Well they’ve gone ahead and done it, legislated away malt liquor for several neighborhoods in Seattle, Washington, effective November 1. The state liquor board yesterday banned “29 drink brands” including, of course, malt liquor. Now I’m not a fan of malt liquor (except perhaps for Dogfish Head’s wacky craft malt liquor, but even that I wouldn’t drink under very many circumstances) but the idea that restricting the sale of certain inexpensive, but high alcohol drinks will in any way cure homelessness is ludicrous.

Board member Roger Hoen “acknowledged some businesses would lose money because of the rules. But, in life, there’s a number of restrictions and inconveniences that we have to live with.” Actually, Roger, you won’t be inconvenienced one little bit so by “we,” you actually mean “they.” You should say what you mean or at least know what you’re saying. I think the “restrictions and inconveniences” you speak of will be borne, as usual, by the people with the least voice in our society, the invisible people without homes or a say in their lives.

But that’s depressing. Luckily, Merritt Long, chairman of the board, ends things on an “upbeat note.” “Besides,” he says, “customers can still choose from more than 4,000 other beer products allowed in Washington” Good point, Merritt, albeit cluelessly condescending, I’m sure we’ll see the homeless choosing a nice bottle of Westmalle Triple or a local barleywine. Way to show your compassion.

I got the following sunny comment to my analysis of the Costco decision from SeattleBeerGuy:

Interesting analysis but I’m not sure I agree with the conclsuions. I think the change has the potential to earn wider distribution for many smaller breweries as they can now sell directly. The price issue does not seem terribly pressing as people who drink beer are generally willing to pay slightly more for a better beer anyway–ever plunk down $3 for 12oz? More than twice what you would pay for a macro-lager.

So yes, the big boxes will outcompete smaller stores on cases of Budweiser or Killian’s but that should only encourage smaller breweries to reach sweetheart deals with local, smaller stores. I see a rosy horizon over which small, local groceries sell beer from small, local breweries. Not a bad thing.

I was just going to post a comment responding to his thoughtful, if overly optimistic, take on the judge’s ruling but the more I thought about, the more I realized it required a more lengthy answer. This is necessary, I think, because it is the opinion that many people will likely hold. I want to be clear that I have no disrespect for this opinion but having been directly involved in the beer business at the retail level, I have a unique perspective on how things generally work from brewery to distributor to retailer. It is for this reason I hold a different opinion than SeattleBeerGuy and is why I can not be as sanguine and positive about the future.

So let’s look at SeattleBeerGuy’s assertions:

1. “The change has the potential to earn wider distribution for many smaller breweries as they can now sell directly.” That sounds good on paper but probably won’t work for a couple of reasons. First, that would require each small brewery to have a larger sales force to sell directly to retailers, including trucks to deliver to them, and merchandisers for support. Most small berweries simply won’t be able to afford to add the staff required. You could argue that one of the current brewery employees or the owner could do it, but given the number of locations that would now have to be sold to directly, that doesn’t seem remotely feasible. Second, buyers would be too busy to meet with a different salesman for each individual brewery. They simply don’t have that kind of time. That’s why having just a few distributors representing the majority of the brands makes sense, especially for the smaller players. Buyers only have to meet with a few people to meet all their needs. So that means distributors will still be the most efficient method for both small breweries and retailers. As it stands now, distributors sell to smaller retailers and larger chain stores are called on by what are called “chain reps.” or “chain salesmen” who give presentations to the larger chains. These more than likely already include “special deals” not made available to smaller retailers but now that it will be legal it will undoubtedly get worse. That’s not likely to change, except that the law will now give even more of an advantage to the big box stores. So buying direct will really only benefit these large stores who have trucks to pick up product and store it in their own warehouses. Those retailers will have an enormous advantage at every stage of the distribution path. Will wider distribution be possible for the smaller breweries? There may be a few medium or middle tier retailers looking for a way to distinguish themselves but I can’t see how that would create enough increased business to make much of a difference. At best, it seems like it might be something of a wash if that happens to balance the loss of business that I believe will eventually be caused by this decision.

