Booze Wars

Steve Pharo has something just outside his Milwaukie office door that Joe Gilliam wants—$70 million worth of vodka, whiskey, tequila and every other distilled spirit sold in Oregon.

In fact, every single one of the 2,676,106 cases of liquor sold in Oregon last year passed through the OLCC warehouse that sits off of Oregon Route 99W, just south of the Acropolis strip club.

For years, Gilliam, president of the Northwest Grocery Association, has dreamed of breaking the OLCC's monopoly on booze. He wants to see his members—Fred Meyer, Safeway, Costco and others—rather than the state, selling liquor. To do that, grocers and their allies must tear down a maze of 1930s-era liquor laws. 

It's curious that in Oregon, a state that has been as reform-minded as any, pioneering unfettered beach access, allowing assisted suicide and being the first to require statewide land-use planning, the OLCC has withstood for nearly 80 years any efforts to unshackle its iron-fisted control over liquor.

Today, that control is under an unprecedented threat. 

"We've never seen this kind of change and pressure," Pharo says.

Here's a primer on why the OLCC's days might be numbered:

What changed?

In November, Washington state residents voted to take liquor control out of the state's hands. For years, Costco had been trying to get the state Legislature to do just that. When legislative efforts failed, the Issaquah, Wash.-based retailer poured more than $22 million into an initiative campaign. Costco, already the nation's largest wine seller, also wanted to sell distilled spirits. In Washington, as in Oregon, the state is the exclusive wholesale provider of distilled spirits, which it sells through state liquor stores to bars, restaurants and individuals. 

Costco's campaign worked—by a margin of 59 percent to 41 percent, breaking the state's monopoly. If the vote survives a Washington Supreme Court challenge, the state will cease selling liquor May 31. 

Instead, Costco, Albertsons and the New Seasons that recently opened in Vancouver will sell booze.

"Washington went from being the most tightly controlled state in the country to being the most deregulated," says Ron Dodge, CEO of Hood River Distillers, Oregon's largest spirits manufacturer. Hood River spent $100,000 in Washington to oppose Costco. "They handed all the business to the big grocers on a silver platter."

What does this have to do with Oregon? 

Immediately after the Washington measure passed in November, Gilliam of the grocers' group said Oregon was next. That's logical because the two states have nearly identical approaches to alcohol sales.

Oregon is among 18 so-called "control" states, where the government maintains a tight grasp on every aspect of alcohol distribution and sales. In Oregon, hard liquor is sold by OLCC-licensed retailers—and there are only 246 of them (California has about six times as many liquor stores per capita). Oregon liquor stores get about 9 percent of sales as a commission.

They must sell at state-established prices and only during prescribed hours. (It was not until 2002, and only because of a financial crisis, that Oregon finally allowed liquor sales on Sunday.) 

Beer and wine are regulated differently, but every bit as strictly. State law carves out monopolies for beer distributors who sell to retail outlets such as grocery stores, bars and restaurants. Wineries have slightly more leeway—they can sell directly to consumers via mail and at their wineries, and directly to stores, although most do not. 

Even as the state is shoving liquor out the door at breakneck pace, the OLCC acts as Oregon's liquor-licensing and enforcement cop. Some might argue that the dual role of marketer and regulator is like jumping into a car and jamming on the gas and the brakes simultaneously. For instance, the OLCC built a sophisticated website to help drinkers track down rarities such as the 55-year-old bottle of single-malt scotch it sold for $14,000 a few years ago. But the agency also sends underage decoys into bars and polices licence-holders diligently. 

No one is suggesting the OLCC cease its licensing and regulatory work—Gilliam and the grocers just want it to stop competing with the private sector for alcoholic-beverage sales. The success of the Washington initiative is creating a good deal of pressure.

"We're trying to look at what we can do differently as the market changes," Pharo says. "But I understand that the industry would like to have us out of the way."

Adds Paul Romain, who leads the Oregon Beer and Wine Distributors Association, "We've never seen anything of this magnitude before."

