Costco Challenges Washington State Alcohol Distribution Laws

In a lawsuit that may have enormous national implications, Costco Wholesale Corp., the warehouse club chain that has become the nation’s largest wine retailer, recently sued the Washington Liquor Board. Washington is the home state of Costco.

The lawsuit challenges Washington laws and regulations prohibiting quantity discounts and extension of credit to retailers, requiring price posting and minimum price markups by distributors, and permitting only in-state wineries and breweries to distribute directly to retailers.

Costco claims that it seeks “to create lower prices and greater choices for Washington consumers and reform an inefficient and unlawful system that permits distributor to benefit at the expense of consumers and certain wineries and brewers.” Costco believes that it can lower its costs and offer better prices and selection to consumers if able to negotiate discounts and buy directly from wineries and breweries and supply its stores through its own distribution systems.

The national ramifications of this case are great.  Costco's general business model of maximizing efficiencies includes buying merchandise directly from manufacturers.  Direct purchasing, to the exclusion of the wholesale distributor, is a process that runs counter to the alcohol beverage industry's traditional “three-tier” system of distribution – a structure implemented by statute in virtually every state since the Repeal of Prohibition.  

Opponents to Costco’s efforts assert that disrupting the traditional method of alcohol distribution will undermine responsible alcohol regulation.  If Costco is successful, they also argue, distributors will be displaced and small retailers will be hurt.  According to published comments, Costco’s response to that scenario is that the small retailers will continue to have a far greater selection of wines and beers than Costco typically carries.

California’s alcohol beverage regulatory system today does not have many of the restrictions challenged by Costco in Washington State.  However, both states currently allow direct sales by in-state wineries and brewers to retailers (although most California manufacturers choose to distribute through the traditional three-tier system).

Costco's lawsuit has captured the attention of industry observers throughout California, and across the nation.  To many, this case may be a direct indicator of how the 21st Amendment will be construed and applied in the 21st Century.