism. Many people will understandably decide how to vote based on this factor alone. There really are public health and safety concerns associated with potential increased consumption of spirits and it is a fair question to ask if more active promotion of these products and more convenient access to them is in the public interest.

Even wine enthusiasts like me who consume alcoholic beverages every day may oppose these reforms, since we often claim somewhat self-righteously that wine is a temperance beverage – different from hard liquor. I’ll admit it: if this was just about letting Safeway and Costco sell vodka and tequila, I would vote against both the initiatives.

But there is more to the proposals than privatizing liquor sales.  How would they change the wine (as opposed to spirits) market? Who would win and lose? Look for answers to these questions in the next Wine Economist post.

9 responses

  1. The idea of trying to distance wine or beer from spirits didn’t work before prohibition, and won’t work now. I am involved in the production of both wine and spirits, and was involed in brewing some years ago. Over the last 30 years i have seen both the fun side and the dark side of adult beverages. The difference isn’t in the drink or where its purchased, it’s in the drinker.

    Those of us who make our living in this great business need to hang together, or we will all be hung separately.

  2. Terrible initiatives, both of them. Fact is that the state should get out of the liquor business, but this is not the time or the way to do it. Both initiatives are poorly written and give way too much power to the people who wrote them (surprise). Plus they’ll cost our cities and counties an enormous amount in lost revenue, and that means more cuts to health and public safety services.

    I’m voting no on 1100 & 1105

  3. Two counter-points to the Swedish model. 1.There’s no correlation between retail price / availability and alcoholism or abuse. 2. Correlation does not equal causation. Even if there was a statistical link between price and alcoholism, low price does not cause people to abuse or become addiction. Illicit drugs are very expensive, have stiff legal penalties associated with all facets of production, sale, and use — yet they are widely abused. Rates of alcoholism in Washington, which has the highest prices on liquor thanks in part to our state system, are not significantly lower than other states. The notion that rates will skyrocket is nothing more than a scare tactic used by those who oppose these initiatives that do not hold any water when applying critical thought and analysis.

  4. I agree with Grimaldi…. please look into the affects these bills would have on the smaller wineries who are putting out some amazing products.

    The big outfits want high volume discounts and the ability to carry credit (which currently isn’t allowed) This would have a significant impact on competitive advantage for the larger wineries.

    Keep reading the fine print here… the affects could be very detrimental.

  5. Something to note on the swedish model is that, contrary to popular belief, Systembolaget has a quite low mark-up, especially on wines and spirits.

    The pricing scheme is transparent and published on their website – everything has a mark-up of 19 % + a set mark-up of 50 US cents on wine, 39 c on spirits and 12 c on beer.

    The reason prices (on low-end products) are so high in Sweden is the alcohol excise taxes (2.4 USD on a bottle of wine) and 25 % VAT (added on top of everything, so mark-up and alcohol tax is taxed yet again).

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