Seattle, Wash.—The first three months of privatization in Washington state have raised concerns regarding wine pricing, but some of the worst fears have yet to be confirmed.

Washington state got out of the liquor business (including wine sales) at the end of May, following the passage of November 2011 ballot Initiative 1183, which garnered support from approximately 60% of voters (see Wines & Vines headline “Privatized: Washington State Votes Yes.”) Distribution was handed to private companies effective June 1.

Successful bidders in an auction of former state-run liquor stores, which primarily sold spirits but also wine, also opened their doors for business. The number of liquor retailers rose from 328 in May to more than 1,500 today, according to Washington State Liquor Control Board information.

But pricing has been a point of contention. Many people expected a greater number of retailers to heighten competition and in turn drive down prices.

State liquor authorities, which are now responsible solely for regulating and overseeing the industry rather than retailing its products, say this is a near impossibility for the first two years of privatization.

10% fee plus 17% fee
I-1183 “added a 10% fee at distribution and a 17% fee at retail,” according to the FAQ on the Washington state Liquor Control Board's website. “So, what you have is: distributors marking up the product (includes cost of goods, operating costs and profit) and adding a 10% fee, then retailers marking up the product (includes cost of goods, operating costs and profit) and adding a 17% fee.”

WSLCB estimates indicate that mark-ups post-privatization could total as much as 72% vs. the 51.9% mark-up at state-run stores.

Distributors have to pay the state $150 million by March 31, 2013, ensuring higher prices until then, but the distribution fee is set to drop to 5% after two years. Whether this results in lower prices at that point is unknown; the FAQ from WSLCB simply states: “Maybe.”

Seattle wine merchant Michael Teer, who owns the Pike and Western Wine Shop opposite Seattle’s Pike Place market as well as Soul Wine in the South Lake Union neighborhood, says the impact on his wine prices hasn’t been great because he largely works directly with Washington state wineries or smaller distributors that aren’t offering volume discounts or charging for split cases.

“Some of the big guys are trying to do broken-case charges and offer quantity discounts and things like that, whereas other, mostly small, distributors I work with aren’t doing anything like that,” he told Wines & Vines last week. “It’s a $1 a bottle broken-case charge, unless you order a mixed 10 cases....So if you’re buying a $6 bottle of wine, that’s a major price increase.”

Teer added that since cash on delivery remains the rule in Washington state, smaller shops often don’t have the cash flow needed to support the volume purchases required to trigger discounts.

However, the market is still adjusting, in Teer’s opinion. “I think things are still in a state of flux,” he said. “I’ll be curious to see if the big guys stick to that broken-case charge.”

Representatives of Southern Wine & Spirits, which opened a 350,000-square-foot warehouse at Puyallup in May to serve the Washington state market, did not return calls for comment by deadline. 

Concern about price war
While the Washington Wine Institute raised concern in July regarding an attempt by some retailers to sell wine at less than the cost of acquisition if undercut by competitors, it has accepted a ruling by the WSLCB to allow retailers to do so.

A minimum price is an important element in maintaining brand integrity, the Institute told members in July, arguing, “A cut-rate price war is not in the best interest of Washington wineries.”

The state’s wine institute accepted the ruling thanks to a provision allowing a review of the ruling permitting below-cost sales if documented harm to the Washington state wine industry occurs.

And the fears of Catie McIntyre Walker of the Wild Walla Walla Wine Woman shop in Walla Walla, who expressed concern to Wines & Vines last fall that companies like Costco would present significant competition to smaller stores like hers, seem unrealized as yet.

Walker told Wines & Vines she would have to work harder to provide customers with wines that volume-based retailers aren’t interested in carrying rather than compete by price.

But as the experience of Teer in Seattle shows, there are still opportunities for small shops to do this.

Pike & Western Wine Shop obtained a small amount of product from the larger distributors, but it has largely worked through that product and shifted to smaller companies, Teer said. And it hasn’t been a hard shift to make.

“There’s plenty of things to replace them with,” he said.