A Toast to the Citizens of Costco

06/05/2012 10:33 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Washington state residents can salute the corporatocracy with pricier liquor, thanks to a law bought by the warehouse chain, writes MoneyShow.com senior editor Igor Greenwald.

When our descendants mark the triumph of corporate democracy, they may well look back on June 1, 2012 as the watershed. Perhaps they will observe it by donating that day’s labor to their benevolent employer, and then head over to the commissary to toast the same with some modestly marked up booze from the corporate distillery.

What makes last Friday so special, you ask? That was the date Washington State changed its liquor control regime to the exact specification of warehouse club king Costco (COST). Costco spent $22 million to get its law passed as a ballot initiative with the support of 60% of the voters last fall.

So on Friday, the state’s monopoly on sales of hard liquor was finally and gloriously overthrown to the delight of that majority, including many who assumed that privately sold liquor would prove cheaper than the spirits dispensed by a grasping government. Their joy lasted the duration of the trip to the nearest private store, where they found prices 10% to 30% higher than what the state stores had charged a day earlier.

That’s because the 2011 ballot initiative, unlike a prior Costco proposal rejected by voters a year earlier, saddled private retailers and distributors with “licensing fees” amounting to 27% of the wholesale price, as compensation to the state for foregone sales profits.

The retailers and distributors have their own costs and profit margins, of course. Adding those to the licensing fees the state Office of Financial Management had estimated that in the best-case scenario liquor prices would merely tread water, with the potential for a 20% price hike, which seems to be what’s now happening.

It doesn’t help that that, according to Reuters, two wholesale distributors control the bulk of the business in the state, or that the wholesalers were the Costco measure’s principal opponents. They might be trying to get back what’s theirs while coincidentally making a point to the voters.

But there are other stores where the liquor prices are no higher than they were at the state outlets. You just need to buy a Costco membership to shop there. Because Costco doesn’t need to go through distributors—it can buy directly from distillers at wholesale prices.

For Costco, higher prices elsewhere are a feature, not a bug: they provide the public revenue that proved essential to passing the initiative, while driving alcohol buyers to Costco, where the store-label Kirkland Signature brand offers Grey Goose-quality vodka for a fraction of the Grey Goose price.

Meanwhile, stores with less than 10,000 square feet of space can only be licensed to sell liquor in undefined “areas” that Costco and other big stores have shunned. How’s that for corporate efficiency?

In all fairness to Costco, perhaps it merely wanted to sell liquor to its customers, and the fact that it stands to gain so many new ones can be chalked up as an unintended bonus. The distributors on the other side of this issue are hardly paragons of free enterprise, and there’s no real reason for a state to manage liquor stores.

At least this privatization, while costly to consumers, won’t drain public revenue, at least not in the short run. In Ohio, they’re trying to privatize the state’s monopoly on liquor distribution for the next 25 years, in exchange for an up-front payment roughly equal to six years of recent profits from this asset.

The man overseeing this looting of the public revenue base is the Republican governor John Kasich, who just might be rewarded with a vice-presidential nomination for his troubles. Only a pesky lawsuit stands between Kasich and plans to funnel the liquor distribution profits to JobsOhio, an unaccountable public-private hybrid that will in turn give the money away to corporations promising to create—or merely keep—jobs in Ohio.

The accounting of the jobs thus saved or won is so dodgy it would make Bernie Madoff blush. But beyond a corporate rewards fund outside public purview, the payoff is in forfeiting all that public revenue, which will require public spending cuts down the line.

And so it goes on in that vein, for as long as it takes for government to be reduced to a transfer agent directing tax revenue from individuals into corporate coffers under long-term contracts for various services and forbearances.

Kasich has also privatized a state prison and wants to lease out the Ohio Turnpike for the next half-century to a private operator. But I’m not trying to suggest that privatization is a uniquely Republican method for raising funds and rewarding friends at the expense of tomorrow’s taxpayers.

It was a Democrat, Richard M. Daley, who sold 75 years of Chicago’s parking meter revenue three years ago for perhaps 50% of its fair market value, to a company that immediately quadrupled parking rates and now claims the city owes it $50 million for free parking by the disabled.

The truth is, politicians have a massive conflict of interest in disposing of long-duration public assets for a short-term gain, not least in political capital. That doesn’t mean privatization shouldn’t be an option, but does suggest that decisions on what to sell, to whom, and for how much are best left to non-partisan experts, under ground rules approved by lawmakers, in a transparent process that encourages competitive bidding.

Alternately, perhaps companies like Costco, having proven that voters can be persuaded to pay more for liquor, should counsel them next to simply to abolish the state legislature. Costco shoppers could then ratify future laws while trawling the aisles.

What’s citizenship anyway if not a membership? The new one would come with exclusive shopping privileges and some great deals on private-label Scotch.

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