2. “The price issue does not seem terribly pressing as people who drink beer are generally willing to pay slightly more for a better beer anyway–ever plunk down $3 for 12oz? More than twice what you would pay for a macro-lager.” This assertion ignores one inescapable fact, which is the people “willing to pay slightly more for a better beer” make up only 3.5% nationally of the total beer market. The other 96.5% are the ones buying crap for the most part. That number is probably higher in Seattle and it’s probably higher where I live in the Bay Area, as well. But even if it’s as high as 10% that still leaves 90% of consumers who aren’t willing to spend more. If you drink good beer you tend to live in a bubble — at least I know I do — where almost everyone you know also drinks decent beer. But the vast majority of consumers don’t drink craft beer. It’s weird to think about, but for every ten people you pass on the street, only one of them shares your love of good beer in a best case scenario. Depending where you live, it may be much, much worse. That’s why in a naming doublespeak that would make Orwell proud, Budwieser, Coors and Miller Genuine Draft are called “premium beers” and beers like Busch, Natural Light and Miller High Life are called “sub premium.” Imports like Heineken and Corona are called “premium imports.” Craft beer is called “specialty beer” which gives you some idea of how small a portion of total beer sales they represent. Most of the beer sales data is collected by two companies, Nielsen and IRI Scan Data, and both use these broad catagories to describe the beers they’re tracking. Both, as I understand it, only collect sales data from groceries, convenience stores, chain liquor stores and the like and so they’re not reflective of the overall market since they discount one-off liquor stores and other small retailers. But these are the figures used by most beer buyers and is does show some trends and has some value in that context since the sales data can be compared over time. And one of things they do show is how much price does matter to the 96.5% of consumers that buy beer not categorized as “specialty beer.” One of the reasons given for Anheuser-Busch’s recent drop in income is that they’ve been engaging in price wars, meaning they’ve lowered their price to increase sales at the expense of profitability. This has been going on in some fashion for at least five or six years, possibly more. And it’s kept domestic beer prices artificially low. So I think it is actually fairly pressing since the vast majority of beer drinkers do shop on price. What all this legal wrangling will result in, I believe is an even wider gap between domestic beer prices and craft beer. This gap makes it harder to convince the 90-96.5% to trade up to better beer. Forget all the arguments you can think of, some people are just stubbornly going to shop on price no matter what. At least that’s the way I see it.

3. “So yes, the big boxes will outcompete smaller stores on cases of Budweiser or Killian’s but that should only encourage smaller breweries to reach sweetheart deals with local, smaller stores. I see a rosy horizon over which small, local groceries sell beer from small, local breweries. Not a bad thing.” The problem with this, as I’ve said before, is that small breweries are not really in any position to make “sweetheart deals” with smaller retailers. I can’t tell you how many meetings I’ve had over the years when I was a beer buyer with small breweries telling me how they simply couldn’t match the big breweries on post-offs (posted discounts that are scheduled throughout the year), scans or scanbacks (another way to offer discounts that are tied to actual sales during a given period of time) or other incentives for hitting sales goals such as contests for stores, etc. And that’s because their business is tied to hitting some formula of volume of sales to the brewery’s capacity in order to be profitable. The amount of leeway they have for advertising or other sales incentives is miniscule compared to the larger breweries who have exponentially larger volume. Only the regional breweries, such as Anchor, Sierra Nevada or New Belgium have enough volume to do anything meaningful on a regular basis. And actually, Sierra Nevada did not discount their beer very often for many, many years. It really wasn’t until they’d built the new facility and introduced twelve-packs that they began doing a regular year-round schedule of discounts. The other problem is that many smaller retailers are also not going to be beating down their local brewery’s doors looking for them, either. There may be a few retailers who actually care about craft beer but in my experience each community only has a couple and usually only one or two that really specializes in having an outstanding beer selection. In Seattle I only know of Bottleworks. There may be another, but I don’t know of it. There’s probably a couple of stores where there’s an employee who’s really into good beer who’s made a difference at one store and who has a small following of customers. And that’s for a city of a little more than half a million people. In the nine counties that comprise the greater Bay Area there are just under seven million people and no dedicated beer store like Bottleworks, despite a vibrant beer culture. My point is that the number of places truly dedicated to the craft beer culture is fantastically small. And that fact makes it very difficult for me to see a “rosy horizon” when an enormous advantage is handed to a handful of big businesses whose sole goal — like all corporations — is domination of their market. I hope I’m wrong and it’s “not a bad thing” as SeattleBeerGuy believes, but my spidey sense is tingling and I can’t see any good coming from this long term, especially once this decision is used as a precedent and spread by Costco throughout the rest of the states.

In one of the most watched legal battles in recent years, the judge yesterday in the Costco case in Washington state may have signaled bad times ahead for small retailers and small breweries. Her short-sighted ruling followed most courts’ bias in recent years that favor big business over the consumer or small local businesses.

