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Originally published Saturday, July 16, 2011 at 8:02 PM

Corrected version

Costco revamps liquor-sales initiative

Costco Wholesale has not given up on the idea of selling liquor in Washington. Having lost last year at the polls, the country's third-largest retailer is back with another initiative for voters to consider.

Seattle Times business reporter

Costco's new liquor initiative

I-1183 would force the state out of the liquor business, but it's not as sweeping as the failed initiative Costco backed last year. The major differences:

Fewer stores: The state would still liquidate its stores and distribution center, but the initiative limits which retail stores could sell liquor by saying they have to measure at least 10,000 square feet. About 1,500 stores statewide meet that criteria, Costco says, down from 5,000 stores that could have applied for licenses under last year's initiative.

More government revenue: State and local governments could have lost millions under last year's measure. Costco says I-1183 will generate $200 million more than the current system over two years by auctioning the state's liquor stores and distribution center and adding fees for distributors and retailers. After that, it claims continuing fees will generate tens of millions of dollars more each year than the current system.

Less deregulation: Last year's initiative would have made legal many activities currently banned, including retailers' ability to distribute their own beer, wine and spirits (known as central warehousing); producers' ability to extend credit; quantity discounts and other deals such as prime shelf space for a price. This year's measure keeps most regulations in place, but allows quantity discounts and central warehousing for wine and liquor.

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Costco Wholesale has not given up on the idea of selling liquor in Washington.

Having lost last year at the polls, the country's third-largest retailer is back with another initiative for voters to consider.

Initiative 1183, which is likely to be on the ballot this fall, resembles last year's effort in that it would push the state out of the liquor business, forcing it to auction off its stores and distribution center. Retail stores — including Costco — would sell spirits instead.

But there are big differences between last year's initiative and this year's effort. Costco seems to have weeded out many parts that opponents found objectionable last time around.

Based on the company's projections, I-1183 would not reduce government liquor revenues like last year's measure.

The new initiative calls for a 17 percent fee from retailers on all liquor sales, and other fees from distributors, which Costco says would provide state and local governments tens of millions of dollars a year more than the current system.

It also limits the number of stores that would sell liquor and leaves in place key rules governing alcohol sales in Washington.

Perhaps most important from a political perspective, it makes no changes in the way beer is distributed and sold.

Last year, beer makers and distributors contributed more than half of the $9.2 million that helped defeat Costco's initiative.

"We were outgunned and lost," said Joel Benoliel, chief legal officer at Costco, which threw $4.8 million behind the measure. The retailer has contributed $1.8 million so far to I-1183.

Fewer stores would sell

Last year's measure, which was written by political consultant Sharon Gilpin, Bellevue attorney Richard Stephens and Seattle resident Stefan Sharkansky, lost by a vote of 53 percent to 47 percent. A similar initiative from liquor distributors lost 65 percent to 35 percent.

Costco played a greater role in writing I-1183, which would limit the number of stores selling spirits by requiring that they measure at least 10,000 square feet, with a couple of exceptions. That means grocery and other large stores — including Costco, whose stores average 140,000 square feet — would qualify, but most convenience stores such as 7-11s would not.

In communities where no other retailers are selling liquor, a smaller store could apply for a license. And people who buy the state's existing liquor stores at auction could stay in business despite their store's size.

There were no size requirement last year. "Opponents argued that we would have every 7-Eleven and gas station selling vodka," Benoliel said.

Costco estimates 1,500 stores could apply for liquor licenses if this year's measure passes. There are 329 stores selling liquor now.

Last year's initiative would have opened the door to more than 5,000 grocery, convenience and other stores, although a state analysis figured only about 3,300 would do it.

Even the 3,300 estimate alarmed some law-enforcement officials and others, who worried it would spark an increase in alcohol-related crime and underage drinking.

Income for governments

I-1183 attempts to make up for any financial losses to state and local governments due to privatization.

The state received $302 million from selling liquor in fiscal 2010. Under last year's measure, it could have lost up to $17 million a year of that share, according to the state's Office of Financial Management. Local governments, for their part, received $69 million in liquor revenues in 2010, and could have lost more than half of their take under the previous Costco-backed measure.

The Office of Financial Management expects to release on Aug. 10 an analysis of I-1183's financial impact. But the initiative would bring in more government revenues than last year's measure, largely because of the 17 percent fee on retailers for total liquor sales.

Costco says that income, along with distributor fees plus auctioning the state's liquor stores and distribution center, would generate $200 million more over two years than the current system. After that, Costco estimates continuing fees would generate tens of millions of dollars more each year than the current system.

I-1183 also takes a lighter hand with deregulation. It does not touch the state's ban on alcohol producers extending credit to their customers, and keeps a ban on the kind of wheeling and dealing that has retailers in other states charging extra for things such as good shelf space. Costco's initiative last year would have gotten rid of both those bans.

The new measure would permit two activities that are now illegal — quantity discounts and central warehousing. Allowing central warehousing means wineries and other producers could deliver to distribution centers for Costco, Safeway and other retailers rather than having to truck their products to each individual store, as they do now.

An entire network of distributors exists to do that trucking and could be hurt by I-1183, although discounting and warehousing would remain off-limits for beer.

"We leave beer alone," said Benoliel, who argues that it is a special category because it's perishable, unlike wine and liquor. But leaving beer regulations in place also might satisfy beer distributors, who fought last year's measure.

Early opposition

Opposition to I-1183 hasn't really kicked in. Only about $27,000 has been raised to oppose it, most from the United Food and Commercial Workers Local 21, the union that represents the state's roughly 650 liquor-store clerks.

The Washington Beer & Wine Wholesalers Association opposes I-1183, but executive director John Guadnola said, "We're not participating financially, although that could change."

The association contributed nearly $2 million to oppose Costco's initiative last year — on top of $2 million it spent in earlier years battling Costco in court, when the Issaquah-based company tried unsuccessfully to overhaul Washington's beer and wine laws through the legal system.

Roughly 70 percent of the business done by Washington's wholesalers is beer, and the other 30 percent is wine, Guadnola said.

I-1183 "is better than last year, which basically completely deregulated beer, wine and spirits," he said.

The Washington Wine Institute, which represents the state's largest wine company, Ste. Michelle Wine Estates, of Woodinville, and about 200 other wineries, opposed Costco's initiative last year.

It has not taken a position yet on I-1183 but appreciates that the measure doesn't try to nix the state's bans on credit and cutting deals for things like shelf space.

"We'd have heartburn about that," said Marty Clubb, president of the wine institute and co-owner of L'Ecole No. 41 near Walla Walla.

Another trade group, Family Wineries of Washington State, is still polling its 85 member wineries but expects to support I-1183. It backed Costco's initiative last year, because it wants significant deregulation.

Current laws "were written for people in the volume business," said John Morgan, the group's secretary and treasurer and owner of Lost River Winery in Winthrop.

I-1183 backers say they turned in more than 350,000 signatures supporting the measure earlier this month.

The state secretary of state's office still must determine whether at least 241,153 of those signatures are from valid registered voters before certifying the initiative for the ballot. A decision is expected in the next couple weeks.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

Information in this article, originally published July 16, 2011, was corrected July 18, 2011. A previous version of this story misstated Joel Benoliel's title. He is Costco's chief legal officer, not its general counsel.

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