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Originally published Saturday, January 21, 2012 at 8:01 PM

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Craft distillers fret over new liquor laws

Washington's fledgling distillery industry faces challenges as the state winds down its liquor business. Distilleries have even bigger questions about whether big grocery chains will carry boutique spirits, and whether drinkers will pay higher prices for them, beginning June 1.

Seattle Times business reporter

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Stacked high in a warehouse southeast of Ellensburg sit more than 1,400 cases of botanical liqueurs that Mhairi Voelsgen, co-founder of broVo Spirits, thought she had sold.

The Washington State Liquor Control Board decided in October to carry the new distiller's Douglas fir, rose geranium, ginger and lemon balm liqueurs. That decision typically precedes an order of up to 200 cases of each product, so broVo went ahead with the run, adding a fifth flavor — lavender — and making several hundred extra cases that it thought would sell fast.

As the last batch was completed on Nov. 10, the liquor-control board canceled broVo's "listings," which is liquor-board parlance for products it carries regularly in many liquor stores.

"Our timing was impeccable," Voelsgen says wryly.

Voters had just passed Initiative 1183 by a wide margin, and the state needed to start winding down its liquor business in anticipation of large grocery stores taking over liquor sales.

The transition puts Washington's fledgling distillery industry in a tough spot. Many are new businesses in their critical launch phases and need regular orders to gain recognition and keep cash flowing.

Even distilleries that can make it to June worry they will not find distributors or large grocery stores to stock their products. They also worry that new fees will raise craft liquor prices beyond consumers' reach.

Only big stores — those measuring at least 10,000 square feet — will be allowed to sell spirits in Washington beginning June 1. That aspect of I-1183 was meant to keep convenience stores out of the business, something that bothered voters about a previous initiative.

For young distilleries, though, it means few small liquor shops featuring local products, the way boutique wine shops do now. Washington's existing 300-some liquor stores can continue selling liquor regardless of their size.

"The craft distilleries are the most ill-affected by 1183," said David Lusby, sales manager of Vinum Wine Importing and Distributing in Seattle. "Under the previous system, they were guaranteed distribution through the state, and under 1183 they're not."

Craft-distillery boom

For decades, distilling was almost a dead art in Washington.

While Oregon's cocktails swelled with locally made whiskey and absinthe, Washington had little liquor to call its own.

That changed dramatically beginning in 2008, when Washington's Legislature passed a craft-distillery law allowing small distilleries to open tasting rooms and sell limited amounts of liquor from them.

In less than four years, the number of craft distilleries has zoomed from zero to 40, with more than a dozen applications pending.

Washington has its own gin, vodka and whiskey as well as more exotic spirits such as absinthe from Woodinville, berry liqueurs from Kent and a limoncello expected to arrive soon from Sodo.

As the state's only liquor-store overseer, the liquor-control board has served as a sort of incubator for distilleries.

Once a distillery got a listing with the state, its liquor became available all over Washington, and details like price, shelf space and how many stores carried their products were negotiated with one customer: the state.

Even distilleries without listings were special-ordered by individual liquor stores.

"The board has a soft spot for Washington's craft distillers," said board spokesman Brian Smith.

Chris Marr, one of three people on the state's liquor-control board, was the main sponsor for the craft-distillery legislation when he was a state senator from Spokane.

Under I-1183, distilleries can sell liquor directly to stores and restaurants, but most do not have the necessary sales force or delivery capability. Instead, they are wooing distributors in hopes of being marketed alongside bigger brands.

"It's sad to say this, but not every distillery is going to find a distributor partner that meets the same level of service they had with the state system," said Lusby at Vinum, which has applied for a license to distribute liquor in Washington.

I-1183 imposes fees on distributors that are so high, particularly during the first couple years, that many smaller distributors will probably wait to enter the market, he said. And Vinum expects to represent only three or four Washington distilleries.

