Costco Starts a Barroom Brawl

Monday, December 31st, 2007

Costco Starts a Barroom Brawl — by looking to bypass the alcohol distribution system, which exists for largely political reasons:

One of the perceived social ills inspiring Prohibition was the owning of bars by brewers. To the Anti-Saloon League and like-minded groups, this arrangement promoted alcoholism. They made the case so effectively that, even after Prohibition was lifted in 1933, most states insisted on keeping alcohol makers far away from alcohol sellers. The favored solution: a three-tier distribution system requiring manufacturers to sell to wholesalers, and wholesalers to sell to retailers.

That structure is still in place in most states today. But a closely watched federal court case filed in Seattle is now challenging the three-tier regime as outdated and anticompetitive. In 2006 Issaquah (Wash.)-based club store Costco Wholesale (COST) won an antitrust lawsuit challenging its home state’s three-level arrangement. The state then appealed, arguing that the 21st Amendment ending Prohibition gave states the authority over alcohol regulation.

The Ninth Circuit Court of Appeals is expected to rule on the case soon — a decision that could have widespread ramifications for every group with a stake in the beer and wine industry. Brewers and wineries nationwide could eventually gain the power to sell their products directly to retailers. Distributors and state tax collectors, meanwhile, could lose substantial revenues. The Costco case could “radically change the rules of the game,” says George Hancock, chairman of Pyramid Breweries, a craft beer brewer in Seattle.

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