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January 11th, 2012 NIGEL JAQUISS | Cover Story
 

Booze Wars

Grocers think they can finally break the state’s 80-year, nearly $500 million monopoly—but at what cost?

lede_booze_3810WW Photo Illustration
Steve Pharo has something just outside his Milwaukie office door that Joe Gilliam wants—$70 million worth of vodka, whiskey, tequila and every other distilled spirit sold in Oregon.

PHARO - IMAGE: Darryl James
Pharo is executive director of the Oregon Liquor Control Commission, and his workplace is a boozehound’s dream. Shrink-wrapped pallets of liquor rise from floor to ceiling in a warehouse the size of three downtown Portland blocks. Beeping forklifts continually unload incoming trucks, while a Rube Goldbergian conveyor system moves 1,000 cases an hour out the door to state liquor stores.

In fact, every single one of the 2,676,106 cases of liquor sold in Oregon last year passed through the OLCC warehouse that sits off of Oregon Route 99W, just south of the Acropolis strip club.

For years, Gilliam, president of the Northwest Grocery Association, has dreamed of breaking the OLCC’s monopoly on booze. He wants to see his members—Fred Meyer, Safeway, Costco and others—rather than the state, selling liquor. To do that, grocers and their allies must tear down a maze of 1930s-era liquor laws. 

It’s curious that in Oregon, a state that has been as reform-minded as any, pioneering unfettered beach access, allowing assisted suicide and being the first to require statewide land-use planning, the OLCC has withstood for nearly 80 years any efforts to unshackle its iron-fisted control over liquor.

Today, that control is under an unprecedented threat. 

“We’ve never seen this kind of change and pressure,” Pharo says.

Here’s a primer on why the OLCC’s days might be numbered:


What changed?

In November, Washington state residents voted to take liquor control out of the state’s hands. For years, Costco had been trying to get the state Legislature to do just that. When legislative efforts failed, the Issaquah, Wash.-based retailer poured more than $22 million into an initiative campaign. Costco, already the nation’s largest wine seller, also wanted to sell distilled spirits. In Washington, as in Oregon, the state is the exclusive wholesale provider of distilled spirits, which it sells through state liquor stores to bars, restaurants and individuals. 

Costco’s campaign worked—by a margin of 59 percent to 41 percent, breaking the state’s monopoly. If the vote survives a Washington Supreme Court challenge, the state will cease selling liquor May 31. 

Instead, Costco, Albertsons and the New Seasons that recently opened in Vancouver will sell booze.

“Washington went from being the most tightly controlled state in the country to being the most deregulated,” says Ron Dodge, CEO of Hood River Distillers, Oregon’s largest spirits manufacturer. Hood River spent $100,000 in Washington to oppose Costco. “They handed all the business to the big grocers on a silver platter.”


What does this have to do with Oregon? 

Immediately after the Washington measure passed in November, Gilliam of the grocers’ group said Oregon was next. That’s logical because the two states have nearly identical approaches to alcohol sales.

Oregon is among 18 so-called “control” states, where the government maintains a tight grasp on every aspect of alcohol distribution and sales. In Oregon, hard liquor is sold by OLCC-licensed retailers—and there are only 246 of them (California has about six times as many liquor stores per capita). Oregon liquor stores get about 9 percent of sales as a commission.

GILLIAM

They must sell at state-established prices and only during prescribed hours. (It was not until 2002, and only because of a financial crisis, that Oregon finally allowed liquor sales on Sunday.) 

Beer and wine are regulated differently, but every bit as strictly. State law carves out monopolies for beer distributors who sell to retail outlets such as grocery stores, bars and restaurants. Wineries have slightly more leeway—they can sell directly to consumers via mail and at their wineries, and directly to stores, although most do not. 

Even as the state is shoving liquor out the door at breakneck pace, the OLCC acts as Oregon’s liquor-licensing and enforcement cop. Some might argue that the dual role of marketer and regulator is like jumping into a car and jamming on the gas and the brakes simultaneously. For instance, the OLCC built a sophisticated website to help drinkers track down rarities such as the 55-year-old bottle of single-malt scotch it sold for $14,000 a few years ago. But the agency also sends underage decoys into bars and polices licence-holders diligently. 

No one is suggesting the OLCC cease its licensing and regulatory work—Gilliam and the grocers just want it to stop competing with the private sector for alcoholic-beverage sales. The success of the Washington initiative is creating a good deal of pressure.

“We’re trying to look at what we can do differently as the market changes,” Pharo says. “But I understand that the industry would like to have us out of the way.”

Adds Paul Romain, who leads the Oregon Beer and Wine Distributors Association, “We’ve never seen anything of this magnitude before.”


Why do the grocers care so much?

The short answer is money. Grocers complain that OLCC rules are tilted in favor of distributors. When distributors buy beer or wine from the manufacturer, they can pay days or weeks later. But the law requires that when distributors deliver product to bars, grocery stores or wine shops, the retailer must pay cash immediately. That means the distributor gets to hold the retailers’ cash for days or weeks before paying his supplier. “There’s no other deal like it anywhere,” Gilliam says. 

So the next time you walk into your neighborhood wine shop, consider that your wine merchant has already paid cash for every bottle in the store—no credit. That’s the law.

Romain says credit practices simply reflect the cost of warehousing wine and beer, and help smaller producers get paid faster. “There are costs critics don’t see,” he says.

Distributors also enjoy brand monopolies in geographic territories. For example, Portland-based Maletis Beverage is the only company allowed to distribute Budweiser beer in the metro area, and state law makes it virtually impossible for Anheuser-Busch ever to end that relationship. 

ROMAIN

Current laws fix prices in ways that, some argue, protect the little guy. But others complain the laws are contrary to the rules of commerce. Oregon requires a beer distributor to sell to every retailer at the same price. With beer, retailers can then decide how much profit they want to make, pricing a six-pack of beer accordingly, although they are prohibited from selling below cost. Hard-liquor prices are even more tightly controlled: A bottle of Hood River vodka, the state’s volume leader, costs the same in every state store, and that price is set by the OLCC. 

One OLCC rule that generates the most heat is its prohibition of the centralized warehousing of wine. Even Mary Botkin, a lobbyist for OLCC union workers and a defender of the agency, scratches her head about this one. 

“Let’s say the Interstate Fred Meyer in North Portland orders 10 cases of pinot noir from a distributor, and it sits on the shelf,” Botkin says. “But the same wine is flying off the shelf at the Hawthorne store. Freddy’s can’t just move the wine from one store to the other. It has to go back to the distributor and get redelivered. That’s just crazy.”

John DiLorenzo, a lawyer for Grocery Outlet, tried in the Legislature and at the OLCC to end central warehousing and is now challenging the prohibition in front of the Oregon Court of Appeals.

“We believe that 20 percent of the final cost of wine is an embedded cost from the 1930s,” DiLorenzo says. “We have nothing against distributors when they add value, but we don’t like it when they just get paid for being there.”


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