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March 5-11, 2009
editorial@boulderweekly.com
 The business of beer
What House Bill 1192 would mean for small, local,
independent business in Colorado
by Dana Logan
This is a story about beer. And about business. And about the people behind business. And their livelihood. And their employees.
And the uncertain future that they face depending on the Colorado legislature’s decision regarding House Bill 1192.
It’s been a long time since Colorado was a dry state. And in the 76 years since the end of Prohibition, a lot has changed. But some of the laws that resulted from Prohibition-era thinking remain. It was around those laws that Wayne Belding and his business partner built their business in 1986.
Now, 23 years after opening the doors of The Boulder Wine Merchant, Belding says that House Bill 1192 threatens the viability of his business and local, mom-and-pop liquor stores across the state.
The bill, which is sponsored by Rep. Liane “Buffie” McFadyen, D-Pueblo West, and Sen. Jennifer Veiga, D-Denver, and is scheduled to be heard by the House committee on March 11, would eliminate the alcohol percentage limitations on beer products sold in Colorado. If passed, convenience and grocery stores that currently sell only 3.2 beer would be allowed to sell full-strength beer for the first time in Colorado history.
The result, says Belding, would be a dramatic drop in liquor stores’ sales, ultimately leading to the closure of hundreds of small
businesses throughout the state.
According to a report prepared by Summit Economics, LLC, and commissioned by the Coalition of Colorado Liquor Store Associations (CCLSA), if House Bill 1192 were to pass, Colorado liquor stores would lose 50 percent of full-strength beer sales to supermarkets and convenience stores in the first year alone and 70 percent of full-strength beer sales within three to five years. As a result of those losses, the report estimates that 40 percent — or about 700 — of the state’s 1,650 small, independent liquor stores would be forced to close within the first three years.
“When you start removing a very significant revenue source, all of a sudden you can’t pay the rent, and then you’re out of business,” says Belding.
And if locally owned businesses go under as a result of this bill, it’s not just the owners who will be looking for work in a terrifying job market; the employees of each closed liquor store will be out of work, too. Even the stores that aren’t forced to close may still find that lost revenue forces them to function with fewer employees.
According to the Summit Economics report, this bill would result in the loss of 4,830 wage-earning and self-employment jobs in the first three years after the law goes into effect. The report claims that these losses will continue through the fifth year when they will level out with a total of 900 fewer stores, 5,500 fewer jobs in the industry, and a loss of $120 million annually in employee and proprietor earnings.
“People have invested their life savings in their business and spent years — decades — to build their business according to the rules, and now they’re changing,” says Belding.
He adds that, if the bill passes, those small-business owners who planned on using the sale of their business for retirement would be without that option. With such a different market, the value of the business as a whole, including the profit margins and resale value, will see a dramatic decrease.
Rep. McFadyen doesn’t believe that the impact of House Bill 1192 could be so devastating.
“That, to me, is almost offensive,” she says. “I literally don’t know how this bill could close 700 liquor stores. I don’t know how that’s even possible, and I don’t know how you even estimate something like that. There are a lot more factors involved in the closing of a liquor store than just whether or not full-strength beer is being sold in convenience and grocery stores.”
While it’s true that the economic and market factors that contribute to the success or demise of any given business are complex, it is clear that given the rules and regulations around alcohol sales in Colorado, a change of this nature could, indeed, have far-reaching consequences.
Why the change?
So, given the possible outcomes, why is House Bill 1192 up for consideration in this year’s General Assembly?
The answer to that question, in a way, goes back to 1987 when the drinking age was changed. Prior to 1987, 18-year-olds were allowed to drink 3.2 beer, while those over the age of 21 could legally drink full-strength beer, wine and spirits. But in 1987, the laws changed making it illegal for anyone under 21 to drink any kind of alcohol. However, when the drinking age changed, the laws regarding the sale of 3.2 beer remained the same.
“It’s a product line that really doesn’t have a reason to exist if 18-year-olds can’t buy beer anymore,” says McFadyen.
And while that may be true, the law wasn’t seriously challenged until last year’s legislative session when two separate bills were introduced. The first was a bill similar to House Bill 1192, and would have eliminated 3.2 beer, allowing grocers and convenience stores to sell full-strength beer, as well as wine and spirits. That bill died in committee.
The second was a bill meant to change another antiquated law that restricted liquor stores from selling alcohol on Sundays. That bill passed.
