Photo caption: Biniam Habte owns two liquor stores in Seattle and has paid he state more than $180,000 in fees in 10 months. Photo credit: Travis Quezon.

Last year, the State Liquor Control Board called for prospective business owners to seize the opportunity of taking over for formerly state-run liquor stores.  Entrepreneurs answered the state’s call, buying liquor licenses and taking over expensive leases at the board’s assurance of a lucrative deal.

Initiative 1183, the 2011 ballot measure that privatized Washington’s liquor sales for the first time since prohibition, was intended to bring the price of liquor down and open up a new market for local businesses.

The Washington Liquor Store Association (WALSA), however, said that in the past year, prices have not gone down and that liquor store owners are losing money at an astonishing rate. Liquor store owners across the state are currently lobbying the Washington State Legislature to pass laws that would relieve them of some of their financial burden and get out of the liquor business altogether.

Of the 167 stores that opened after privatization last year, most have gone out of business, and of those still standing, only two are profitable, according to Mukilteo resident Michael Cho, secretary of WALSA.  Cho had to close two of his three liquor stores in Bainbridge Island and Anacortes in the last two months, with one liquor store remaining in Gig Harbor.

Infograph by Ryan Catabay and Renee Takara.
Infograph by Ryan Catabay and Renee Takara.

WALSA recently surveyed 100 current liquor store owners and found that 90 percent of them would surrender their liquor license to the state and cancel their contract if they had the option to. WALSA maintains that store owners were misled by the Liquor Control Board into a bad deal and, more importantly, that their problems can be immediately addressed through the right legislation.

Causes of the liquor store closures are attributed to high rent from taking on the leases of formerly state-run stores, unfair business practices by Washington’s distributors, and a 17 percent fee that liquor stores must pay on all their sales.

It’s a symptom linked only to the small businesses. Larger grocery store chains are able to absorb the 17 percent fee by distributing it across all of its non-liquor retail — a luxury that smaller liquor stores do not have.

“We have to pay 17 percent of all sales,” Cho said. “The problem is that we are purely liquor stores. Other big businesses can just spread that amount across other retail they sell. The irony is that the specialty stores, pure liquor stores — they are the ones most handicapped by the law.”

The 17 percent fee is compounded by purchasing issues caused by Washington’s two sole distributors, Southern Wines and Spirits and Young’s Market Co., which controls 90 percent of all liquor sold in the state, Cho said. The distributors do not have to pay the 17 percent fee.

“[Distributors] have exclusive rights to sell,” Cho said. “There’s no competition to bring the prices down. They claim that there’s competition among the [individual liquor] brands, but it’s still a single company setting the prices. There’s no alternate supplier.”

For liquor store owners, a large part of the appeal in taking over stores from the state came from the promise of a new market. When Washington privatized its liquor stores, it allowed stores to sell liquor to bars and restaurants. Unfortunately, because liquor store owners have to deal with the 17 percent fee and distributors don’t, they are also able to sell the same liquor directly to bars and restaurants at lower prices.

Distributors, on the other hand, argue that they are at a disadvantage to retailers.
Representatives from Southern Wines and Spirits and Young’s Market Co. testified against legislation that would exempt liquor stores from the 17 percent fee. The distributors argued that they have already put significant capital investments into their distribution network with bars and restaurants. Distributors are also expected to pay up a total of $150 million in distributor license fees to the state by May 31 under Washington’s license law.

But Cho characterized it this way: Imagine if Apple and Microsoft encouraged people to open computer stores. Then when the stores finally opened, Apple and Microsoft decided to sell the computers directly to the customers.

“When I made my bid on three stores, my business plan included sales to bars and restaurants,” Cho said. “We thought distributors would treat us fairly, not treat us like the competitor. They never said that we would be cut out of the market completely.”

Biniam Habte owns two stores formerly owned by the state, one in the Washington University District and the other in Ballard.

In the last 10 months, Habte said he paid the state more than $180,000 out of pocket in order to keep up with fees owed to the state.

“When the state was advertising the business, they advertised it as a lucrative business,” Habte said. “We didn’t think the government would lie about that. We thought it would be a business that you could make a living out of.”

The problem with the 17 percent fee, Habte said, is that it is taken out of a liquor store’s gross, not it’s profit. In other words, the fee does not account for all of a store’s costs, such as sales tax, rent and employees’ salaries.

“When the state takes the 17 percent out of our gross (sales), after we pay rent, basically, we are in the red,” Habte said. “Every month, stores pay the state from their pockets to do business. We are basically tax collectors for the state right now. We pay the employees, we pay everything. And we pass the taxes we collect from the people to the government. On top of that, we pay the 17 percent from our pocket, not from the profit we make.”

Habte said the remaining liquor stores are staying in business with the hopes that legislation will be passed.

House Bill 2026 allows for liquor store owners to seek refunds from the state in the amounts that they bid for their stores and provide them a way to sell off their inventory.

House Bill 1161 was recently passed to the Rules Committee for a second reading. The bill would allow liquor stores to ignore the 17 percent fee in sales to bars and restaurants. The bill acknowledges marketplace issues caused by Initiative 1183 and calls for more fairness in the market for liquor store owners.

WASLA testified that liquor store owners were initially told by the state that the 17 percent would not apply to them, but now that the additional fee applies, they are having a difficult time staying in business.

“Right now, we are hoping things are going to change,” Habte said. “That’s why we’re just trying to survive so far. We’re hoping one day there’s a law that changes everything.”

Habte said consumers need to take a stronger stance in order to lower liquor prices across the board. He also said consumers need to realize that liquor store prices are the same as in larger grocery chains.

“I think most consumers have the wrong idea that grocery stores are cheaper for liquor,” Habte said. “They are not cheaper. [Big grocery chains] have buying power. They are bigger, they buy a lot and they get it for cheaper than us. Our margin and the grocery store’s margin are what’s different. They make more money, we make less, but the prices are exactly the same.”

In 2011, 60 percent of Washington voters rallied behind Initiative 1183. Habte said he would like to see consumers also support the success of small, local liquor stores. If local liquor stores are successful, they can become competitive and lower prices, he explained.

“And at the end of the day, the consumer is the one who is hurting,” Habte said. “Initiative 1183 was supposed to make it cheaper. But now it’s got all the taxes, the 17 percent and everything, and the distributor is marking it up. I don’t know why the consumer is not crying out to the Liquor Control Board to complain about the prices.”

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