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NABCA Legal Symposium on Alcohol Beverage Law and Regulation

NABCA Legal Symposium on Alcohol Beverage Law and Regulation. Rick Garza Deputy Director Washington State Liquor Control Board March 09, 2011 . Privatization Efforts in Washington State. Timeline: 2004 -2008 - Costco vs. Hoen Lawsuit 2009 - Joint Select Committee Beer/Wine Regulations

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NABCA Legal Symposium on Alcohol Beverage Law and Regulation

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  1. NABCA Legal Symposium on Alcohol Beverage Law and Regulation Rick Garza Deputy Director Washington State Liquor Control Board March 09, 2011

  2. Privatization Efforts in Washington State • Timeline: 2004 -2008 - Costco vs. Hoen Lawsuit 2009 - Joint Select Committee Beer/Wine Regulations • SHB 2040 Modifications to 3-Tier and Tied House Laws 2010 – • State Auditors Report • Legislative Bills to Privatize • Public Perception of State System • Initiatives 1100-1105 2011 - Liquor Control Board Response • Public Safety • Revenue • Convenience

  3. Uniform Pricing Laws & Regulations(Costco v. Hoen) Costco's Challenge Costco filed a federal court challenge to several key requirements of the state’s three-tier system of beer and wine distribution, arguing they violate federal anti-trust laws. Nine specific restraints were challenged: • Uniform Pricing (manufacturers must offer uniform prices to distributors, distributors must offer uniform prices to retailers). • Price Posting (prices posted electronically with state and may be viewed when final). • Price Holding (electronically posted prices adhered to for 30 days). • Minimum Mark Up (selling price at least 10% over posted price). • Ban on Quantity Discounts (no price break for volume purchase). • Ban on Credit (no distributor sales on credit to retailers). • Delivered Pricing (price to retailer includes cost of delivery, even if delivery declined). • Ban on Central Warehousing (delivery is to licensed retail location only). • Ban on Retail to Retail sales (retailers cannot sell to other retailers).

  4. Privatization Efforts in Washington State • Timeline: 2004 -2008 - Costco vs. Hoen Lawsuit 2009 - Joint Select Committee Beer/Wine Regulations • SHB 2040 Modifications to 3-Tier and Tied House Laws 2010 – • State Auditors Report • Legislative Bills to Privatize • Public Perception of State System • Initiatives 1100-1105 2011 - Liquor Control Board Response • Public Safety • Revenue • Convenience

  5. Joint Select Committee Beer/Wine Regulation • 3- Tier and Tied House Laws • Supports separation of the three tiers • Prevent domination of one tier over another or exclusion of competitors’ products • Two aspects: • Ownership – prohibit M and D from owning or having a financial interest in a R. • EHB 2040 removes prohibition in financial interest and ownership between the tiers • Money’s worth – prohibit M and D from providing things of value to R. • EHB 2040 allows manufacturers and distributors to provide branded promotional items of nominal value to retailer with conditions • All other Costco related issues rejected by Legislation

  6. Privatization Efforts in Washington State • Timeline: 2004 -2008 - Costco vs. Hoen Lawsuit 2009 - Joint Select Committee Beer/Wine Regulations • SHB 2040 Modifications to 3-Tier and Tied House Laws 2010 – • State Auditors Report • Legislative Bills to Privatize • Public Perception of State System • Initiatives 1100-1105 2011 - Liquor Control Board Response • Public Safety • Revenue • Convenience

  7. 2010 Opinion Page Editorials It’s time for the state liquor monopoly to go. This fall, Washington voters should support Initiative 1100, which keeps the state as the regulator of alcohol but not the retailer. The two tasks conflict. The state is set up to police the market, not to make money from it. Retail trade is not what government does best. While the board is divided on whether continued state control is preferable to privatization, it is persuaded that liquor sales are not essential services of state government. If Washington is to preserve its ability to provide essential educational and social services, it will need to pare state programs – even worthwhile ones. It’s time to shed this antique system, turn liquor distribution and marketing over to the free market, and enforce liquor laws without a conflict of interest or well-disguised and ignored irony.

