Consumers Get Corkscrewed

The Liquor Board is quietly raising wine prices in state stores—because retail competitors want it to.

Happy holidays to all our readers! Raise a glass of wine to toast a better tomorrow. But do so knowing that as of Saturday, Jan. 1, wine costs more than before. In theory, higher prices apply only to wine sold at state liquor stores, but in the past, commercial retailers who already charge more for the same products have quickly matched such markups. So wine's likely to cost more in Washington generally in 2005.

Winemakers aren't raising prices voluntarily. Their prices are being raised whether they like it or not, in the name of fairness, by the three politically appointed commissioners of the Washington State Liquor Control Board. Their word is inalterable law in all matters alcoholic. In 2002, after years of lobbying by retailers who don't like having to compete with rock-bottom state-liquor-store prices, the commission agreed in principle to explore ways to bring liquor-store wine prices in line with those in commercial stores. Last summer, with no public hearings or notification, the board approved a plan to gradually raise prices on the 100 top-selling wines, until they match those reported by a private market survey as the state average.

The increases are being instituted in three stages—in January, April, and July—perhaps to avoid calling too much attention to them. Depending on the current difference between the state and commercial prices, the hikes range from small—20 cents on Columbia Crest Grand Estate chardonnay—to gargantuan: Hyatt's cab-merlot blend, listed at $4.70 in October, is due to hit $8.20 when the process is completed.

So how do these price increases benefit consumers, who might rightfully expect that state stores need charge only what it costs to procure, tax, and sell beverages—without needing to profit? Well, there is no consumer benefit. And it's clear from talking to state officials that they aren't the least bit concerned with what consumers think.

Understanding how this came to be requires a little background. It's not widely known, but until now consumers have been able to save a good deal of money by purchasing wine at a store owned and operated by the Liquor Control Board. The selection's not great, and most of the bottles are drawn from lower-quality tiers, but there are plenty of worthwhile bargains to be found between the Franzia Sunset Blush 5-liter boxes and the Manischewitz Concord Grape. Barnard Griffin's fine chardonnay, for instance, currently sells in a liquor store for around $8, about two bucks less than the average price in a supermarket; Hogue Cellars' late-harvest riesling is a buck and a half cheaper than the $7.50 they get for it in commercial stores.

There are good economic reasons for the previous price differential, which, among the 100 top-selling wines affected by the new price fiat, averages 10 percent but often exceeds 20 percent. Anyone who has ever shopped at a state liquor store knows that they don't spend a lot on atmosphere. But the big reason for the price difference is that for-profit stores have to buy wine from a distributor, who by regulation must mark up anything he or she distributes by at least 10 percent. The Liquor Board, though, can buy direct from winemakers.

This situation, understandably, infuriates people who sell wine in the private sector. Even veteran wine lobbyist Sydney Abrams admits that the people who wrote legislation back in 1969 to allow the sale of wine by commercial retailers never envisioned the present two-tier system. "When we got the law changed to allow wine to be sold in supermarkets, nobody figured the liquor stores would go on selling it," says Abrams. But the law didn't mandate that the state get out of the wine business, and it didn't, mainly because wine accounted for a tidy portion of the stores' bottom line.

Disappointed that the Liquor Board didn't leave selling wine to them, Washington's grocery lobby has made half a dozen attempts to rid itself of competition from state liquor stores, sometimes through legislation, sometimes in other ways. The percentage of total wine sold by state stores has fallen since 1969, but over the past 20 years that percentage has been about 10 percent—not insignificant.

Unable to persuade the Legislature to shut down the Liquor Board's wine business, big private wine retailers have come up with some nifty ways to fight back. Their lobbyists have badgered the Liquor Board to level the playing field by raising prices in liquor stores to supermarket rates. But level playing fields don't always stay level. In the late 1980s, the Liquor Board jacked up wine prices toward parity with the open market, only to see the open market promptly raise its prices, too.

In the late 1990s, despite studies showing that the difference between liquor-store and private-sector prices was insignificant, the board was bludgeoned into raising prices by $1.80 a case. Again, the difference rapidly returned as private retailers ratcheted up their prices.

Encouraged, retailers kept up and even increased the pressure, and it now looks like they've won the biggest battle of the war yet. At a 2002 convention of the Washington Beer and Wine Wholesalers Association, the three Liquor Board commissioners—Chair Merritt Long, Vera Ing, and Roger Hoen—agreed to explore ways to bring state-store wine prices in line with the commercial market. That led to last summer's quiet decision to raise prices on the 100 top-selling wines until they match those reported as the state average.

But what if a winemaker doesn't want to raise prices? Well, that's just too bad. Liquor Board Communications Director Bob Burdick says, "We are allowing our suppliers to adjust the prices that they charge us upward, to cover the cost of the price increases." If that sounds like a pretty good deal for the winemakers, consider what happens to their volume when they're no longer allowed to set their prices to maximize sales.

The board is not only telling winemakers what to charge for their products, it has agreed to limit the state's own wine sales to avoid competing with the private sector—even after prices are at "parity." The board's new pricing strategy envisions a commitment to "prevent us from achieving more than a 10 percent share of the Washington wine market," says Burdick. "The board agreed to this as a matter of good faith."

Perhaps the most astonishing thing about the new price policy is the commission's insistence that all "stakeholders" were consulted before it was put into effect. All? A publication called "Wine Program Strategy 2004–2009" enumerates the stakeholders interviewed: the director of the Washington Wine Commission, a winemaker, three sales managers, three heads of wine distributorships, and the presidents of the state food retail industry and its distillery association. It appears that everyone in a position to profit from the policy was represented. Anyone who will be stuck with the bill was not.

I asked the commission's public information officer, Sharon Michael, why nobody was asked to represent the interests of consumers. She replied, somewhat frostily: "I don't know of any organized group representing liquor consumers." Liquor Board Chair Long doesn't dismiss his customers so bluntly but does suggest that the individual wine buyer didn't carry much weight when the board was doing its "due diligence on what our role should be."

"Based on the information we've gathered," Long says, "people don't come to a liquor store to buy wine. Wine is often a second purchase for people coming to our stores." What about customers in rural areas, without the huge range of retail wine choices that is available to consumers in the Puget Sound conurbation? "Well, in smaller communities, there might be a greater impact, but we don't feel that those smaller communities represent a large component of our sales. It's just part of the trade-off people make for living there."

Is there any chance that this policy might be rescinded when the Legislature gets a look at it this month? Practically none. For 70 years, the board has been an all-but-unaccountable lawmaking entity unto itself, huddled under the mantle of the 21st Amendment, which granted all regulation of alcohol consumption to the states. That sanctuary is being assaulted on all sides by lawsuits charging the board with illegal encouragement of monopoly practices and discrimination against out-of-state products.

This new round of price-fixing and sales limitation can only add fuel to the fires already burning. In fact, a practicing paranoid might think that this latest successful thrust by wholesalers and retailers to manipulate the state's role in the wine market was brilliantly Machiavellian— a last round of absurd violations of the free market to bring the state's role in selling alcohol crashing down in flames.

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