Last June, Colorado Governor John Hickenlooper signed a bill that would transform the state’s beverage-retailing landscape. Senate Bill 16-197 (SB16-197), sponsored by term-limited Democratic state senator Pat Steadman of Denver, was a historic compromise. The debate had lasted for decades, from the 1933 repeal of the Volstead Act through the final two weeks, when industry stakeholders negotiated at the Colorado capitol every day until midnight. With national grocery chains threatening a ballot initiative that would change the system overnight, the pressure was on to strike a deal before the 2016 legislative session ended. After weeks of strained deliberations, and with only four hours left to approve or veto measures passed by the legislature, Hickenlooper signed the bill into law.
At the end of Prohibition, when each state determined its own laws governing the sale of beverage alcohol, Colorado decided that an individual or company could hold just a single retail license. The result was a competitive market that served as a catalyst for a vibrant economy of craft breweries, distilleries and wineries. SB16-197 changed that law, allowing pharmacy-licensed grocery stores to gradually phase in more liquor licenses, while giving independent retailers the chance to either compete in the new environment or sell their stores and transition out of the business.
Beginning this year, pharmacy-licensed grocery stores with one liquor license may apply for four additional licenses, provided they purchase at least two existing retail stores in the same area, including all stores within 1,500 feet (3,000 feet in towns with fewer than 10,000 people). The number of licenses allowed for grocery stores will increase gradually every five years, rising to 20 licenses in 2032 and an unlimited number in 2037. Also starting this year, current off-premise licensees may apply for another license plus additional licenses in 2022 and 2027 for a total of four. As with the grocery stores, the liquor stores must be 1,500 feet (or 3,000 feet) from other off-premise licenses. They may add food and other merchandise to their retail mix, not to exceed 20 percent of profits. The law also provides for a committee that will recommend how to implement the replacement of low-alcohol beer (3.2 percent alcohol by weight) with full-strength beer at all stores.
The law aims to give consumers the convenience of buying spirits, wine and full-strength beer while they’re shopping for groceries—a change the governor, most retailers and craft producers saw as inevitable—while protecting retailers who put money into in their businesses under the former laws from having their investments devalued overnight by a flood of new licenses. Most of the state’s retailers own small stores located in shopping centers anchored by national grocery chains, and 68 percent of them speak English as a second language. The law is designed to protect the interests of these small-business owners, as well as retail and craft-industry jobs.
“SB16-197 was a monumental compromise because everyone had to give something up,” says Ron Vaughn, co-owner and COO of Argonaut Wine & Liquor in Denver. “It addresses the needs of many people and takes into consideration jobs and the investments the retailers made. It will be interesting to see how it affects Colorado’s market.”
Negotiations And Deals
Most retailers are satisfied with the law, mainly because it’s preferable to the immediate change that would have occurred at the ballot box, says Jeanne McEvoy, president and CEO of the Colorado Licensed Beverage Association (CLBA). The nonprofit trade group represents more than 1,600 retailers. By the time the bill was signed, Colorado retailers were well-versed in the debate. “This issue has come up every three to five years since the store opened in 1971,” says Clif Louis, owner of The Vineyard Wine Shop in Denver. “We’d always fought it, but this time the chains were raising real money.”
Mat Dinsmore, managing partner at Wilbur’s Total Beverage in Fort Collins, says he raised funds for the retailers’ organization for six months. He’s not sure a ballot measure would have passed in 2016, but like the governor, he’s certain it would have eventually. Along with a lobbyist representing the state’s largest stores and several other retailers, Dinsmore was at the bargaining table to the very end, and he notes that over 50 organizations and companies were represented. The retailers report that Target and Walmart stayed at the bargaining table and negotiated in good faith, while Kroger and Safeway withdrew from the negotiations.
The retailers’ biggest compromise was giving up the sole right to sell distilled spirits. Most predicted grocers would gain the right to sell full-strength beer and wine, but spirits came as something of a surprise. The national chains’ biggest compromise was agreeing to buy at least two retail stores—including the license, the inventory and the lease agreement—and all stores within the radius restriction. The agreement to acquire licenses slowly was also critical to the deal. The bill could have failed on either of those stipulations.
It appeared the bill would fail as late as two days before it was signed. “Allowing grocery stores to sell beverage alcohol had been an issue since Sunday sales were introduced in 2008,” says Jim Dean, store manager of Hazel’s Beverage World in Boulder. “It almost didn’t go through because people couldn’t agree on what should happen with beer.” He notes that although local craft beers get a lot of attention, most stores still sell mostly mainstream domestic lagers—and now grocery stores will sell them as well. Beer sales can comprise as much as 50 percent to 70 percent of sales at small stores, says the CLBA’s McEvoy. When grocery stores begin selling full-strength beer in 2019, many of those small stores will find it hard to compete.
Most retailers are comfortable with the law that will limit them to four off-premise licenses, while the grocery stores will eventually be allowed more. “It takes an enormous amount of capital to open new stores, and most retailers don’t have that kind of money,” Dean says. “Including Hazel’s, there are only four or five stores with the capital to open more than one or two additional stores anyway, so four is a fair number.”