  8. Impact 1100: Deregulation of Alcohol 1. Repeals Pricing Restrictions on Alcohol Beverage Industry Initiative 1100 deregulates alcohol and treats it like any other product. It repeals traditional three-tier system, tied-house restrictions and price controls on spirits, beer and wine. Initiative 1100 allows pricing practices that are currently prohibited such as: • 2. Terminates State Distribution and Retail of Spirits by December 2011

  9. Impact 1105: • Terminates State Distribution and Retail of Spirits by April 01, 2012. Initiative 1105 directs the Liquor Control Board (LCB) to implement a plan to terminate the system of state liquor stores and liquor distribution and dispose of assets. • LCB policy, enforcement and licensing functions remain (unfunded) • Creates general licenses for retail and distribution • Over 930 state employee jobs eliminated • Over 155 small businesses impacted

  10. Background

  11. Privatization Efforts in Washington State • Timeline: 2004 -2008 - Costco vs. Hoen Lawsuit 2009 - Joint Select Committee Beer/Wine Regulations • SHB 2040 Modifications to 3-Tier and Tied House Laws 2010 – • State Auditors Report • Legislative Bills to Privatize • Public Perception of State System • Initiatives 1100-1105 2011 - Liquor Control Board Response • Public Safety • Revenue • Convenience

  12. Survey of Customers & Non-customers:Satisfaction & Potential Changes Washington State Liquor Control Board DECEMBER 2010

  13. KEY FINDINGS • 46% of all respondents shopped at a state liquor store in the last year • Frequency of shopping went down as age went up • Stores got high marks from customers • Highest grades were for staff, cleanliness, safety, and supply • Lowest marks were for prices, and wine selection • 7 in 10 were satisfied with selection • High ratings for convenience • A’s and B’s for location, checkout speed, store layout and operating hours • 2/3 said there were the “right number” of liquor stores • 2/3 Customers said “right number” • 4/10 Non-customers said “right number” • Majority of customers supported suggested changes • On-line order • Expand items to include non-alcohol items • Open liquor stores inside other stores • Sell gift cards • Extend hours of operation • Most Non-customers opposed every change

  14. Courtesy, Cleanliness Got Highest Grades; Wine Selection, Value, Prices Scored Lowest Q8: Now, I’d like to ask about your impression of the liquor store you shop most frequently. As I read a list of things about the store, I would like you to rate each one. We will use a letter grade system, like they use in school, where “A” is Excellent, “B” is Good, “C” is Satisfactory, “D” is Unsatisfactory and “F” is Failing.

  15. Convenience Factors Mostly Graded A or B Q10: Next, I’d like to ask you a few questions about customer convenience. Using the same grading scale as before, how would you rate….

  16. Most Customers Support Most Suggested Changes; Most Non-customers Oppose Q13: The state is considering some changes in the operation of its liquor stores. As I read a few of these, tell me whether you think that is a good idea or a bad idea.

  17. Modernization Initiatives 2011-13 • 15 Stores and New Models • 8 new stores • Pilot up to 5 co-located within grocery stores • Open 2 new specialty “super stores” in dense, urban markets • Standardize store hours • Gift cards • Online ordering for pickup at store • Customer • Restaurant

  18. Modernization Initiatives 2011-13 • Delivery to licensees • Contracted out to private sector • Liquor-related merchandise such as ice, corkscrews, and barware • Stocking contracted out to private sector • Sampling in liquor stores

  19. Washington Pricing Revised Current $15.95 • Applying the California pricing model in Washington would reduce the average retail bottle price by 32% or $5.17 per bottle. • Annual revenue distribution would be reduced by 76% or $224 million $10.78 New Sales Tax $0.87 State Tax $5.06 New Gallon Tax $0.65 LCB Operational Cost $2.76 State Profit $1.63 LCB Operational Cost $2.76 Standard Bottle Cost $6.50 Standard Bottle Cost $6.50

  20. California Comparison California Washington $15.95 • LCB business operational expense is 32% less than average private sector. • Washington State distributes more than 4 times the money per bottle than California. $11.66 CA Sales Tax $0.93 State Tax $5.06 CA Gallon Tax $0.65 Distributor & Retailer Mark-Up $3.58 State Profit $1.63 LCB Operational Cost $2.76 Standard Bottle Cost $6.50 Standard Bottle Cost $6.50

  21. Questions

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