Why do the grocers care so much?

The short answer is money. Grocers complain that OLCC rules are tilted in favor of distributors. When distributors buy beer or wine from the manufacturer, they can pay days or weeks later. But the law requires that when distributors deliver product to bars, grocery stores or wine shops, the retailer must pay cash immediately. That means the distributor gets to hold the retailers' cash for days or weeks before paying his supplier. "There's no other deal like it anywhere," Gilliam says. 

So the next time you walk into your neighborhood wine shop, consider that your wine merchant has already paid cash for every bottle in the store—no credit. That's the law.

Romain says credit practices simply reflect the cost of warehousing wine and beer, and help smaller producers get paid faster. "There are costs critics don't see," he says.

Distributors also enjoy brand monopolies in geographic territories. For example, Portland-based Maletis Beverage is the only company allowed to distribute Budweiser beer in the metro area, and state law makes it virtually impossible for Anheuser-Busch ever to end that relationship. 

Current laws fix prices in ways that, some argue, protect the little guy. But others complain the laws are contrary to the rules of commerce. Oregon requires a beer distributor to sell to every retailer at the same price. With beer, retailers can then decide how much profit they want to make, pricing a six-pack of beer accordingly, although they are prohibited from selling below cost. Hard-liquor prices are even more tightly controlled: A bottle of Hood River vodka, the state's volume leader, costs the same in every state store, and that price is set by the OLCC. 

One OLCC rule that generates the most heat is its prohibition of the centralized warehousing of wine. Even Mary Botkin, a lobbyist for OLCC union workers and a defender of the agency, scratches her head about this one. 

"Let's say the Interstate Fred Meyer in North Portland orders 10 cases of pinot noir from a distributor, and it sits on the shelf," Botkin says. "But the same wine is flying off the shelf at the Hawthorne store. Freddy's can't just move the wine from one store to the other. It has to go back to the distributor and get redelivered. That's just crazy."

John DiLorenzo, a lawyer for Grocery Outlet, tried in the Legislature and at the OLCC to end central warehousing and is now challenging the prohibition in front of the Oregon Court of Appeals.

"We believe that 20 percent of the final cost of wine is an embedded cost from the 1930s," DiLorenzo says. "We have nothing against distributors when they add value, but we don't like it when they just get paid for being there."

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One of the immutable rules in Salem is if it brings in money, don't mess with it.

Last year, state figures show the OLCC delivered more than $178 million to state and local governments, including $8 million for substance-abuse and mental-health programs. The money goes to every city and county as well as the state's general fund, which means there is considerable resistance to change.

The Oregon Beer and Wine Distributors Association also plays a powerful role in maintaining the status quo. Romain has led the group since 1983, which means he mastered the state's arcane alcohol rules before most lawmakers had their first drink. The distributors' political-action committees have given Romain more than $750,000 for campaign contributions in the past five years, making him a colossus in Salem.

Union support also has helped protect the OLCC. Romain, a Republican, has a somewhat unlikely ally in Botkin, a veteran lobbyist for the  American Federation of State, County and Municipal Employees. AFSCME represents 67 OLCC warehouse and distribution workers, as well as the agency's enforcement staff. In 2011, lawmakers proposed deep cuts to the OLCC's head count. But when the session ended, the budget included a small staff increase.

Botkin acknowledges some laws are puzzling, but she does not see the need for change.

“What we have is an OK system,” she says. 

How would breaking the OLCC's grip affect consumers?

Oregon drinkers have lots of choices. The OLCC warehouse contains nearly 1,800 different items, from Aalborg Akvavit ($21.95 a bottle) to Zwack "Kosher" Slivovitz ($20.45), any of which is available at every OLCC store.

"The selection in Oregon is second to none," says Hood River Distillers' Dodge. "That could all change in deregulation."

That's because shelf space is limited—even at big-box stores—and the Costcos of the world prefer to carry fewer rather than more items. Oregon's booming craft distillers fear there would not be shelf space for them in a deregulated environment, a concern Dodge says is evident in states where big-box stores sell liquor.

