Boozy Brawl

[May 6th, 2009]

Two titans of the Oregon booze lobby are facing off in a brawl with high stakes for both low-income Oregonians and the Oregon Liquor Control Commission.

The issue likely to be decided in the coming months dates back to Dec. 27, 2007. That’s when Paul Romain—lobbyist for the powerful Oregon Beer and Wine Distributors Association—sent his 16 members an email alerting them to what he said was a potentially illegal practice by Grocery Outlets Inc., which owns 31 Oregon stores.

“The Oregon Liquor Control Commission no longer allows the central warehousing of wine by a retailer,” Romain wrote to distributors. “Please review your delivery practices and determine if you are delivering to a central warehouse. If so, please end the practice.”

Despite the implication from Romain’s email that the OLCC had recently changed its policy, the situation angering him was this: Since 1986, California-based Grocery Outlet Inc. has employed a unique business model in Oregon. The chain specializes in buying grocery items that are being discontinued, re-labeled or otherwise made available at a deep discount.

In 1986, Grocery Outlet got written permission from the OLCC to receive wine from distributors at its Clackamas warehouse, then ship the wine itself to its affiliated Oregon stores, including 10 in the metropolitan area. That practice differs from the normal model, in which wholesale distributors handle the transport and delivery of wine.

Essentially, Grocery Outlet was cutting out the middle man when moving wine from Clackamas to its 31 stores, which the company says serve 500,000 Oregonians each month.

Grocery Outlet’s influential lobbyist, John DiLorenzo Jr., says his client’s operation is fair, since the distributors already earn a profit from moving the wine to the warehouse. Should distributors, he asks, get paid a second time—adding 20 to 30 percent to the cost of a bottle—for moving it to retail locations?

The answer, says Romain, is that the 31 stores are set up as separate business entities from the parent company and therefore the transfer from warehouse to store constitutes a retailer-to-retailer transaction, which is prohibited under Oregon’s byzantine liquor laws.

“It’s a neat little business plan Grocery Outlet has,” Romain says. “If only it were legal.”

Since 1934, the year after Prohibition ended, Oregon has operated under a “three-tier” system, which demands strict separation of liquor producers, wholesalers and retailers. In an earlier legal and legislative battle, DiLorenzo challenged part of that separation and won the right of out-of-state wineries to bypass distributors and ship directly to Oregon retailers (see “Uncorking the Wine Market,” WW, Nov. 1, 2006).

Ironically, that victory led Romain to review the rules that govern shipping to a central warehouse. And when Romain—whose email instructing distributors about legal compliance gives a small indication of his sway over the industry in Oregon—heard from distributors what Grocery Outlet was doing, he decided to put a stop to it.

In January 2008, the OLCC gave Grocery Outlet 90 days to discontinue its practice of shipping wine directly to its affiliated stores and find “alternative arrangements.”

DiLorenzo then successfully sought an injunction against the OLCC in Clackamas County Circuit Court, arguing that Grocery Outlet had written permission from the OLCC for what it was doing and that to stop would cause “irreparable harm.”

Specifically, DiLorenzo argued that any loss of the subsidy from wine sales in Grocery Outlet stores in Woodburn and East Salem would cause the stores to close immediately, thus depriving low-income Oregonians access to cheap groceries.

Romain says that argument is bogus.

“They operate in Washington state without using a central warehouse, and from what I can see, they’re doing just fine,” Romain says.

The five OLCC commissioners were supposed to hear arguments from both sides as early as May 18, but skirmishing over whether Romain’s group can intervene in the case has pushed the schedule back into the summer.

In the meantime, Grocery Outlet will continue to peddle cheap, obscure wines.

Both DiLorenzo and Romain are confident they will prevail.

“As is often the case with the OLCC, the statutes have for years been interpreted by the agency with a certain amount of whim and caprice,” DiLorenzo says. “Upon close reading, the statutes often do not stand for what the OLCC would like them to stand for.”

Romain says his opponent is simply wrong. “If you don’t like the law, change the law,” he says. “But what his client is doing is clearly wrong.”