So, on July 1, 2008, liquor stores throughout the state began opening their doors to customers on Sunday. Prior to that, Coloradans who wanted to drink on Sunday were forced to either buy their booze in advance or go to a grocery or convenience store where they could pick up a six-pack (or more) of 3.2 beer.
But since liquor stores are now open on Sundays, the need to stock up is gone, and many people no longer purchase 3.2 beer because they prefer to drink full-strength beer if given the option.
“Because of Sunday sales, we’ve seen the sale of 3.2 alcohol or malt products plummet in the state,” says McFadyen. “It was my understanding that when we decided to change the law to allow Sunday sales, there would be a companion bill to do away with 3.2 alcohol in Colorado because we are only one of five states with 3.2 alcohol still left on the books. And I really believed that my vote for Sunday sales was based on getting rid of both 3.2 and the blue law [regarding Sunday sales] to maintain fairness for both sides of the retail market.”
But is it fair?
Belding admits that grocery and convenience stores are coping with a loss of revenue due to Sunday sales.
“Yes, it’s a valid point, given the preference [for full-strength beer],” he says.
But he also points out that liquor licenses were established with strict rules regarding conduct and very strict limitations on what retailers can sell.
“We can sell alcoholic beverages and items directly related to their service. We can’t open a deli; we can’t sell sandwiches,” he says.
“So an entity that sells lots of other stuff wants to take some of our piece of the pie, if you will, without commensurate loosening of restrictions on what we can sell. Basically, it’s just taking away what we have without giving us an opportunity to compete on other products.”
In other words, Belding explains, grocery stores and convenience stores have a variety of products, from food to gas to home products and convenience items, which they can use to find another niche in the marketplace to compensate for their loss of 3.2 beer revenue. But liquor licensees, under strict regulations, have no other available product with which they can recoup the losses in beer sales that are sure to result from this bill.
“We can’t get into the food realm,” he says. “We can’t offer another sort of product like clothing. We’re very constricted on what we can sell. So, basically, they’re pulling the business away and saying, ‘You’ll have to do with less.’”
When asked if the bill would be more equitable if there were a provision that allowed liquor stores to sell food or some other product,
Belding says that he does believe it would be a fairer way to go about this.
“If you want the convenience of having beer in grocery stores, then why not let the liquor establishments become grocers as well?” he asks.
Rep. McFadyen responds with a question of her own: “Are they arguing that they should become grocery stores?”
Belding says that he absolutely doesn’t wish to be a grocery store, but he says the point is that the playing field is far from level.
“It’s not like I want to be a deli or anything like that, but that’s a natural sort of competitive entity that could exist if the marketplace were opened up. Maybe ultimately that’s what we’ll get to, but the bill proposed here does not — it’s totally one-sided. It smacks of unfairness,” he says. “Philosophically, I don’t have any true objection to a free and open market if everyone were permitted to operate under the same guidelines, but that’s not the case. And because we’ve been in this business for 20-plus years, built around the rules, and now you change the rules and all of a sudden it has a very dramatic impact on the economies of every liquor licensee.”
The Colorado Wine Industry Development Board (CWIDB) has put out a position paper regarding full-strength beer sales in grocery stores.
In it, the CWIDB claims: “[House Bill 1192] does not seek to find an equitable approach to changing 70 years of doing business.
Rather than seek to level the playing field so grocers and liquor retailers can compete fairly, [House Bill 1192] proposes to give grocery and convenience stores, largely owned and controlled by out-of-state corporations, significant advantages over small, mostly family-owned, independent business people who employ thousands of Coloradoans (sic).”
But McFadyen maintains that the bill is fair. She says it’s about getting rid of a disparity caused by Sunday sales — that the grocers and convenience stores are the ones dealing with an unfair situation.
“It’s not fair to vendors who have taken the hit of 3.2 sales. The same question should be asked: should we have passed Sunday sales knowing that people could go out of business?” she says.
But in the eight months since Sunday sales have been legal, not one grocery or convenience store has gone under as a result of a decrease in 3.2 sales, according to Jeanne McEvoy, executive director of the Colorado Licensed Beverage Association (CLBA).
“If you run the numbers based upon what’s reported to the state of Colorado, the average convenience store sells about eight to 10 cases of beer a week. And their profit is $4 a case, for the most part. So, if they’ve lost 25 percent of their business, they’ve lost 2 cases of beer; they’ve lost eight bucks per week,” McEvoy says. “It may be a little more in some areas. It really depends. We have convenience stores that are reporting no losses. It depends on where they’re located. It depends on what the competition is. But there’s not been one business close. They haven’t laid off one employee.”