Boutique sales

Grocery chains are not talking yet about how much liquor they plan to carry, Lusby said.

"They're focused on whether they have 10,000 square feet, but apart from that it's pretty quiet," he said.

The minimum-size limitation is unique to Washington.

In other states, artisan distillers count on small wine and liquor shops to sell their products, said Susan Karakasevic, whose family owns the seven-employee Charbay Winery and Distillery in St. Helena, Calif.

"We fit best with small restaurants or wine shops, where there's personal contact with the customer," she said.

Charbay began making brandy and grappa in 1983 and vodka in 1998, and has since added rum, whiskey and tequila. They have been sold in 43 states, including Washington, but rarely in major grocery chains.

John McKay, executive vice president for Costco Wholesale's northern region, said it carries selected craft spirits in some markets. In Alaska, it regularly stocks an Alaskan vodka called Permafrost, he said, and in California it recently stocked a product from Woodinville Whiskey.

Steven Stone, founder and head distiller of Sound Spirits in Seattle and president of the Washington Distillers Guild, said he doesn't know if big players like Safeway will carry local products in Washington.

But smaller chains including Seattle-based Metropolitan Markets and Bellingham-based Haggen have already called asking what's available, Stone said.

Rethinking plans

Meanwhile, distilleries are scrambling to stay in the game.

They fought an early liquor-control board decision to stop taking special orders after Jan. 1, saying it could hurt new distilleries that do not have listings — including broVo, whose listings were canceled because it would have taken too long to put the products on shelves in a system that's being phased out.

As a result, the liquor board is requiring distilleries that want special-order eligibility to sign an agreement promising to buy back any stock left on May 31.

"That's fantastic," said Orlin Sorensen, co-owner of Woodville Whiskey. "That means we can sell full throttle through May 31."

Still, many Washington distilleries are looking for other ways to make money during the transition.

"It's caused me to rethink my business plan," said Ryan Hembree, founder and head distiller at Skip Rock Distillers in Snohomish, which started bottling potato vodka last spring.

Skip Rock had not yet landed a regular listing with Washington's liquor stores when I-1183 passed.

Hembree is not even sure he will receive more special orders; the liquor-control board bought so much of his vodka initially that bottles have been discounted to move them off shelves before June.

Hembree is looking to other areas.

"I was planning on building Washington first, as my home territory," he said. "Over the next six months, I'll do a lot more business in other states."

He's already selling vodka in British Columbia and hopes to get listings in Oregon and Idaho.

Priced out of market?

Distilleries are worried that even if their products land on grocery shelves, the prices might rise beyond what consumers will pay.

Unlike mass producers selling liquor at Costco and Safeway, craft distilleries cannot sell in huge volumes.

If retailers and distributors insist on the same margins they get nationally, the prices on many craft spirits are bound to climb, said Stone, the Washington Distillers Guild president.

Those margins would be compounded by Washington's high liquor taxes and new fees imposed by I-1183 on liquor retailers and distributors.

Stone estimates his Ebb & Flow gin and vodka could climb as much as $10 a bottle to about $42.

"We're all trying to figure out what's going to happen," he said. "It could be we have to concentrate on going out of state more, where taxes are lower. Then we'd have to absorb shipping costs, but it could be that's less."

Stone also plans to push for changes in the law. For example, he thinks it was an oversight that I-1183 kept a limit that allows craft distilleries to sell just two bottles per person a day from their tasting rooms.

Privatization elsewhere

Selling in other states might help Washington distilleries in the short run, but changes could be coming there as well.

Joe Gilliam, president of the Northwest Grocery Association, which represents Costco and others, met recently with Idaho's governor and other officials to discuss privatizing its liquor system.

Despite the challenges, broVo's Voelsgen has hope.

"The public has been demanding a private system for a while, and I'm hopeful we'll get more specialty stores and people committed to local products," she said.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com. On Twitter @AllisonSeattle.

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