An editorial in today’s Seattle Times discusses what they refer to as the “outdated economics of beer and wine sales.” This is in the context of local lawsuit that was originally filed in early 2004 involving Costco and the Washington State Liquor Board (WSLCB). Costco is seeking to dismantle the three-tier system in place there because to do so would give them — and other large retailers like Wal-Mart and their ilk — an enormous advantage that would effectively let them damage or destroy countless small businesses. The argument against that line of reasoning is, of course, that diversity would not suffer. In an earlier article about the case, “Dave Burman, a partner with the firm Perkins Coie LLP, which is representing Costco in the suit, said, ‘Costco believes that consumers are better off when there is vigorous competition. People who don’t want to compete always say that competition is unfair, but we want the kind of competitive environment where people are rewarded for being smart, not where the state says who should make how much money.'”
The other side replies “that if the regulations were lifted, it would lead to less choice for the consumer. This whole system affords the public a great amount of choice in product. If Costco prevails, they and Wal-Mart will dominate the retail sale of beer and wine, and there won’t be the selection that is currently available.”
“Burman disagrees, stating, ‘It certainly wouldn’t wipe out local businesses. There are plenty if [sic] distributors and small wine shops in California, where this kind of legislation does not exist.'” I mention all this background because I feel compelled to point out what went unquestioned by the Seattle Times, that “this kind of legislation does not exist” in California. California does have a very similar three-tier system, however, and Burman’s statement is about as blatant a falsehood as I’ve seen unquestioned in print.
Of course, it’s not hard to figure out the newspaper’s agenda. No author is listed for the editorial, so I infer that it’s the official position taken by the paper. I don’t have a copy of today’s paper in hand, but I’m willing to bet finding an ad by Costco will be a whole lot easier than finding one by the WSLCB or a local beer distributor. They’re undoubtedly pro-business, like most daily newspapers, because they rely on advertising revenue, which is funded almost exclusively by the business sector.
The editorial accuses the state of “saying it wants to keep wine and beer expensive so that the people will drink less of it. To that end, in the wholesale market the state bans volume discounts, sales at negotiated prices, sales on credit and delivery to a customer’s warehouse.” But of course, that’s not the only reason. The more commonly understood reason is that it levels the playing field for retailers and does not give an advantage to large retailers like Costco. And large retailers generally enjoy a huge advantage in most other types of products since there are few restrictions in other classes of goods that prohibit volume discounts. And that undoubtedly pisses them off, because they naturally want to dominate everything they can. In an earlier editorial piece, I stated that I don’t always agree with the NBWA. Well this is one of the times that I do agree with them. Not allowing large box retailers to bully lower prices for volume buys may indeed lead to incrimentally higher beer prices, but the difference is worth it. Because the real benefit it that small retailers theoretically pay the same wholesale price as the big guys do. That allows at least a consistent price and reduces lowballing and squeezing competition out of the market. I say theoretically, because at least in California I know of several ways in which the big retailers get around these restrictions.
Costco’s paltry beer selection generally favors the big three and a few giant imports like Heineken and Corona. Larger Costco’s in certain places also often carry a couple of regional players like Sierra Nevada or Anchor and maybe one or two local breweries that are chosen on a market by market basis. We’re talking about a dozen or so skus. To give that some perspective, when I was the beer buyer at BevMo, at its peak, I had over 1400 beer skus. So Costco wants to change state law — and is willing to spend legal fees by the keg — over a pretty miniscule percentage of the available packages in the state. Changing this law the way they want to, may have the effect of lowering the price of a few beers, but that will undoubtedly widen the gap between craft beer and large brewery products. And that makes it harder for brewers to induce consumers to trade up for better beer.
I know I may be in the minority on this one, but I think beer should be more expensive. Good brewers make great beer, work very hard and should be rewarded for their efforts. But the drive by large brewers to keep volume up also keeps prices artificially lower than they should be. As I’ve said before, this also has the effect of keeping the gap between craft beer and mass-produced unnaturally wide, and this causes craft beer sales to suffer, in my opinion. But until we can persuade the average consumer that it’s very much worth their while to support good beer by being willing to spend a little more for it, this will continue to be a Sisyphus-like struggle.
I don’t know where the Washington State Brewers Guild, a trade organization of small brewers within the state, comes down in this debate, but in my opinion they should be supporting the three-tier system, at least for now. There are definitely reforms that are needed to the present system, but the changes this suit is seeking will benefit only a small number of businesses, and the state’s craft brewers won’t be among them.
The editorial continues:
The effect of these bans is to keep prices high. Maybe that encourages a few of the penurious to stay sober, though we don’t think the state’s attorneys who make this argument really believe it.
Certainly it is not the motive of the distributors who have lobbied the Liquor Board for years. The Liquor Board does them a favor by forbidding them to cut prices, forcing them to mark up their bottles by at least 10 percent and forbidding them to sell below cost.
These are not health restrictions to benefit the people. They are economic restrictions to benefit the beer and wine distributors at the expense of the people.
There will remain a high-end market, though small producers, distributors and retailers may have to scramble. That is business. The extent of changes will depend on how many customers are motivated by price — and that should be up to them.
A fallacious component of their argument is that when they refer to customers with varying motivations by price, they’re talking about the same customer — they’re clearly not. Not all consumers of beer and wine are after the same thing, of course. Some may be looking for the cheapest possible package of lawnmower beer, some for a decent craft beer to pair with a home-cooked meal, while still others may be looking for the experience of enjoying a limited vintage barleywine. While the first may only care about price, the second may have some concerns about it within a certain range and the latter is more interested in acquiring a fine beer, with little regard to the price (within reason, of course). Removing the price controls as Costco envisions will clearly effect the first group, may have some limited effect on the second, but almost no effect on the last group. But the only change we can pretty much guarantee is that cheap beer will get cheaper and good beer will remain largely unchanged, thus widening the gap. And that’s bad news, I think, for the small craft breweries.
The argument that these “economic restrictions … benefit the beer and wine distributors at the expense of the people” certainly sounds like a lofty principle is at stake. But a closer inspection of the way the beer business works reveals that really only the big box retailers like Costco and Wal-Mart will benefit. Things may not be perfect the way they are — and they certainly aren’t — but Costco envisions a world in which they make more money and everybody else loses. And that’s certainly not good for “the people.”