Bill Passed to Ban Warehouse Sales of Foods, Drugs : Retailing: Groceries would be restricted at new ‘big-box’ stores such as Wal-Mart and Costco. Proponents contend the measure is intended to protect markets.

SACRAMENTO —  In a last-minute action that Wal-Mart and Costco described as a crippling sneak attack against warehouse retailers, the state Legislature this week passed a bill that would effectively prohibit sales of groceries and prescription drugs in new branches of such “big-box” stores.

Although the measure would allow the companies to maintain sales in existing warehouse outlets, industry representatives, hoping Gov. Gray Davis will veto the bill, said the ban could ultimately drive them out of California. A spokesman for Davis said the governor has not taken a position on the bill.

The stores trade in high-volume items for home and small-business consumers, often at wholesale prices, and set aside large sections for food shelves, fruit and vegetable displays, meat cases and pharmacies.

Proponents said the bill’s primary aim was to protect neighborhood businesses, including mom-and-pop Korean-owned grocery stores in low-income sections of Los Angeles, from being “devoured” by big-box competitors.

The bill’s author, Assemblyman Dick Floyd (D-Wilmington), who also had powerful support from organized labor and supermarket chains including Safeway and its subsidiary Vons, said the warehouse stores need to be contained “before these bastards take over the whole country.”

Costco Chairman Jeffrey Brotman, in a telephone interview from company headquarters near Seattle, countered that two-thirds of Costco’s volume is sold wholesale to small retail businesses. “We’re not driving Korean grocers out of business,” he said. “We’re helping them stay in business.”

But, Floyd said, because of the expanding big-box industry, “you can no longer find a clothing store, a stationery store or a hardware store” catering to neighborhood residents in low-income urban areas like his southern Los Angeles County district. Brotman said Costco intends to double its 85 stores in California in five to 10 years. But he said “if this bill [becomes law], we’re out of business” eventually in the state. Wal-Mart operates 110 stores and 24 similar Sam’s Clubs in California.

Specifically, the bill prohibits local governments from granting business licenses to retail stores of more than 100,000 square feet if more than 15,000 square feet is used for nontaxable items--that is, most foods and prescription drugs.

With plans to build units of up to 150,000 square feet, said Costco Senior Vice President Joel Benoliel, Costco could not profitably sell food and drugs in only 10% of that floor space.

He called the Floyd bill “the Pearl Harbor of legislation” for its surprise attack on the industry. In classic late-session fashion for special interests, the bill materialized suddenly three days before the Legislature was to adjourn for the year, then in 48 hours short-circuited a process that normally takes weeks or months and passed in both houses by bare majorities.

The real powers behind the bill, industry opponents said, were labor unions and conventional supermarkets politically allied with the Democratic leaders of the two houses.

Wal-Mart’s 40,000 California employees are nonunion; of Costco’s 23,000 workers in California, 9,500 are members of the Teamsters union, company officers said.