Liquor stores: small-retail model

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Kit Abrams, owner of Queen Liquor on the Westside, believes in the quality and appeal of Colorado’s wines and craft beers.

Kit Abrams, owner of Queen Liquor on the Westside, believes in the quality and appeal of Colorado’s wines and craft beers.

Seventy years ago, small retailers dominated most markets in Colorado Springs. Food was distributed through scores of small independent grocery stores, each serving its immediate neighborhood. Small hardware stores sold everything from sledgehammers to staples from storefronts in downtown Colorado Springs, Old Colorado City and Manitou Springs.

Wholesalers supplied shoes, men’s clothing, sporting goods, books, stationery, jewelry and women’s clothing to independent retailers. There were no supermarkets, no big-box stores, no category-busting retailers except for a couple of locally owned downtown department stores.

Those days are long gone. Retail markets are dominated by national companies, which take advantage of efficiencies of scale and vast buying power to deliver goods cheaply and efficiently to consumers.

We may regret losing the good old days of locally owned businesses and personalized service, but the constantly breaking wave of capitalism drives beneficial innovation, improving all of our lives.

Or does it?

In Colorado, one major retail category has remained immune to change. Thanks to post-Prohibition state-level regulations, chain liquor stores cannot operate in Colorado. More significantly, groceries and convenience stores cannot sell spirits or full-strength beer.

These regulations as well as local licensing ordinances have effectively protected the retail liquor industry from the “creative destruction” that has changed the face of retailing since World War II.

More than 140 independently owned liquor stores serve the Pikes Peak region. Are they just government-enabled survivors, using political clout to stay in business while gouging consumers with higher prices and poor service? Or are they engines of employment and innovation, offering great service while supporting the growth of Colorado craft breweries?

In 2008, the convenience store industry sought to persuade the state Legislature to lift the full-strength beer ban. The liquor industry fought back, commissioning Summit Economics of Colorado Springs to examine the economic and social impacts of replacing 3.2 beer sales with full-strength beer sales.

Summit concluded that ending the ban would decimate the state’s small liquor stores and seriously damage larger retailers such as Cheers or Powers Liquor Mart. Beer represents 60 percent of alcohol sales in Colorado, and ending the state-mandated beer restrictions could put half of Colorado’s 1,650 independent liquor stores out of business. Noting that the two dominant national brewers (Anheuser-Busch and MillerCoors) control Colorado wholesale beer sales, the study’s authors predicted that beer consumers wouldn’t realize lower prices.

Given that approximately 10,000 Colorado residents are directly employed by retail liquor outlets, either as owners or employees, half could lose their jobs. Moreover, there would be no corresponding increase in convenience store/grocery store employment. If liquor stores closed, property values would suffer and banks would have to deal with defaulted loans.

The prospect of substantial job losses as the state entered the great recession may have persuaded the Legislature to leave liquor laws alone, but there are other reasons to retain the industry’s archaic structure.

Craft beer’s rise

Colorado’s craft beer industry is among the strongest of any state. In 2012, 139 licensed craft breweries were in operation, including 84 brewpubs and 54 manufacturer breweries. Colorado ranks second in the number of breweries by state, third in breweries per capita. The Front Range, with 74 breweries in operation, is the nation’s largest craft-brewing market.

Support from independent liquor stores has been crucial to the industry’s growth. Independent operators make their own buying decisions, and are more likely to serve new or niche markets.

While sales of national brands have been flat in recent years, craft beer sales have increased 7 to 9 percent annually. It seems clear that, in this case, restrictive government regulation not only increased employment and customer choice, but also enabled a new industry to develop. That’s a radical departure from conventional business wisdom, but liquor store owners say that the proof is right before your eyes.

“Without independents [making their own decisions], wholesalers would probably just carry the top 20 brands,” said Austin Sherwood, general manager of Coaltrain Wine and Spirits. “We’re primarily a wine store, so only about 35 percent of our sales are from beer — and of those, craft beers account for 90 percent.”