The specific state regulations dismantled by Judge Pechman are:

1. Bans on volume discounts and credit sales of beer and wine.
2. Minimum markup requirements, which force manufacturers to charge at least 10 percent over cost when they sell beer and wine to distributors. Distributors face the same rule when they resell the products to retailers.
3. Mandates that manufacturers and distributors post product prices with the state, and keep prices the same for a month afterward. Distributors must charge that price to each retailer, and retailers can’t get discounts for paying for freight or picking up the product themselves.
4. A ban on retailers storing or receiving beer or wine at a central warehouse.

So let’s look at each of these:

1. Volume sales. This, of course, benefits the huge box stores like Costco and Wal-Mart and will make it increasingly difficult for smaller retailers like family-owned mom and pop liquor stores to compete since they cannot buy in the large quantities of a Costco. This gives a huge, unbalanced advantage to the big retailers. Will these small stores go out of business as a result? It’s hard to say, but it certainly won’t make it any easier on them. It probably won’t happen right away, but it doesn’t seem a stretch to say a few years from now consumers will have less choice because there will be fewer places to buy beer. It would be easy to blame this all on the big stores but unfortunately consumers are at least partly to blame for this. The big stores merely exploit most people’s belief that low prices are the only criteria worth considering in purchase decisions. Stores like Wal-Mart could not destroy whole towns if their customers didn’t flock to them zombie-like in search of the latest bargain. As long as people shop on price alone without regard to the consequences of their choices, small businesses will continue to die out and our consumer landscape will become more and more homogenized with the same handful of national retailers dominating. Think I’m paranoid? Look at the state of music radio today now that Clear Channel owns most of the radio stations. The only way to combat this is to think about where you make your purchases and to be willing to pay a few cents more to support small, local businesses. The benefits to your community are huge even if they’re not immediately apparent. But if you don’t, you’d be naive to believe that the low prices that you were lured in by will continue once they’ve put your corner liquor store out of business. Not only will prices shoot up again dramatically but the number of available beers — and especially the non-national, local brands — will shrink precipitously. So if you value good beer, please think as much about where you buy your beer as what beer to buy.

2. Minimum mark-ups. At first blush, this appears to make no sense. Remove it and prices will drop, right? Maybe at first, but not for long, because this is very deceiving. You can see why Costco went after it, since they work on volume sales that allow them to have lower margins overall. Small businesses don’t have that luxury and most businesses don’t — and can’t — use that business model. Even so, 10% is nothing. Most businesses mark up their goods 40-50% and the beverage retailers I know about shoot for a markup of around 20-25%, less for sale and loss leader items. So on a per-item basis, the markup on alcoholic beverages is already lower than the market in general. So what will removing the 10% markup accomplish? It will allow the big box stores to get even deeper discounts which will assist them in their efforts to squash their competition. Will prices to consumers go down? Probably at first, but it will primarily be the big domestic and import brands that will have lower prices. It’s unlikely to have much effect on craft beers and smaller import beers. So the gap between the two will continue to widen, which is bad for everybody.

3. Price posting and freight discounts. Posting prices at a central location is to insure a level playing field. Removing it, of course, makes the playing field uneven. If there is no longer a requirement to post prices, then all manner of back room deals become possible … and legal. Again, this may lower some prices for some retailers for some period of time. But it will hurt the small retailers who won’t be offered any back room deals, and the small breweries who can’t afford to offer any back room deals to retailers. As to the frieight discounts — are you sensing a pattern yet? — this will only benefit the companies large enough to have their own fleet of trucks and you can probably figure out who they are.

4. Central warehouse ban. Again, the only businesses that have central warehouses are the very large, multi-location big box stores. The warehouse allows them to buy in extreme bulk. Not only does this give them yet another unfair advantage, but it also removes any incentive to sell fresh product to the consumer. Of course, since most of the brands that will be effected by this taste pretty bad already, maybe that’s not such a bad thing.

Both the national press such as AP and the local papers such as the Seattle Times and the Seattle Post-Intelligencer are reporting this as a victory not only for Costco but for consumers as well, saying that the decision will lower beer and wine prices in the state. But that’s just propaganda, it doesn’t really examine the long term ramifications of the decision. Short term, prices may indeed go down but that’s not always a good thing. But selling a bill of goods to the public by saying one thing when another is more likely true is what our media does best. Large city newspapers — who are big business themselves — generally always take the side of business in their reporting and are one of the many ways information consumers receive is managed. This is a terrific example of collective restraint by the media to not actually examine what this decision means for the average consumer preferring instead to spin it in a way that actually downplays its negative aspects.

What’s more troubling is that with this victory, Costco will be examining the remaining forty-nine states to decide if — or more likely when — they can screw consumers in those states, too. Our only hope is to spend a little more for better beer before it’s too late. Support your local businesses as much as possible. Don’t be pennywise and pound foolish.