Jack Backman, owner and manager of Cheers Liquor Mart in Colorado Springs, also agrees with the limit. “It puts us on a level playing field with the grocery stores, yet will keep chains like Total Wine and BevMo out of Colorado,” he says. Backman explains that each store’s success depends on its local market and its proximity to other stores. Like Denver, Colorado Springs is a highly competitive market.
Colorado retailers do speculate as to whether large-scale beverage alcohol chains like Total Wine and BevMo will move into the state. The answer is uncertain, but with the limited number of licenses—many of which will go to pharmacy-licensed chains, such as Kroger, Safeway, Walmart and Target—along with radius restrictions and a lack of clarity on how beer will pan out, they’re unlikely to jump in immediately. Meanwhile, chains without pharmacies, including Trader Joe’s, Whole Foods Market and Cost Plus World Market, will still only be allowed one license.
Licenses have already started moving around. For instance, Whole Foods had its sole license in Denver, but later moved it to Boulder, a small but competitive market that’s a major destination for craft beverages and food. “The licensing in Boulder will depend on how many chains establish their licenses in the city, and if the stores around them are willing to sell their businesses,” says Tiffany Lough, co–general manager at Liquor Mart in Boulder. It’s hard to make a blanket prediction, as licensing will vary from location to location. Although small retailers may come under pressure to sell, they’re not required to do so.
Proximity to grocery stores weighs in heavily when retailers determine whether they’ll begin to sell food or not, and none of them consider it a major focus. Argonaut, Cheers, Hazel’s and Liquor Mart have added some food, with a focus on gourmet items that have a long shelf life. Many smaller stores have started stocking chips and nuts. All of them plan to focus on their core business, not on food. Wilbur’s and The Vineyard aren’t currently planning to add food. Dean of Hazel’s notes that grocers had far more to gain by bringing in beverage alcohol than liquor stores had to gain by bringing in food. Although the law limits sales of other merchandise to 20 percent of total revenues, Dean predicts no stores will come close to that number, as consumers don’t traditionally shop for groceries at liquor stores.
Retailers are cagey about discussing their plans to open new stores. “Most larger retailers will have to expand, but they should first do research on any underserved areas in the state,” says Wilbur’s Dinsmore. “With the huge investment needed to open a new big-box store, there’s more value in existing stores. We’ll look for opportunities to expand and adapt to the changing market.” Dean agrees that a measured approach is best. “We’d investigate an opportunity if we could represent the Hazel’s brand in the right way, but we wouldn’t add another store just to do it,” he explains.
In October, Louis and his wife purchased City Wine, an existing store located a mile and a half from The Vineyard, and he plans to manage both of them as separate entities. Under the new law, each store must operate independently, and no stock may be transferred from one to another. Under the former one-store law, it became common for two or more family members to each hold one off-premise license. Although the CLBA’s McEvoy predicts that some families will merge their assets, none of the retailers interviewed for this story thought joining their businesses would prove a wise move. After all, a retailer with a trusted brand and solid financials may have the resources to launch three additional stores by 2027, an option more attractive than merging.
McEvoy adds that a number of the state’s biggest players are looking for new locations. But it will be a tight market, with national chains bidding on small stores and radius restrictions preventing any stores from being too close to one another. The restrictions could lead to an increase in large-format destination stores at major highway junctions, particularly just outside city limits.
The new law has forced retailers of all sizes to strategize and plan out the future of their businesses. The national chains want to buy existing small stores, while mid-sized and large retailers are quietly mapping the best spots for new outlets. It seems the gears are slowly turning, but the risk remains that national chains like Kroger and Safeway may attempt to sponsor another ballot initiative to further loosen restrictions. In a letter to the Colorado state senate, Hickenlooper wrote, “On the matter of the multiple ballot initiatives pertaining to sales of wine, distilled spirits and full-strength beer in grocery stores, I sign this law today with the understanding that most, and hopefully all, of these initiatives will be withdrawn, as discussed in the SB16-197 compromise process.” Retailers say it’s unlikely the national chains will push for a ballot initiative in the next few years, and Argonaut’s Vaughn adds that both voters and legislators have a degree of fatigue concerning the issue. Plus, in November, Coloradoans voted to make it harder to add amendments to the state constitution.
Argonaut’s Vaughn says SB16-197 will set a precedent for other states that are in the process of updating their off-premise licensing laws. The consideration the law gives to preserving existing retail and craft-industry jobs is a particularly distinctive feature. “Colorado’s market had to change, but the law rolls out the change slowly, so small businesses don’t have the rug pulled out from under them,” Liquor Mart’s Lough explains.
“Many small shops and a few larger players will close by January 1st, 2019, depending on their proximity to other stores,” says Wilbur’s Dinsmore. “Some owners of small stores will take the money and run, yet others will turn down offers from companies like Kroger. Nobody is truly happy with SB16-197, which actually means that everyone compromised, and we made a pretty good deal. The wrinkles still have to be ironed out, so Market Watch will be covering this topic for years.”