Friday, March 24, 2006

The Costco Lawsuit - Why You Should Care

Interestingly, Costco’s current lawsuit against the state of Washington has received rather limited press coverage and wine industry interest, at least as compared to 2005’s Supreme Court Granholm ruling in the direct shipping case.

The reason that this case should be interesting for consumers and producers alike is that it potentially sets the stage to eliminate many of the state's policies which are claimed to reduce alcoholism, protect small retailers, reduce sales to minors and create "orderly markets". The state is scrambling to justify why it prevents retailers from getting discounts on volume purchases - Costco's stock in trade - and wholesalers in Washington are resisting any changes to these laws for fear that Costco's influence will lead to further demands including (presumably) direct purchases from wineries (gasp!).

(I should point out that I’ve previously defended wholesalers, at least on the broad scale, as they generally provide a service that wineries themselves don’t want to perform. Imagine a 20,000 case winery with 10,000 sales outlets (grocery, restaurant, liquor store, wine shop, etc) across the country. Managing that becomes tremendously expensive, inefficient and takes away from what wineries do best – make wine).

Having said that, I do take issue when distributors get unnecessarily protective – preventing direct shipments to consumers or retailers, for example. This stifles a free market and forces the consumer to pay more for a product in markets where wineries could self-distribute, even if on a limited scale (like selling to Costco, for example!).

What’s notable about the Costco case is that the state of Washington, according to legal analysts, has dropped the ball in initial proceedings. Costco intends to demonstrate a pattern of collusion between state officials and liquor wholesalers and has been much more effective in its arguments than expected during the initial proceedings. The state, on the other hand, is using defenses like "higher prices to the consumer produce lower consumption of alcohol", something that is hardly relevant, nor supported by either facts or the state's previous actions and policies.

The state also argues that by preventing volume discounts and sales on credit (something many other states allow) it helps retailers to maintain level inventories and keep strong business practices. (sarcasm on) Thank God we have the governement to watch out for our businesses! What foolish mistakes we would make without Big Brother around! (sarcasm off)

Much like Granholm last year, a victory for Costco strikes a blow against wholesalers nationwide as elimination of distributor protections will lead more states toward the less-regulated model of California where wineries can sell to anyone in the state (consumer, retailer, etc), prices and markups are unregulated, discounts are allowed, alcohol can be bought on credit, etc.

Here's to a brave new world!


Anonymous Anonymous said...

The basics of your post are right, but there are a couple of points.

the Washington State Legislature passed a law, with the backing of the distributors, which does open up the state to direct shipment by out of state wineries.

Not many will take advantage as there are other issues in Washington that, until they are addressed by the Costco lawsuit, will make wineries and retailers alike hesitate before they commit to a direct to retailer strategy.

Some of those issues are price posting, minimum markups and sales to central warehouses.

Until the lawsuit is settled it won't be clear what will happen there, but for now it is the only state that I know of that doesn't mandate a three tier system, in one form or another.


March 27, 2006 11:31 AM  
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