Costco has built a multibillion-dollar business with this no-frills approach: Buy in massive quantities directly from manufacturers and...
Costco has built a multibillion-dollar business with this no-frills approach:
Buy in massive quantities directly from manufacturers and pass the savings on to consumers. Never mind that it sells Baccarat crystal and Lenox stemware off of crates.
This premise has worked for most everything, except wine and beer.
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The Issaquah-based wholesale-club giant sued the state Liquor Control Board in February 2004, charging that its decades-old system to import, distribute and sell wine and beer violates the federal Sherman Antitrust Act.
A federal judge Wednesday bolstered Costco’s case, ruling parts of the state’s system are “irreconcilably in conflict with federal antitrust law.”
Still, Costco and the state are headed to trial in March over this burning question: Violation or no, is the state shielded by the U.S. Constitution?
The 21st Amendment, passed by Congress in 1933, ended Prohibition and granted states broad power to decide how to import, distribute and sell alcoholic beverages within their borders.
Washington state set up a three-tier system designed to prevent overconsumption and the consolidation of power, and to raise revenue by collecting taxes.
The system sought to do this by adding a middleman between the buyer and seller. Out-of-state wineries and brewers must sell to distributors, who then sell those products to retailers.
By contrast, in-state producers can sell directly to retailers.
To ensure temperance, the producers and the distributors are each required to mark up products at least 10 percent.
Among other restrictions, state statute prevents distributors from extending credit to retailers and providing volume discounts to superbuyers.
This means Costco pays roughly the same per-bottle price for 1,000 cases of wine as a one-store wine shop that buys 50 cases.
U.S. District Judge Marsha Pechman ruled that many of these restrictions violate antitrust law by reducing price competition and increasing the price of beer and wine in the state.
The trial will determine whether the 21st Amendment protects the state, despite these violations.
Costco Chief Executive Jim Sinegal said the wholesale-club chain could pass on better prices and selection to consumers if it were allowed to buy directly from wineries and brewers.
“We don’t think artificially jacking up the price is going to change consumption,” Sinegal said, referring to the state’s argument that the three-tier system ensures temperance.
State Assistant Attorney General David Hankins said the state will argue that the three-tier system gives citizens access to beer and wine, but not to a point that it’s abused.
“Our response: It’s not potato chips,” he said. “This lower cost of alcohol can mean a greater cost to society.”
Pechman ruled on a second issue — one that would have the largest effect on out-of-state wineries and brewers.
She concluded the state violated the U.S. Constitution’s commerce clause by allowing in-state beer and wine producers to sell directly to retailers, while out-of-state producers cannot.
Pechman didn’t go so far as to dismantle the state’s regulatory system, which governs the sale and distribution of wine and beer.
Rather, she gave the state Legislature until April 14 to decide whether to extend self-distribution to out-of-state beer and wine producers, or to withdraw that privilege from in-state producers. Either way, the idea is to level the playing field.
Hankins was encouraged that the judge turned the issue over to the Legislature and that the state still has time to prove the three-tier system works.
“[Costco is] just one step closer in a board game,” he said. “They’re moving along the pieces. They get their day, and we get our day in court to fight whether our system works.”
Monica Soto Ouchi: 206-515-5632 or email@example.com