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Costco fighting wine, beer sales rules

By Monica Soto Ouchi
Seattle Times retail reporter

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Lonnie Schott pays careful attention to the wine selection at Costco.

Each wine he sees on their shelves, he pulls off of his at The Grape Escape in Bellevue. While both pay the same price to purchase beer and wine from distributors, Costco can afford to sell it for less.

Were they to go head-to-head on a product, "we can't compete," said Schott.

Costco faces the state today in U.S. District Court in Seattle over its attempt to challenge — and possibly dismantle — the decades-old regulatory system that governs the sales and distribution of wine and beer.

The wholesale-club chain argues that the system violates antitrust laws and boosts consumer prices, while proponents say it gives small brewers, wineries and stores access to the marketplace.

Whatever side one supports, this much is true: Costco has brought the first significant challenge to a system that has its roots in Prohibition — one that may be less David vs. Goliath, and more old economy vs. new.

"We're following it with heightened interest," said Wendell Lee, general counsel for The Wine Institute.

Costco, the country's largest retailer of wines, sued the state Liquor Control Board in February. Its central argument: The wholesale-club chain could pass on better prices and selection to consumers if it were allowed to buy directly from wineries and brewers.

The company's business model rests on its ability to buy in bulk directly from manufacturers and pass on the savings to consumers.

This premise works for everything but wine and beer.
 
Thank the 21st Amendment, which ended Prohibition and granted each state the power to decide how to import, distribute and sell alcoholic beverages within its borders.

Washington state set up a three-tier system designed to prevent over-consumption and the consolidation of power. Here's how:

The system requires out-of-state wineries and brewers to sell their products to distributors, who sell to retailers.

The suppliers (wineries and brewers) and the distributors are free to set their own prices, but each is required to mark up its products at least 10 percent.

The law also prohibits them from extending credit to retailers and providing volume discounts to super buyers. This means Costco pays the same per-bottle price for 1,000 cases of wine as a one-store wine shop that buys 50 cases.

In its lawsuit, Costco said it doesn't seek to eliminate the role of distributors, just to subject them to market forces.

"It's not very good for the consumer (because) it controls the distribution of product," Chief Executive Jim Sinegal said. "Any time you do that, you have a lot of phony expenses and costs built into the system."

While competition from super retailers, such as Wal-Mart and Costco, has forced consolidation in other industries, advocates of the system say one just needs to peruse the vast wine selection at their local grocery store to understand why the law exists.

"If you go to Safeway and look at how many brands of laundry detergent get sold, there are five or six," one industry observer said. "You go to the wine aisle, and there are hundreds of brands."

Schott agrees.

His store carries 450 wines and 56 beers. Distributors give him access to tens of thousands of products — ones that he doesn't have the time or expertise to select on his own.

Schott said he receives weekly updates on the court case. Were the system dismantled, it'd be difficult to stay in business.

"We'd spend more time looking for wine than running our business," he said. "Our selection would go down."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com