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Nov 02

I-1183: Removing the rules of fair play.

Sports fans know there are certain rules in place to keep the game fair for all. The alcohol business is also like this. How did these rules get here and how do they protect?

Why rules were needed

Prior to prohibition, America was considered a nation of drunkards. In the 1880s in an attempt to reform liquor sales, license fees to operate saloons were raised in effort to eliminate lower class dives. These business owners didn’t want to go out of business, so many turned to breweries for financial assistance. And the breweries responded. What resulted was a plethora of saloons tied to specific breweries. If you wanted a Schlitz you’d visit the corner saloon, next door may be an Anheuser-Busch saloon, and so forth. There was nothing like the Tap House back in those days. Instead, each saloon sold only their supporting brewery’s beer.

Brewing companies soon realized that tied houses were a very profitable way to dump their product on the population. During the 1890s, the number of saloons in Chicago increased dramatically. This led to increased competition and price wars among breweries. However, the cutthroat competition among the breweries had an adverse affect on its customers, and served to tarnish the respectability the industry had achieved during the 1870s. To quote the Associated Beer Distributors of Illinois; “pressure was exerted on retailers to maximize sales without regard to the well being of customers or the general public.”

Post-Prohibition: Cheers to drinking again, with new laws.These “tied houses” were seen as one of several contributors to national prohibition.

And when prohibition ended, laws were written taken to create a fair playing field. There would be no more tied houses.

Most states instituted a “three-tier system.” Alcohol could only be sold from manufacturers to distributors, distributors to retailers. Each tier is not allowed to have an interest in the other two tiers. Thus, fair competition and moderate marketing practices were encouraged. There are some exceptions and variances to these laws, but the addition of a middleman and separation of interests in general has worked very well for the brewing and liquor industries.

How rules protect

Alcohol retailers play on the same field, by the same rules. They pay the same price. They cannot sell product at a loss, simply to get customers in the door. All invoices are paid for at time of receipt. There is no credit. They all adhere to age restrictions for sales.

There are no “tied houses” in that a producer supplies only to businesses in which they have vested financial interest. Consumers are free to buy the same product at multiple businesses, be it Costco, Safeway, a convenience store, or the corner specialty shop.

Why those rules are in jeopardy

In Washington State, there is much confusion by consumers about the sale of beer, wine, and spirits. Much of this has to do with the state control of the spirits segment, and most citizens want the state out of the alcohol business. Corporations want the business. People want cheaper spirits, not wanting to pay mark-ups over 50%. I don’t blame them; that’s a high profit margin.

But corporations are smart. They’re not only going after removing the state from the spirits business, they’re striking out entire portions of the laws as they relate to wine and beer (2010, I-1100).

After defeat in 2010, Costco’s attorneys went back to the drawing board to figure out how best to get their initiatives approved. I-1183 is the result. It not only frees spirits from state control, but also removes the rules of the game as it relates to wine (and beer). Beer is in parenthesis because they decided to take on only one lobby: Wine. Page 40 of I-1183 completely removes the three-tier system as it relates to wine sales.

So why is protection of beer a concern? Our legal system considers precedent; beer is next.

What no rules means for small business

I-1183: Putting the squeeze on small business.With the elimination of the three-tier system, the ability to buy on credit and at deep discounts on bulk quantities will be introduced into the wine/beer industry. No longer will small businesses be able to compete with corporations.

Many producers will put their faith in corporations, signing supply contracts and joining forces to create “ties to houses” — but this also means their disappearance from the shelves of small retailers. Attorneys say, “Nonsense! Without the three tiers, small retailers can buy from corporations and resell.” But that’s just bad business. Why would a retail shop pay retail price, only to resell at a higher price than the corporations? That’s just stupid. And most small business owners aren’t stupid.

With tied houses, no longer are consumers free to buy the product here and there. There is only there. And the here will disappear, no longer able to compete.

Some say, “Survival of the Fittest” — to me, it looks more like “Survival of the Biggest.”

Please support small business and consumer choice. Vote No on I-1183.


Quotes from Forgotten Chicago: Tied Houses by Serhii Chrucky.

3 comments

  1. brendan

    The number of people who misunderstand the ramifications of I1183 depress the heck out of me – this hits it on the head. I1183 is awesome if you want to drink Blue Moon or Bud Light purchased at your local mega-mart, and terrible if you support independent brewers and buy their product at independent retailers. I hope to God it doesn’t pass…

  2. eric

    I understand your fear, but that is what it is – fear. Sadly, our legislature refuses to act in so many ways that we’re left to legislation via initiative. I don’t like it, but that’s how it is.

