SEATTLE – Costco Wholesale Corp. built its club-store empire by thinking big: a mind-boggling array of merchandise packed into sprawling warehouses and sold by the truckload at bargain prices.
Today, the Kirkland-based company renews its arguments for another big idea – erasing a 70-year-old system of liquor laws that keeps Costco from fully unleashing its buying power on the market for beer and wine.
If Costco prevails, opponents say the nation’s largest wholesale club operator could call into question other states’ long-standing “three-tier” systems, which support beer and wine wholesalers across the country.
Costco maintains that it’s only trying to get the best deal for its customers, who pay a membership fee to snap up discounts on everything from flat-screen TVs to Dom Perignon.
“I think our customers expect us to fight for something like this,” said Jim Sinegal, the company’s chief executive.
Costco’s challenge of Washington state’s post-Prohibition liquor laws began in 2004 with a civil lawsuit filed in U.S. District Court.
The company claimed the state’s liquor regulations, which include mandatory price markups, restrictions on direct sales and bans on volume discounts, unfairly prevented it from exploiting competitive advantages.
U.S. District Judge Marsha Pechman sided with Costco, throwing out a sweeping list of state regulations that she ruled were in violation of federal antitrust law.
State officials appealed to the 9th U.S. Circuit Court of Appeals, where a hearing is scheduled today in Seattle.
Washington state and its allies argue that the 21st Amendment, which ended Prohibition, gives states wide powers to regulate the sale and distribution of alcoholic drinks.
The system also works well in maintaining an orderly market for beer, wine and liquor, said David Hankins, an assistant state attorney general on the case.
“There have not been any complaints to the Legislature or the Liquor Control Board,” Hankins said. “You’ve got one lone company out there that says, ‘We don’t think it’s right.’”
Regulators say every state has some version of the three-tiered system for regulating beer and wine sales.
Washington’s version mandates that manufacturers sell only to wholesalers, who in turn sell to retailers. There are minimum price markups of 10 percent at each step.
Pechman’s rulings struck down that system, along with:
* Bans on volume discounts and credit sales of beer and wine.
* Mandates that manufacturers and distributors post prices with the state and hold those prices for a month. Distributors must charge that price to each retailer, and retailers can’t 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.
Those restrictions stop Costco from doing what it does best, Sinegal said – even though the company is considered the country’s top wine retailer, selling about $805 million in wine in fiscal year 2006.
Costco’s opponents, however, say the system was set up to safeguard the state’s interests in controlling alcohol consumption, keeping alcohol markets under control and collecting taxes.
Without those rules, some of Costco’s opponents say, the alcohol market could return to more chaotic pre-Prohibition practices, including pressure to sell to minors, violate trade laws, and seek monopolies.
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