Paul Ferrante, who manages Queen Liquor on West Uintah Street, worked at Bristol Brewing for five years.

“Mike (Bristol) still does his own marketing here in Colorado Springs,” Ferrante said, “but now he has wholesalers who represent him everywhere else. Without that support from independents when they were starting out, he might not have gotten where he is today.”

“A few years ago craft sales were less than 3 percent of the beer market,” said store owner Kit Abrams, “and now it’s over 6 percent. It’ll be 14-15 percent in a few years.”

Queen, which carries more than 300 craft beers from over two dozen craft breweries, has likely surpassed that percentage.

“We have 15 cooler doors (for beer),” said Abrams, “and four of them are stocked with beer from Colorado craft breweries.”

Independent liquor stores also nurture Colorado distilleries and wineries.

As the Business Journal reported in January, start-up whiskey distiller Michael Myers plans to move his business, Distillery 291, from a 300-square-foot basement to the 6,000-square-foot space on Tejon Street now occupied by Bristol Brewing. Bristol and its 30 employees will in turn move to the newly renovated Ivywild School building near its current location on South Tejon Street.

Seven area liquor stores, including Queen and Coaltrain, carry Myers’ whisky.

“I knew one or two of the store owners from being a customer,” Myers said, “And the others either found me, or attended a tasting.

“ Local is good — local stores put back into the local economy. And one of the good things about Colorado is that you can get a wholesaler’s license and self-distribute. Mike Bristol told me about that.”

Bristol doesn’t mind sharing his views, either.

“With chain store operators, if I wanted to sell beer to the Safeway three blocks away, I’d also have to sell to every Safeway in the region,” Bristol said, “and I don’t particularly want to do that. I might do OK here, but not so well in Cheyenne. (If there were no independents) you’d have craft beers, but they’d be ones tied to the majors, like Red Hook. You’d miss the incredible creative coalition of brewers like myself. Independents know their customers, they get feedback, and they can tell us how we can serve them better. “

While craft brewing is a relatively recent phenomenon in Colorado, small-scale wine production began on the western slope in 1899. Today, Colorado has more than 120 growers, nearly 1,000 acres of vineyards and 90 commercial wineries and tasting rooms. Colorado wine production has exploded in the past 20 years, increasing more than tenfold since 1992.

“We carry 30 to 50 Colorado wines,” said Ferrante, “and about a dozen Colorado whiskeys.”

Still growing

Is the market saturated? Entrepreneurs might say no. The Colorado Brewers Guild reported that 75 new breweries and brewpubs were in the planning process during 2012, including several in the Pikes Peak region.

“A guy came in yesterday who’s starting a new brewery on Garden of the Gods Road,” said Sherwood. “We’ll see how that develops.”

Given that the current occupant of the Governor’s Mansion opened the first brewpub in Denver 25 years ago, any legislation opposed by the craft-beer industry is unlikely to make it past his desk.

That may not mean that the convenience store industry is giving up the fight, though.

“They’re trying to run a bill which would license cigarette retailers,” said Abrams, “and let them sell beer too. I don’t know whether it’s just talk, but we take it seriously.

“We’ll fight them to the death.”

Colorado’s liquor industry, by the numbers

Number of Colorado independent liquor stores 1,650

Approximate number in Colorado Springs 140

Number of liquor licensees (bars, restaurants, liquor stores) 741

Liquor store employees, statewide 10,000

Liquor stores per capita rank, nationally 4

Number of Colorado craft breweries in 2012 139

Number of brewpubs 85

Stand-alone craft breweries 54

Brewery-related jobs in Colorado 6,600

Craft brewery jobs 4,200

Largest craft brewing market in U.S. Front Range, 74 breweries

Colorado rank by number of craft breweries (California is No. 1) 2

By breweries per capita 3

By draft beer consumed 1

Source: Colorado Brewers Guild