Costco's Liquor Board Suit Could Help Small Wine Shops

The edge is their thoughtful selection, but they too make their money on volume.

Costco's ongoing fight with the Washington State Liquor Control Board hinges on two federal laws. The 21st Amendment to the U.S. Constitution gives states the right to regulate alcohol. And the Sherman Act—the law Costco is citing to back its claims—prohibits restraining interstate trade. The Ninth Circuit Court of Appeals is currently reviewing the case to decide which federal law trumps the other in regard to our state's alcohol pricing policies.

Right now beer and wine wholesalers in Washington must post their prices with the WSLCB each month and hold that price for all retail buyers the entire month. In addition, wholesalers are required to accept only cash on delivery from retailers, instead of extending credit. Costco argues that these rules drive up prices for the consumer.

Some supporters of the Liquor Control Board regulations say that if Costco wins the case, and Washington wine retailers are allowed to buy on credit and at varied prices, smaller wine merchants will be put out of business. That's because no stand-alone wine shop can compete with the low margins at which Costco offers their products, nor can they buy at the same huge volume for a greater discount. The common fear is that people won't make an extra trip to the neighborhood shop once Costco's prices on wine are even lower.

But I think change would simply separate the strong from the weak.

Smaller wine shops' edge over Costco is their thoughtful selection, but they too make their money on volume. When you look for wine at an indie shop, you'll see a few dozen bottles offered in large quantities and the rest stocked in quantities as few as four bottles (especially more expensive wines) because they don't sell as frequently. Since they're paying COD for wine, retail buyers must put the bulk of their money into stock that moves fast. It's a delicate balance between ordering what will sell and taking a chance on what you think customers might like. If credit terms were allowed, small retailers could take more chances.

Another benefit: Independent wine shops pay rent with in-store tastings and buying clubs. Both get devoted customers focused on particular wines in which the retailer has invested. If wholesalers could offer volume discounts, wine tastings and wine clubs could become more profitable for the indies—and bring a better deal for the consumer. Smaller shops could also buy a small producer's entire product line as an exclusive, another way to set themselves apart from the competition.

If the Liquor Control Board is forced to alter its pricing regulations, independent retailers will have to specialize or die. Their customer e-mail lists would become more sacred, and their loyal customers would become the biggest winners of all.

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