Will the Washington state Costco ruling hurt small wineries/retailers?

I noticed this letter in the Wall Street Journal today, and wondered about the impact of the Costco ruling might have.

Big-Box Muscle Worries Small Wineries, Brewers
May 20, 2006; Page A9

It's important to point out that the three-tier distribution system that governs the sale of alcoholic beverages in every state in the nation ensures that licensed retailers of all sizes have an even playing field when it comes to the responsible sale of beer, wine and distilled spirits ("Court Ruling Could Cut Prices for Beer, Wine1," Marketplace, May 11).

If Judge Marsha Pechman's decision stands, big-box stores will have even greater competitive advantages to muscle out smaller retailers at the expense of choice, convenience and service for Washington state consumers. While Costco claims that this decision will result in lower prices, that may not actually be the case. Providing the transportation, logistics, refrigerated storage, delivery and constant maintenance of perishable products, such as beer, is costly, regardless of who is performing the tasks. Is there really a guarantee that big-box stores will pass along savings to customers?

Americans place a high priority on having convenient access to the numerous choices of beer, wine and spirits available in the marketplace today, much of which is made possible by independent retail outlets. If Costco begins dealing directly with producers as a result of this ruling, the little guys -- microbreweries, farm wineries and, eventually, retailers -- will be left in the lurch. They certainly don't have the market power or profit margins to deal with the "enormous clout" of big-box retailers.

Harry Wiles
Executive Director
American Beverage Licensees
Bethesda, Md.

According to its website, the American Beverage Licensees is the largest trade association, representing nearly 20,000 bars, restaurants, taverns, and liquor stores. http://www.ablusa.org/

Regards, Bob

[Robin Garr]

I noticed this letter in the Wall Street Journal today, and wondered about the impact of the Costco ruling might have.

I'm guessing that ABL is hauling the same wagon as WSWA here, Bob ... trying to maintain the regulatory status quo - essentially a protective monopoly - limiting participation in the alcoholic-beverage economy to a small group of insiders.

Yes, large-industry competition can be rough on small businesses, as we've seen in the Wal-marting of America. But fine wine (and probably artisanal beer, too) is a bit of an exception, I think, because there is a strong niche market for it, and little interest in that market for industrial products. Else wouldn't Gallo, Kendall-Jackson, Brown-Forman and the like have driven small producers and importers out of business already?

The three-tier system is an unfortunate legacy of Prohibition, and as we move close to a century later, it's time for it to go. Deregulation hasn't eliminated small, quality producers in other industries, and it isn't likely to do so in alcoholic beverage trade.

"Deregulation hasn't eliminated small, quality producers in other industries ..."

Can you name some industries where that's true, Robin?

I'm thinking of airlines, for example. Deregulation has had a very mixed history there. I'm trying to think of an example where deregulation led to an increase in quality of goods or service -- except for a few really expensive executive flights on highly travelled routes, airline deregulation favored low cost suppliers. And, it's not clear air safety has improved as a result.

Any other examples?

[Not that I disagree with your premise, but as one who learned most about wine from small local wine retailers, I'm interested in the long term impact of deregulation.

Regards, Bob

[Robin Garr]

Can you name some industries where that's true, Robin?

I'm thinking of airlines, for example. Deregulation has had a very mixed history there. I'm trying to think of an example where deregulation led to an increase in quality of goods or service -- except for a few really expensive executive flights on highly travelled routes, airline deregulation favored low cost suppliers. And, it's not clear air safety has improved as a result.

Any other examples?

This is tough, Bob, because as a card-carrying and proud liberal, I'm not at all in favor of completely deregulated industry and not prepared to argue for it. I'm guilty here of using broad terms to describe a narrow situation. To restate it, I'm in favor of deregulating the transportation of alcoholic beverages because I believe it's a specific regulated industry in which regulations were adopted not for the benefit of the consumer but to provide a mechanism by which the organized crime cartels that had controlled distribution during Prohibition could essentially "go legal" while protecting their monopoly. That's not a good thing, and it's not much akin to the airline industry. (Although that being said, again, the airline industry probably could have used *some* deregulation - air travel costs are clearly far lower than they used to be, especially when inflation is taken into account.)

Again, bottom line, I don't see the demise of the three-tier system - as a mandatory operation - to be a threat to consumers or to any well-run business, large or small. And I know for certain that most of the small wine-geek retailers I know would be absolutely delighted to be free to deal directly with producers, would view that as a tremendous opportunity, not a threat, and would be eager to pass along their savings to consumers like me.

Thanks for narrowing the discussion, Robin. It's worth remembering that the decision is not yet final, might be overturned on appeal, and applies only to Washington. So far, Costco has even discussed bringing similar actions in other states according to the Journal.

The narrow rulings in this case, though, seem to favor only the big guys: Washington prohibits volume discounts; all retailers, from the corner store to the giant discount chain, must pay the same price for their beer and wine. The state also bars the central warehousing of beer and wine by retailers. That means Costco must make 24 separate purchases of beer and wine stocks for its 24 stores in Washington, rather than simply make one big purchase and warehouse it at a central location. And the law requires Costco to pay cash rather than on credit.

Presumably small retailers won't benefit from at least the first two factors: volume discounts and central distribution. And, credit will still be at the option of distributors or wineries -- a small guy may still have to pay cash on the barrel head for commercial reasons.

This decision may be a harbringer of the future repeal of the entire three tier system, but reports of its death, unfortunately, may be premature.

Regards, Bob

"... it's a specific regulated industry in which regulations were adopted not for the benefit of the consumer but to provide a mechanism by which the organized crime cartels that had controlled distribution during Prohibition could essentially "go legal" while protecting their monopoly."

I don't know if you are joking me or not, Robin -- if so you've given me an interesting afternoon trying to decide if you are or if there is a historical basis for your comment -- thanks for that.

Of course, I know that some distributors have bootleggers in their ancestories -- the Bronfman clan for example.

But I've never read that they had the political clout to actually set up the three tier system, and get it through the political hoops necessary for passage. I must confess I've never seen an objective history of Repeal, so your version might well be correct.

On the other hand, have you seen such a history?

Regards, Bob (still chuckling).