Costco - Beginning of the End?
Guest commentary by Jay Brooks
In one of the most watched legal battles in recent years, the judge yesterday in the Costco case in Washington state may have signaled bad times ahead for small retailers and small breweries. Her short-sighted ruling followed most courtsí bias in recent years that favor big business over the consumer or small local businesses.
The specific state regulations dismantled by Judge Pechman are:
Bans on volume discounts and credit sales of beer and wine.
Minimum markup requirements, which force manufacturers to charge at least 10 percent over cost when they sell beer and wine to distributors. Distributors face the same rule when they resell the products to retailers.
Mandates that manufacturers and distributors post product prices with the state, and keep prices the same for a month afterward. Distributors must charge that price to each retailer, and retailers canít get discounts for paying for freight or picking up the product themselves.
A ban on retailers storing or receiving beer or wine at a central warehouse.
So letís look at each of these:
1. Volume sales. This, of course, benefits the huge box stores like Costco and Wal-Mart and will make it increasingly difficult for smaller retailers like family-owned mom and pop liquor stores to compete since they cannot buy in the large quantities of a Costco. This gives a huge, unbalanced advantage to the big retailers. Will these small stores go out of business as a result? Itís hard to say, but it certainly wonít make it any easier on them. It probably wonít happen right away, but it doesnít seem a stretch to say a few years from now consumers will have less choice because there will be fewer places to buy beer. It would be easy to blame this all on the big stores but unfortunately consumers are at least partly to blame for this. The big stores merely exploit most peopleís belief that low prices are the only criteria worth considering in purchase decisions. Stores like Wal-Mart could not destroy whole towns if their customers didnít flock to them zombie-like in search of the latest bargain. As long as people shop on price alone without regard to the consequences of their choices, small businesses will continue to die out and our consumer landscape will become more and more homogenized with the same handful of national retailers dominating. Think Iím paranoid? Look at the state of music radio today now that Clear Channel owns most of the radio stations. The only way to combat this is to think about where you make your purchases and to be willing to pay a few cents more to support small, local businesses. The benefits to your community are huge even if theyíre not immediately apparent. But if you donít, youíd be naive to believe that the low prices that you were lured in by will continue once theyíve put your corner liquor store out of business. Not only will prices shoot up again dramatically but the number of available beers ó and especially the non-national, local brands ó will shrink precipitously. So if you value good beer, please think as much about where you buy your beer as what beer to buy.
2. Minimum mark-ups. At first blush, this appears to make no sense. Remove it and prices will drop, right? Maybe at first, but not for long, because this is very deceiving. You can see why Costco went after it, since they work on volume sales that allow them to have lower margins overall. Small businesses donít have that luxury and most businesses donít ó and canít ó use that business model. Even so, 10% is nothing. Most businesses mark up their goods 40-50% and the beverage retailers I know about shoot for a markup of around 20-25%, less for sale and loss leader items. So on a per-item basis, the markup on alcoholic beverages is already lower than the market in general. So what will removing the 10% markup accomplish? It will allow the big box stores to get even deeper discounts which will assist them in their efforts to squash their competition. Will prices to consumers go down? Probably at first, but it will primarily be the big domestic and import brands that will have lower prices. Itís unlikely to have much effect on craft beers and smaller import beers. So the gap between the two will continue to widen, which is bad for everybody.
3. Price posting and freight discounts. Posting prices at a central location is to insure a level playing field. Removing it, of course, makes the playing field uneven. If there is no longer a requirement to post prices, then all manner of back room deals become possible Ö and legal. Again, this may lower some prices for some retailers for some period of time. But it will hurt the small retailers who wonít be offered any back room deals, and the small breweries who canít afford to offer any back room deals to retailers. As to the frieight discounts ó are you sensing a pattern yet? ó this will only benefit the companies large enough to have their own fleet of trucks and you can probably figure out who they are.
4. Central warehouse ban. Again, the only businesses that have central warehouses are the very large, multi-location big box stores. The warehouse allows them to buy in extreme bulk. Not only does this give them yet another unfair advantage, but it also removes any incentive to sell fresh product to the consumer. Of course, since most of the brands that will be effected by this taste pretty bad already, maybe thatís not such a bad thing.
Both the national press such as AP and the local papers such as the Seattle Times and the Seattle Post-Intelligencer are reporting this as a victory not only for Costco but for consumers as well, saying that the decision will lower beer and wine prices in the state. But thatís just propaganda, it doesnít really examine the long term ramifications of the decision. Short term, prices may indeed go down but thatís not always a good thing. But selling a bill of goods to the public by saying one thing when another is more likely true is what our media does best. Large city newspapers ó who are big business themselves ó generally always take the side of business in their reporting and are one of the many ways information consumers receive is managed. This is a terrific example of collective restraint by the media to not actually examine what this decision means for the average consumer preferring instead to spin it in a way that actually downplays its negative aspects.
Whatís more troubling is that with this victory, Costco will be examining the remaining forty-nine states to decide if ó or more likely when ó they can screw consumers in those states, too. Our only hope is to spend a little more for better beer before itís too late. Support your local businesses as much as possible. Donít be pennywise and pound foolish.
Jay Brooks is a beer writer living in Northern California.
He has been a beer aficionado since the late 1970ís and has been working in the beer business for over 25 years.
Most recently, Jay was General Manager of the Celebrator Beer News until recently becoming a full-time parent and a part-time writer. He continues to write for the Celebrator and the Ale Street News.
With Jayís perceptive interpretation of the beer industry and the business of beer, ProBrewer welcomes Jay as a regular contributor to our Commentary section.
For much more of Jayís great ramblings, visit his beer blog at www.brookston.org/beer/