This is the first in a series of posts on Initiative 1183, the latest liquor privatization initiative. This post focuses on one of the wine-specific changes in the initiative, volume discounting. Here I detail what volume discounting means, why Costco cares, why some are for/against it, and what it means to consumers.

See a previous post on Initiative 1183 with additional details about the initiative’s contents here.

Volume Discounting

What it means: Currently the wholesale cost of wine is fixed regardless of how much one buys. This means that retailers that buy a single bottle and those that buy ten cases pay the same amount.

Initiative 1183 would allow wineries and distributors to adjust the wholesale price of the wine based on the volume sold. If retailers agree to buy a greater volume, they can potentially get or negotiate a lower price. For example, wineries could set different wholesale prices for one case, five cases, ten cases, and a pallet.

Note that is would not be the case for beer or spirits – just wine (NB: See correction below). Some believe the reason for this was an unwillingness to take on several large lobbies simultaneously.

Why Costco Cares: Costco obviously brings a whole lot of buying power. This would allow Costco and others to use their buying power to obtain lower prices based on the amount they purchase.

Why Some Are For/Against: Proponents of volume discounting says that it just makes sense. Why shouldn’t they be able to negotiate a lower wholesale price if a retailer is willing to buy a larger volume? In their view, the current laws restrict their ability to do business.

Opponents of volume discounting say that fixing the wholesale price allows smaller wineries to compete on the same playing field as the big boys. Taking it away allows companies like Costco to dictate price, something they can’t afford.

The logic is as follows. Let’s say there are two producers making a wine that costs $21 to produce and that they both sell for $25 wholesale. Producer A makes 200 cases of their wine – a common amount for many of Washington’s small wineries. Producer B makes 20,000 cases of their wine – a common amount for many California wineries.

Costco says to both producers that it will buy all of their cases of wine, but only if the producer agrees to a wholesale price of $22. Producer A has two choices: sell the wine to Costco and make $200 total or walk away and look to sell the wine elsewhere for $25 wholesale. Producer B can do the same but stands to make $20,000 on the sale to Costco.

Opponents say that if they did give Costco volume discounts, they might go out of business as they wouldn’t make enough profit. Conversely, if they don’t give Costco the volume discount, they might have trouble selling the wine elsewhere given Costco’s discounted prices on its wines.

Proponents say not allowing them to offer volume discounts is restricting their ability to do business and potentially putting them in jeopardy. Let’s say Producer A does decide that he wants to sell all 200 cases for a $200 profit. Current law prohibits him from doing so.

What It Means for Consumers: Volume discounting will allow Costco and other large companies to both increase their margin and pass lower prices along to consumers. This gives them a competitive advantage. Consumers can expect to see lower prices on some of the wines that Costco and companies like them carry.

In my opinion, consumers can also expect to see a shakeout in the wine industry as large wineries from California, Washington, and elsewhere take advantage of the ability to offer volume discounts at Costco and large grocery outlets. Some Washington wineries will be able to survive in this environment. Some wineries will not. I also expect that the selection of wine at large grocery stores may decrease as companies focus on brands they can buy with volume discounts.

Some will argue that there will always be a place for small, boutique wines and wine stores even with Costco offering its discounted prices. Costco obviously only offers a very limited number of brands. However, if these wineries and wine stores can’t compete on price with the wines Costco, Kroger, and others offer, don’t expect them to last too long, especially in a down economy.

Proponents say that this is the way capitalism is supposed to work where the strongest survive; opponents say that this is what has led to our chain store society where mom and pop stores can’t compete.

Feel free to comment below on what you believe the effects of volume discounting will be for you/your business.

Next up on Initiative 1183, a look at another wine-specific aspect of Initiative 1183, central warehousing.

CORRECTION: According to Section 119 of Initiative 1183, volume discounting would be allowed for spirits. It would not, however, be allowed for beer as indicated above.