Tri-Citians get into the business of booze

Michael Shemali of Kennewick knew he wanted to sell liquor after voters decided the state should get out of the business of selling alcohol.

Shemali sees the vast new changes as an opportunity, though many other Tri-City business owners have concerns.

He and his business partner Rajiv Malhan are opening Mid Columbia Wine & Spirits in Richland and Kennewick, becoming one of the first new Tri-City businesses to emerge after voters passed Initiative 1183 with almost 59 percent support in November.

Two lawsuits seek to overturn the measure, but the state is moving forward with the changes.

Closing state-run liquor stores means about 1,000 employees -- including about 28 in the Tri-Cities -- will lose their jobs. Most already are looking for other work, said Brian Smith, communications director for the state Liquor Control Board.

There is no guarantee that people who buy the right to operate the state-run stores in the online auction (http://liq.wa. gov/retail/auctions) that started earlier this week will hire existing staff, he said.

Many questions remain about what is going to happen after the state gets out of selling liquor by June 1.

Local business owners expect the transition to have its bumps, and worry what the changes will mean for them and their customers. One of the largest uncertainties is how much prices for liquor may climb after the state stops controlling them.

More freedoms for liquor stores

Mid Columbia Wine & Spirits is among about 40 Tri-City businesses to apply for the new state spirits retail license. So far, the state has received about 1,000 applications.

In the Tri-Cities, grocery stores including Yoke's Fresh Market, Costco and Fred Meyer have applied for the new license, along with the Kennewick Flower Shop and Perry's Finley Shopper.

Shemali says Mid Columbia Wine & Spirits won't look like a typical liquor store.

The stores will have a Tuscan theme and will offer more variety, including about 5,000 types of liquor, up to 4,000 kinds of wine and up to 3,000 types of beer, he said.

Shemali already sells wine with his business Hooked on Wine, an online wine retailer that he says is the largest wine seller on eBay. His business partner, Malhan, owns RM Construction of Richland.

The variety will be possible because Shemali said their stores will be about three times the size of the state-owned stores -- about 15,500 square feet in Richland and 14,200 square feet in Kennewick.

The Richland store at 1753 George Washington Way, Suite 399, is to open June 1 and the Kennewick store at 731 N. Columbia Center Boulevard, Suite 100B, will open mid-June. The stores will be open seven days a week.

Their motto will be "warehouse pricing without the membership," Shemali said.

He said they already are planning to have classes and wine and beer tasting events on Friday and Saturday nights. The law won't allow them to hold liquor tastings, yet.

Shemali said he is lucky the initiative passed.

"This has never been done in the state of Washington," he said. "What we are doing is brand new territory."

And that's made everything a little different, from getting a bank loan to a business license, he said. People aren't sure how to classify the new liquor stores.

"It's scary," Shemali said. "All we have is the sales data provided by the state, and that's it."

More questions than answers

"Will you still be open?" is a question often heard from customers at the West Richland Liquor Store.

Kuo-Ying Frenzel, manager for the contract store, said people are unsure about what the initiative will mean for them.

She has already applied for the new spirits retail license she needs to operate as a liquor store after May 31 and plans to keep the store at 4083 W. Van Giesen St. open as normal with its five employees.

But remaining open doesn't mean there won't be significant changes.

The biggest one is inventory, Frenzel said. Right now, the state owns all the liquor, and the store sells it for the state. Starting June 1, the inventory at the store will belong to her.

And instead of getting all the liquor from one distributor, the state, Frenzel said she will use multiple private distributors. She said she intends to keep the store's variety. She will be able to sell beer, in addition to soda and mixers, and plans to expand cigar and cigarette choices.

Frenzel will be able to do things she couldn't before, such as have a store website, advertise and sell gift cards.

And the store will be able to promote other businesses, such as restaurants that buy her liquor.

The question of pricing

At Black Heron Spirits Distillery in West Richland, no liquor is being made.

Joel Tefft, the distillery's co-owner, said since voters passed the initiative the state hasn't ordered much liquor from him.

He would normally have sold about 300 cases to the state in those six months. Instead, he likely will sell six to 12 cases.

And while craft distillers could start selling liquor to bars and restaurants starting March 1, Tefft said he hasn't found any buyers. Instead, he is working with distributors.

So until Black Heron knows what distributors will want, such as their Ink Vodka or Desert Lighting Corn Whisky, Tefft and co-owner Becky Runyan are getting by on sales from their tasting room, open noon to 5 p.m. Tuesday through Sunday at 8011 Keene Road.

Tefft said his distillery makes about 1,000 cases a year, but could make as much as 10,000.

And he expects more people will buy liquor as it becomes more readily available at grocery stores like wine and beer.

Chuck Fisher, owner of Jack-sons Sports Bar & Restaurant in Richland and the Kennewick Jack-sons, said he likes having a choice of where to buy liquor. Instead of buying from his assigned liquor store, he could go to Costco, for example.

But, he said, "I don't feel it's a level playing field."

Fisher said he doesn't have the same buying power with two restaurants as a chain restaurant would. And I-1183 allows quantity discounts on liquor and wine purchases. The prohibition on quantity discounts for beer remains.

That means large restaurant chains may be able to lower their drink prices, he said. And he isn't sure yet if liquor cost increases will mean he'll need to consider raising prices.

"Pricing is the biggest question," agreed Trevor Blackwell, director of operations at Twigs Bistro and Martini Bar in Kennewick.

He doesn't doubt prices will increase. But no one knows how much.

Blackwell said he's been told something different everyday.

One of his biggest concerns is making sure the liquor Twigs uses remains available during the transition.

Blackwell said he doesn't think the state is as prepared as it should be.

Liquor taxes, fees

Most people agree prices will go up after the state stops controlling liquor June 1.

And Washington liquor taxes also aren't going away.

Right now, more than half of the $30 price of a Black Heron bottle of Ink Vodka goes to taxes, Tefft said. That includes the state's portion from sales, a 20.5 percent sales tax and a liter tax.

And the state will still receive revenue from the sales through two new fees on distributors and retailers. The initiative added a 10 percent fee on liquor sales at the distributor level and a 17 percent fee at the retail level, said Smith, with the liquor board.

If the 10 percent fees on distributor sales don't collectively add up to $150 million by March 31, 2013, distributors will have to make up the difference, Smith said.

Those fees are intended to offset the revenue the state shared from liquor sales with local governments and will go down after the first two years.

Distributors and retail outlets likely will include the fees they have to pay the state as part of their cost of doing business. But now there is more cost of doing business associated with liquor because private distributors will be part of the process.

"Pricing will be dictated by distributors," said Frenzel, with the West Richland store.

And it isn't like there will be competition to keep the prices down, she said. Most distilleries sign with one distributor, so their liquor is only available from the one company.

At Black Heron, Tefft said he expects to see his profit drop. He doesn't think they can raise the price of their Black Heron Brandy beyond $30 and still have customers wanting to buy it.

So he hopes to ride out the first two years. "We don't know what else to do," he said.

He also hopes small distilleries can get the Legislature to pass a tax break like the one for small wineries.

Tefft said he voted for the initiative because the change was inevitable, but he hopes it doesn't just end up benefiting large companies like Costco.

"We'll survive," he said.

This story was originally published March 11, 2012 at 12:00 AM with the headline "Tri-Citians get into the business of booze ."