The Great Masquerade: Deregulation Disguised as Privatization

Summer 2010

While there is much speculation about what the upcoming November elections have in store across the country, there is one issue looming in Washington state that warrants special attention – an unprecedented attempt at alcohol deregulation by ballot box. Make no mistake – the current threats to sane and sensible alcohol regulation in Washington state are unequaled in the history of American alcohol regulation.

Two initiatives dealing with privatization of the state’s liquor distribution and retail sales have qualified for the ballot – Initiative 1100 (I-1100) and Initiative 1105 (I-1105). I-1100 is advertised as privatization, but it would essentially deregulate alcohol altogether in Washington state. Small independent retailers would be the real loser if I-1100 were to win. A competing initiative, I-1105, would require the following: the state to close all liquor stores; private retailers be licensed to sell liquor; distributors be licensed to distribute spirits; and the removal of the current prohibition on quantity discounts.

The driving force behind I-1100 is retail giant Costco Wholesale Corporation, the nation’s largest wine retailer. Costco first tried to deregulate alcohol in the courts with landmark litigation against the state’s Liquor Control Board. In that case, Costco claimed the state’s regulatory system was a violation of the Sherman Antitrust Act and filed suit against the Washington Liquor Control Board. While Costco lost most of its arguments in the courts, it then tried a deregulatory push in the Washington state legislature and with the Liquor Control Board. Costco failed in the state legislature to throw away sensible alcohol regulation. Now, Costco is taking its third bite at the deregulatory apple in a campaign they are taking straight to the people – the citizens of Washington state. I-1100, disguised as privatization of the states liquor distribution and retail sales, would essentially deregulate alcohol altogether in that state. It would remove state laws that level the playing field and protect the public by eliminating effective state regulations. Costco has already told the Wall Street Journal that, if successful with this ballot initiative, it may launch similar campaigns in other states and continue to deregulate alcohol across the country.

I-1100 is billed as an effort to privatize the state’s “monopoly” on the distribution and sale of distilled spirits. Many states use the controlmodel to sell spirits, and still others use the licensed system accompanied by an effective regulatory structure. State legislatures routinely have robust debates about the appropriate control of alcohol sales, especially as it relates to ensuring the collection of tax revenue for the state. But I-1100 is much more than a privatization effort. It is privatization plus the complete deregulation of the alcohol industry.
I-1100 would eliminate all price control measures (only the ban on selling below cost would remain), uniform price requirements and the prohibition on quantity discounts. Advertising regulations would be changed to restrict ads only that have a “demonstrable effect” on underage drinking or abusive consumption. This, combined with the elimination of influence restrictions, would put small retailers at a competitive disadvantage and make retail chains even more powerful in the state of Washington.

Additionally, I-1100 would remove laws that regulate relationships between suppliers, distributors and retailers. The proposal would eliminate the prohibition against manufacturers owning, influencing or providing favors to retailers. I-1100 would throw out the level playing field for all segments of the alcohol industry, tilting the balance against independent owners and operators. It would allow the biggest and boldest global retailers to set the rules for the industry, and long discredited practices such as “pay to play,” “exclusivity” and preferential business terms for the biggest retailers all could be made legal by I-1100.

Representatives from the Washington Brewers Guild and the Washington Wine Institute have also voiced their concern that I-1100, while being promoted as a “modernizing” of liquor laws, is actually a sweeping proposal that repeals 39 state laws, enabling the biggest retailers, distributors, and producers to own and give favorable pricing to each other, while ignoring smaller producers, distributors and retailers. That would be a devastating blow to the level playing field that small breweries and other alcohol suppliers need to stay afloat and prosper.

The National Beer Wholesalers Association and the Washington Beer and Wine Wholesalers Association are very concerned about this serious threat to the state’s regulatory structure and the regulations that work to ensure an orderly market, where manufacturers and retailers of all sizes are able to compete fairly. NBWA will continue to work with a broad-based coalition of those interested in maintaining effective alcohol regulation to fight this unprecedented challenge and ensure a continued level playing field for independent retailers.

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National Beer Wholesalers Association President & CEO Craig Purser provides industry commentary each quarter for ABL Insider, a publication of American Beverage Licensees (ABL), a national trade association for retail alcohol beverage license holders across the United States. Each column provides insight on issues of concern to beer distributors, their retail partners and others in the alcohol beverage industry. To learn more about ABL Insider, please visit http://ablusa.org/news/abl-insider.