The success of Oregon's flourishing craft-wine and beer industries seems at odds with Oregon distillers' fears. Grocery stores are under no compulsion to give shelf space to Hair of the Dog beer or any of Oregon's 400 wineries, yet many do because consumers want variety and will pay for it.

Romain says, however, if volume discounts were allowed, craft distillers would get pushed off the shelf.

"Whatever the case, I think the small distillers should be at the table," DiLorenzo says.

How would deregulation affect the cost of booze?

The effect of deregulation on prices is hotly debated.

Not surprisingly, those in favor of deregulation say prices could get cheaper, while defenders of the status quo warn prices will rise.

OLCC and industry-price data suggest Oregonians get their Jack Daniel's and Tanqueray cheaply. The OLCC regularly compares its prices to those in Washington and California, and Pharo says Oregon's prices are lower.

"We don't compete with the 'loss leaders' you might see in California," he says. "But we could if the Legislature wanted us to."

Pharo, Dodge and other opponents of deregulation say liquor prices will rise in Washington because distributors and retailers will need to make a profit, whereas before only the state took a cut. 

In theory, the state gets a better deal than many competing buyers will get under deregulation, because each of them will buy far less than the state. A deregulated system also means middlemen will enter the liquor business, prompting critics to say that retailers such as Costco and Safeway will require bigger margins than the 9 percent OLCC stores now get.

Gilliam disagrees.

"The private sector is more efficient," he says.

Temperance groups such as the Oregon Partnership oppose any deregulation. The group argues that more outlets selling for more hours creates more opportunities for alcohol abuse, particularly among underage drinkers.

"Our system has worked really well in terms of keeping teens from getting liquor," says Judy Cushing, president of the Oregon Partnership. "Privatization would really let the camel's nose under the tent."

A recent report by the federal Centers for Disease Control and Prevention supports Cushing's position.

"Privatization results in increased per-capita alcohol consumption, a well-established proxy for excessive consumption," the February 2011 report says.

Cushing and the CDCP may be right, but federal statistics also show Oregon's tight control over alcohol has not stopped consumers from drinking more per capita than those in other states who enjoy unfettered access to booze. And it has not stopped Oregonians from drinking and driving more, as measured by DUII arrests per capita.

What's next?

Whether Oregon is ready for or needs the kind of sweeping change that's coming in Washington is uncertain.

Gilliam and grocers have made it clear if the Legislature does not make substantive changes, probably in 2013, they will consider putting a Washington-like measure on the ballot.

"If 2013 is a dead end, the industry will have to decide on the initiative process," Gilliam says.

Even Romain concedes citizens like the idea of privatization. "If there were a yes or no vote in Oregon, it would pass," he says.

In the meantime, the OLCC is moving forward with two rule changes that Pharo says are significant and should address concerns about convenience. In March, the five gubernatorial-appointed OLCC commissioners will vote whether to allow corporations, rather than individually run state liquor stores, to sell booze. That would allow Safeway, for example, to obtain a license to operate a liquor store within an existing grocery location.

In addition, state stores that are willing to expand and invest in improvements would be allowed to sell beer and wine. But even if both changes are approved, Pharo does not anticipate an increase in the number of licensed stores. Gilliam says the proposed moves fall far short of what his members want.

"The OLCC rule changes as proposed," he says, "are a goose egg."

In rocky economic times, perhaps the biggest barrier to sweeping change will be lawmakers' concerns about preserving the cash flow from liquor sales and the (far smaller) contributions from beer and wine taxes.

In Washington, the state's fiscal impact analysis of the Costco measure predicts state and local revenues will increase by more than $400 million in the next six years. There are no guarantees that estimate is correct, of course, but everybody who wants to change Oregon's system acknowledges any new approach must produce at least as much tax revenue as the current system.

“Any plan would have to be at least revenue neutral,” Gilliam says. 

WWeek 2015