    Do you really think Boundary Bay, Silver City, HUB, or any other beer that matters is going to start strong-arming small retailers?

    Do you think Costco cares about these brands? Do you think your target audience buys beer from Costco?

    The state needs to get out of the liquor retailing. Once that has been put in place, there’s always time to tweak laws.

    And, hey, don’t worry, the legislature has a habit of overturning citizen (or in this case, admittedly, business) initiatives. So even when this passes, it will never see the light of day.

    I find your comment on choice very interesting – have you ever been to a store that stocks liquor in California? Do you think we have choice in this state? Right now, the state determines what brands are carried in the state (a potential roadblock to startup distilleries). Do we really need state bureaucrats determining selection? Not to mention the crappy hours, crappy service, and overinflated prices to support said bureaucracy.

    You’ll be fine. Relax and enjoy a beer!

    1. Tiffany

      Fear or fact? It is fact that removal of the three tier system will have serious implications for a business such as ours. Just because bad things result for small business and consumers doesn’t mean “fear.” I see the writing on the wall very clearly. I’m not afraid of it. I am concerned that people don’t understand the full implications of a yes vote. There has been little about this in the media. Much of the no campaign has been focused on the scare tactics of underage drinking. I-1183 isn’t only about liquor and state control, it will affect your wine and beer. I’ve read the initiative multiple times, considering the impacts it has on a business like mine and on my customers, fellow beer enthusiasts.

      Our business carries over 3,000 SKUs of beer on the books, many of these brands are also carried at Safeway, Costco, Wal*Mart, Whole Foods, and other corporate chains. We are able to effectively compete with these larger businesses on retail price because we pay the same wholesale price. We are able to maintain product freshness because we bring in small amounts at a time, storing in beer-friendly temperatures under UV filtered lights.

      With the passage of I-1100, corporations will have the purchase advantage under bulk sales statutes. They will be able to amass and store in central warehouses. What does this mean to the beer consumer? You may be able to get certain brands cheaper at corporations, but it could be old and improperly stored. And if you’re a beer drinker, I’m sure you realize that most craft beers have no bottling or best-by dates on the labels. Corporations are left to themselves to control quality. (Currently the middle tier, distributors, regularly check stock for freshness.) Standard pricing will likely increase as breweries who focus on “sustainable operations” must give discounts to corporations who purchase in bulk; this means increased pricing to businesses like mine. It’s not a case of “strong-arming,” it’s a case of following laws and being on the short end of the stick — simply because voters are (unknowingly) catering to corporations.

      Yes, our audience buys beer from Costco. They also buy from Safeway, Albertsons, Fred Meyer, Top Foods, Whole Foods, and I can name a dozen other chains. Let’s be real: People shop where and when it is convenient for them. We do everything we can to remain innovative, competitive, and offer a pleasant shopping environment. Costco’s business model is focused more on “large” and “quick turn;” they have business-to-business centers that could potentially act as a distribution center for products we carry. We have many Costco customers coming to us to buy single bottles to try, before they buy full cases at the center across the street. We have good relationships with Costco customers and many Costco employees shop at our business. Our competition is all around us, and right now we’re all on the same playing field: unilateral pricing, unilateral reporting, unilateral delivery, unilateral storage (in store). Why are voters intent on giving the corporations more control? People respond with, “free market,” but I-1183 is not free-market focused, it’s focused on giving retailers with 10,000 square feet and larger spaces the advantage with liquor. Further, I-1183 removes the three tiers of protection — protection of tax collection (state), protection of pricing and availability (retailer), protection of pricing and quality (consumer). Plain and simple. Black and white.

      As for choice, yes, choice will be affected. Some brands will sign exclusive distribution contracts with corporations and will no longer make their product available to other retailers. Multiple brands transported into the state on single vehicles will begin to disappear as larger brands shift to other retailers who are now able to act as both distributor and retailer. There will be fallout. We don’t know which brands will be affected. Time will tell.

      Large liquor chains, such as BevMo, already have plans to open in Washington should I-1183 pass. That’s smart business. We’re doing our part to operate smart — identifying possible business model changes to remain viable should a large liquor chain locate too nearby, educating people on how the three-tier system works (so they can make educated voting decisions, not just base the vote on “I want cheap liquor.”). I-1183 is about a lot more than ceasing “state control” of liquor. It’s about giving advantage to corporations.

      Support your community. Vote no on I-1183.

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