Still, to the liquor-store owners concerned about their economic viability if House Bill 1192 were to pass, McFadyen claims that the situation they are facing is their own fault.
“I would just say back, then they should not have argued for Sunday sales. When they came to the legislature and asked for Sunday sales, they knew the expectation was to change the law on 3.2 alcohol. They had to have known that. They knew that. I understood there was an agreement on that issue, and so I voted to have Sunday sales. Now I’m hearing, ‘We don’t want to get rid of 3.2,’” she says.
Beer is the beginning
Regardless of the outcome of House Bill 1192, one thing is nearly certain: grocery stores are not going to stop with beer. If the bill passes and grocery and convenience stores begin selling full-strength beer, the next step is to ask for wine, or possibly spirits. If it doesn’t pass, next time they may ask to sell all types of alcohol, as they did last year.
“As big grocers see a profit center, and as they experience a profit center in other markets where beer and wine sales are permitted in grocery stores, there’s no reason why they wouldn’t seek to do that here,” says Belding.
And if they can’t get it through the legislature, there’s a pretty good chance that they’ll take it to the ballot.
“My concern is that if the retail industry cannot change the law through the legislature, where the legislature would control the bill itself, there is a great deal of potential to put this to the ballot,” McFadyen says. “And if the retail industry has to absorb the cost of a ballot issue and all the campaigning and the signatures and everything that goes with putting an issue to the ballot, the likelihood is that it would include more than just full-strength beer. And I really believe that’s what would hurt the liquor stores — if they had a ballot issue that included wine.”
And although, certainly, Rep. McFadyen is right that taking beer and wine sales away from liquor stores would hurt them worse than taking away only beer, the idea that dealing with it through the legislature will prevent big-box retailers from asking for wine and/or spirits in the future is flawed, some say.
If the legislation allowing full-strength beer were to pass, Belding says the next step is asking permission to sell wine, too.
“I don’t see why they wouldn’t. Especially if they were successful [in getting full-strength beer],” he says.
So the argument that handling it through the legislature would prevent retailers from going back to the legislature next year and asking for more, or going to the public via a ballot initiative this year, just isn’t realistic. In fact, some say that it would set a precedent that might make it even easier to get permission to sell wine and spirits in the future.
Still, McFadyen feels strongly that this bill belongs in the legislature.
“I believe this is the best way to handle it. I really believe if it goes to a ballot issue, it could be more than full-strength beer, and I think that would be much more harmful for liquor stores,” she says.
McEvoy disagrees with that approach.
“I think the Chicken Little attitude — ‘the sky is falling’ — is no good reason to put bad policy in place,” she says.
Alternate endings
When it comes right down to it, almost everyone agrees that 3.2 beer is an anachronism — a product that has little to no reason for existence in today’s market.
But it does exist. And how to deal with that is the issue at hand.
Colorado is one of only five states that still have 3.2 beer. It’s clear that, one way or another, it’s on its way out. But how that is handled could be the difference between the success and failure of 700 local businesses across the state, not to mention the job and revenue losses that would accompany those potential closures.
Rep. McFadyen claims that the best approach is to eliminate 3.2 beer and replace it with full-strength beer in grocery and convenience stores. Liquor stores, as well as their advocates, claim that this approach would have devastating results.
So what can be done?
While it may seem on the surface as if the options are either to keep things the way they are or to allow full-strength beer in big-box stores, alternative ideas do exist.
In their position paper, the CWIDB offers suggestions for making House Bill 1192 more equitable in a way that supports and does not penalize existing liquor stores. Among them is the suggestion that if 3.2 beer is an obsolete product, Colorado could do away with it altogether, without replacing it with full-strength beer. Another idea is that the state could remove restrictions on product selections for liquor licensees so that liquor stores can compete with grocery and convenience stores. They go on to suggest other alternatives, including allowing liquor stores to own multiple licenses.
While none of these options may be perfect, it’s clear that, given the current economic climate, legislation that would jeopardize thousands of jobs in local, independent businesses throughout the state must be approached with caution.
“The crux,” Belding says, “ is having your business taken away without any possibility of competing on another front. This isn’t leveling the playing field because it’s not level. It’s far from level.”
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