1. Presented by: Pat Kohler, Agency Director March 7, 2012 Sleepless in Olympia: I–1183 in Transition

2. Agency Goals: Orderly transition by May 31, 2012. Meet the timelines and the requirements spelled out in the initiative. Advert harm to contract, tribal and military stores. Maximize reasonable value for our assets. 2

3. I-1183 Timeline December 8, 2011 – I-1183 becomes law March 1, 2012 – Distributor and COA’s licenses active May 31, 2012 – State business operations close June 1, 2012 – Spirit Retail licenses active 3

4. Implementation Project Teams Audit Team Legal & Policy Team Product Supply Team Employee Transition Team Communication Team State Liquor Store Team Contract Liquor Store Team Asset Disposal Team Reverse Logistics Team Warehouse Hibernation Team State Store Auction Team Warehouse Sale Team Regulatory Team Organizational Structure Rulemaking Team IT Team 4

5. Key Activity Timeline Activity JanFebMarAprMayJunJulAugSep Store Audits State Store Auction Store Closures Reverse Logistics Employee Layoffs Asset Disposal Warehouse Hibernation 5

6. Key Agency Challenges Administering layoff of over 1,000 employees under two complex collective bargaining agreements. Providing full retail services through May 31, 2012, yet ensuring that inventories are depleted at the end of the day. Conducting audits of over 300 store locations in eight weeks. Auctioning of State Store Rights at locations that are owned by 3 rd parties. Changes to the existing regulatory system. 6

7. Supplier Buy Back Agreement 124 suppliers established agreements, representing 99% of spirits. Only 96 of 424 (22%) listed beer, wine & mixer products will be covered by an agreement. 2,225 of 2,850 (78%) special order spirits will be covered by an agreement. Reversed logistics. 7

8. State Store Auction A successful bidder owns the exclusive right to apply for a spirit retail license for the existing location. – Allow for liquor sales at a premise under 10,000 sf 2 – Location is not subject to local jurisdictional challenge – The “right” is sellable, transferable, and re-locatable – No obligation to operate a liquor licensed business Public on-line auction. – Individual store locations – All system bid – 45 day window Maximum reasonable value. – Criteria to determine total revenue factoring in cost avoidance 8

9. Regulatory Changes Uniform Pricing: Is repealed for spirits and wine (No sales below acquisition cost). Ban on quantity discounts: Is repealed for spirits and wine (No sales below acquisition cost). Ban on Central Warehousing Is repealed for spirits and wine. Ban on Retail to Retail Sales: Is repealed for spirits and wine to a degree (24 liters per sale to an on-premises licensees). Liquor Markup & Taxes: The markup is removed. Removes the 15% discount on the purchase of spirits by retail on-premises spirits liquor licensees. 9

10. Producer/Manufacturer Typically a brewer, winery, or distillery Current 3-Tier System Distributor Companies specifically designed to sell specific products to restaurants, bars, stores, etc. Retailer Grocery & liquor stores, bars, restaurants, etc. Consumer 10

11. 11 Distributor Producer Off Premise Retailer Off Premise Retailer On Premise Retailer On Premise Retailer Consumer I-1183 Model

12. In State Producer Privileges – Sell to Distributor – Sell to Retailer – Sell to Consumer at the Distillery Costs – 10% distributor fee on sales to Retailers – 17% retailer fee on sales to consumers Out of State Producer Privileges – Sell to Distributor – Sell to Retailer Costs – 10% distributor fee on sales to Retailers 12 Producer

13. Privileges – Sell to Distributor – Sell to Retailer Costs – 10% distributor fee on sales to Retailers (first two years) – 5% distributor fee on sales to Retailers – $150 million distributor assessment for “holders” of a distributors license (for the period March 2012 – March 2013) 13 Distributor

14. Off Premise Privileges – No Uniform Pricing – Quantity Discounts – Central Warehousing – Retail to Retail Sales (limited to 24 liters/day) Costs – 17% retailer fee on all spirit sales On Premise Privileges – No Uniform Pricing – Quantity Discounts – Central Warehousing Costs – 17% retailer fee on all spirit sales 14 Retailer Additional Requirements: Must maintain 10,000 ft 2 of retail space

15. 15 Distributor Producer Off Premise Retailer Off Premise Retailer On Premise Retailer On Premise Retailer Consumer I-1183 Model

16. Current Applications by License Type License TypeApplications Spirit Certificate of Approval (COA) 24 Authorized Representative COA (Foreign & US) 77 Spirit Distributor39 Spirit Retailer789 Contract Liquor Stores66 Wine Seller Reseller Endorsement284 As of March 1, 2012 16

17. Q and A 17