Shawn Vestal: Privatized liquor leaves little guys with big hangover

It was late on a Friday afternoon in the spring of 2012. The auction of state liquor stores was drawing to a close, and Byron Roselli had a group of clients in his Vancouver office, all bidding to become new business owners in the freed-up, privatized Washington booze market.

The state was selling off the rights to its liquor stores, pitching it as a “once in a lifetime” opportunity, Roselli said. But it became clear that the bidders were going over the top – everyone watching, he said, was shocked as the bids rose and rose, into the hundreds of thousands of dollars.

“I was asking them if they were nuts,” he said. “Everybody that was on the sidelines watching the results of that auction were totally mystified at how people could bid so much. It was a frenzy.”

Overall, Roselli consulted with 24 people who bought the rights to the former state liquor stores. Twenty-three of them have gone out of business, and the 24th will close at the end of the month. At this rate, some estimate, up to 80 percent of the 167 stores auctioned off will be closed within a year.

The owners have been swamped by a tsunami of problems – including their own credulity in paying top dollar for stores that would soon be competing against Costco, Total Wine and grocery giants on a playing field that’s anything but level.

But Roselli, whose experience with liquor sales in Washington goes back to 1999, also believes the state misrepresented the deal to bidders, whose financial lives have been destroyed.

He thinks the state ought to give them their money back.

“I believe the state Liquor Control Board misrepresented this opportunity to such a degree that those bidders who want their money refunded should have the opportunity to have their money refunded,” he said.

The implementation of Initiative 1183 has been a rocky road from almost every perspective – except maybe Costco’s. Many of us made assumptions about liquor privatization that have not been borne out – across-the-board cheap booze being one of them. The people who bought the rights to operate the former state stores apparently believed that widespread sales in warehouse stores, booze-marts and grocery stores was somehow going to leave enough meat on the bone for them. Shifting the market into private hands has been complicated; people and companies are suing from every angle.

Chris Marr, the former state senator from Spokane and current Liquor Control Board member, said a large part of that is a direct result of government by initiative – a process that leaves policy details to be handled after the fact. In the case of turning over stores to private owners, the initiative required the liquor board to auction the stores – though the state didn’t, in fact, own stores – and get out in a matter of weeks.

Marr said he’s sympathetic to people who invested in businesses that did not succeed, but he insists the board did not snooker simple, naïve folks into a bad deal. Like Roselli, he said he was shocked at the bidding last April.

“When the totals came in, $31 million (in total), we were all very, very surprised,” he said.

Roselli agrees that many of the problems for the new private store owners were foreseeable. Many of his clients are immigrants, and some have experience with other businesses. He does not argue that they are naïve or gullible. He said that the way the state provided sales information in the auction was misleading. He gave an example of a Tacoma store; the “quick facts” for the auction included the figure for gross sales in fiscal year 2011: $10.7 million.

That store was sold at auction for $275,000.

A deeper look at the financials would have revealed a huge problem, however. All but $37,000 of the sales were wholesale transactions to bars and restaurants – virtually all of whom would be getting better deals directly from distributors in the new market. Roselli also estimated the loss in market share to other stores – around 60 percent.

“Which means that’s a $12,000-a-year store,” he said. “It has no value.”

Roselli said some bidders also found out, after the fact, that they would not be able to keep their leases in the existing stores. Marr said the state was clear up front about this possibility and built a safety valve into the agreements allowing store owners to operate within a 1-mile radius of the former state stores.

Marr is the former owner of car dealerships. He said that in buying a new business, it’s important to do the due diligence, which involves looking beyond the total sales figures. He said some bidders had not even read I-1183 before spending hundreds of thousands of dollars to compete in the new market it created.

When he bought a car dealership, he said, “I didn’t just look at sales numbers. I looked at what drove those numbers – how much was parts, how much was used vehicles, how much was new vehicles.”

The free market is not, of course, some magic place where everyone prospers. There are winners and losers, and the losers suffer. It is pretty easy to argue that these folks should have seen these problems coming and pretty hard to see much diligence in their due diligence.

Still, it’s also difficult not to sympathize with the disastrous results for the people who thought that there would be room for them – for the small business, for the little guy – in the new world of private booze.

“This certainly was not the opportunity of a lifetime,” Roselli said. “It was a total disaster.”