Olympia, Wash. -- An initiative on Washington state’s general election ballot this November could potentially undo years of legislative progress made by the state’s wine industry -- all in the name of liberalizing distribution rules.

Spearheaded by Issaquah, Wash.-based Costco Wholesale Corp., initiative 1100 seeks the full privatization of the Washington state liquor distribution system. Costco previously challenged Washington’s retail monopoly in 2005 in an effort to win the right to buy wine from producers rather than via a distributor.

The new initiative, if passed, would not only end the state’s monopoly on alcohol sales but also refinements to the three-tier system and tied-house rules that the Washington Wine Institute has secured during the past five years that have protected the state’s wine industry.

“This initiative, in addition to privatizing spirits, repeals all of those laws that had to do with the three-tier system and the tied-house laws,” WWI executive director Jean Leonard told Wines & Vines. “Some of those legal protections have probably helped the Washington wine industry get where it is today, by providing a level playing field for access to retailers.”

Should voters approve the initiative, the changes couldn’t be amended for at least two years. Leonard feels voters who approve of privatizing spirits sales may be unaware of the potential impact on their favorite wineries.

Smaller wineries could be at a disadvantage to larger players if volume discounts are allowed: Larger wineries would have a cost advantage. Smaller operations could also be pinched if credit is allowed, rather than cash on delivery, as is currently required. While both options could open markets for wineries of all sizes, smaller wineries in need of stable cash flow could be disadvantaged.

According to WWI, eliminating restrictions on licensees and wineries sharing advertising costs could allow grocers to charge wineries to offer in-store tastings, or for preferential placement -- again, measures that would favor large wineries with significant marketing budgets.

Leonard said she doesn’t believe that most voters are aware of these implications, even though the petition backing the placement of initiative 1100 on the November ballot garnered close to 400,000 signatures, more than 5% of the state’s total population.

Besides the Costco-led initiative 1100, liquor distributors are seeking certification of initiative 1105, which also seeks privatization of the state’s liquor trade.

“My best guess is that most people view both of these initiatives as allowing the sale of spirits in grocery stores,” Leonard said. “And my guess is that is about as far as most voters will have gone with respect to analyzing these initiatives.”

But Susan Johnson, a partner at the law firm Stoel Rives LLP in Seattle with a special interest in food, beverage and hospitality industry issues, said initiative 1100 enjoys a better chance of success than Costco’s previous challenge to Washington state’s liquor distribution system. Stoel Rives has been tracking the various initiatives regarding alcohol sales seeking a place on the November ballot, and Johnson said Costco’s lawsuit in 2005 helped set the stage for the current debate by raising awareness of the fact that Washington is one of just 18 states to retain a monopoly on liquor sales.

“This stands a better chance than any of the privatization efforts we’ve seen over the past decade,” Johnson said. “I think the public attitude is just more receptive.”

Meanwhile, the advocacy group Keep Our Kids Safe, which enjoys financial backing from the union that represents state liquor store employees, seeks to preserve the existing system of liquor distribution, but has not attempted to place its cause on the ballot. Notably, opponents of the two ballot initiatives garnered greater financial support than proponents.

The Washington State Liquor Control Board oversees 161 state stores and 173 private stores, and recently took steps to expand its retail network to keep pace with population growth (see Wines & Vines headline, “Washington Opens New State Stores,” January 19, 2010).