Gulp! Liquor sellers face challenges of theft, taxes

Puget Sound Business Journal by Glenn Drosendahl, Contributing Writer

When you shop for liquor in Washington, the selection’s much the same whether you’re in Longview, Lynnwood or Liberty Lake.
That will change on June 1, when about 1,200 private stores start selling liquor under voter-approved Initiative 1183, introducing a whole new facet to shopping for spirits in Washington — variety.
As the retail sector prepares for this historic changeover, supermarket chains and freestanding liquor stores alike will confront a flood of new challenges, such as figuring out which bottles to stock, how to keep them from being stolen and how to make a profit on them while forking over stiff new state taxes.
Despite these headaches, few of Washington’s existing grocery retailers plan to let the opportunity slip by.
“I think liquor will be important from a margin perspective,” said Peter Guyer, president of Athena Marketing International, a Seattle-based consulting firm specializing in the global food, beverage and consumer products industries.
Supermarket liquor sales totaled $2.27 billion nationally in the fiscal year ending last June, according to Chicago-based research firm SymphonyIRI Group. That’s less than half the total for wine and just a quarter of the sales of beer and cider, but hardly insignificant.
Supermarkets run on light margins and are reluctant to reveal plans for competitors to see. When an entire state opens up for liquor sales, they are even less eager to talk. As Guyer puts it, “There’s a lot of trepidation and opaqueness out there”
There’s also a lot of eagerness. Among the applicants for retail spiro its licenses are nearly 170 Safeway stores, 113 Albertsons, 64 Quality Food Centers, 70 Targets, 61 Fred Meyers, 50 Walmarts and 28 Costcos (not to mention 135 Rite-Aids, 120 Walgreens and 54 Bartell Drugs stores and hundreds of other smaller businesses).
Here are some of the choices these retailers face:

Selection

To make room for a liquor section. supermarkets will do a SKU (stock keeping unit) rationalization and “cut some lower-margin products to make room for liquor, which has a higher margin,” Guyer said.
Some stores are lining up to stock mainly mass-market brands, while others are taking the boutique route.
“We aren’t going to carry a lot of the half gallons.” said Mark Takagi, speciality sales director for Metropolitan Markets, a group of six higher-end grocery stores based in Seattle.
Just as his stores now have tastings to promote fine wines, olive oils and balsamic vinegars, Takagi anticipates liquor tastings too, for specialty products such as fine tequilas. Each store’s wine stewards will be certified as spirits specialists.
Metropolitan Markets is aiming to have 300 different products (or SKUs) in each of its liquor sections. The relatively roomy Uptown Metropolitan Market, in Seattle’s lower Queen Anne area, will have five to six times as much liquor as Admiral store, in West Seattle, he said.
While Foods Market will also take a localized approach.
“The plan would very much be Pacific Northwest-specific,” Regional Marketing Director David Hulbert said. “Whole Foods Market is a regionalized company, and the product mix would be a local decision.”
Officials at Whole Food’s Pacific Northwest office, in Bellevue, didn’t give further details, because, Hulbert said, “at this point there are simply too many variables.”
Sever of the Whole Food’s more than 310 stores are in Washington. The chain has applied for retail spirits licenses for its five King County stores, but not at those in Lynwood or Vancouver.
Safeway officials declined to reveal their plans for their Washington stores, citing the competitiveness of the marketplace. Officials at QFC and Costco Wholesale did not respond to questions about their plans.

Security

Metropolitan Markets, like many liquor retailers, will keep spirits behind sliding-glass doors that can be locked during late-night hours or other times when staffing is light.
“Security is absolutely a concern with wine,” Takagi said. “High-end meat and other expensive things seem to be disappearing — things people need or have a buyer for out there. We know that’s going to happen with spirits.”
That feeling is widespread. Some stores will need extra security cameras, Guyer said.
Others, such as South Seattle’s Westwood Village QFC, plan to put security locks on bottles of spirits, said wine steward, Bonnie Jeuris.

Taxes and price

Perhaps the biggest issue to be determined, both for stores and consumers, is pricing.
Privatization as determined by I-1183 comes with taxes of 17 percent for retail sales and 10 percent for distribution. If the state’s total tax haul from distributors falls short of $150 million after a year distributors will be required to make up the difference. The state Office of Financial Management indeed predicts a revenue shortfall of at least $84 million that distributors will have to make up.
Those fees mean suppliers and distributors both are likely to raise their prices, prompting retailers to do the same.
“I think there’s going to be sticker shock, without a doubt,” Takagi said ‘You’re looking at a 20 percent higher cost, retail”
Costco Wholesale was the main backer of the initiative, pouring more than $20 million into the campaign. The Issaquah-based retail giant stands to gain from privatization because it will be able to buy at volume discounts, something not allowed under the state controlled system. It also markets its own Kirkland Signature spirits. currently sold in other states.
Guyer, the Seattle-based analyst. agrees that prices are apt to be higher initially. but he thinks ultimately they will drop.
“In a way, Washington is getting greedy with these high fees. They’re much higher than other stales. It’s troubling” he said. “In a couple of years I think government will be more reasonable and reduce those fees, although given this economy that might not be easy to do.”
Despite a potentially rough transition, he thinks the challenge to privatization is a healthy process, one that will benefit all those involved.
He said grocery chains can earn additional profit margins, consumers will enjoy more competitive pricing and greater variety “within an arm’s reach of desire,” and marketers and brand owners will gain higher sales and profits by having multiple sales channels, rather than only state-owned stores.