Category Archives: Importation

The Biggest Change Since Prohibition…NOT!

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Within days we will be entering a brave new world in Ontario with lots of competition in beer sales from private retailers, with wine following close behind.  At least that is the hype from the provincial government as it announces “the biggest change since the repeal of Prohibition”, with its recent amendments to the Liquor Control Act.  It’s now time to take a closer look at what these “changes” really are.  This post is more about beer than my usual wine theme, because that’s what’s happening right now, but the current situation illuminates the mindset of the folks who came up with this scheme.

The Beer Store Monopoly

First, a little background to beer sales in Ontario.  Many, many people believe that The Beer Store, which has a near monopoly on beer sales in the province, is government owned.  In an Ipsos Reid survey in 2013 (reportedly, as the survey results can no longer be found on line), only 13% of responders knew it was foreign owned [buzzer sound]  Yes, it is owned by three giant multinational foreign beer companies, none of which is majority Canadian owned:  Molson Coors (read Coors), Anheuser-Busch InBev (owners of Labatts), and Sapporo from Japan (owners of Sleemans).  I say “near monopoly” because there are only two other ways for the consumer to buy beer in Ontario, at the LCBO (also a near monopoly) and at the breweries themselves (not very convenient).  Now here are the facts that will make the situation clearer:

  • The Beer Store (we’ll call it TBS from now on) is privately owned.
  • It sets its own prices, unregulated (to be accurate, prices are set by the brewers, but as we have seen, that is effectively the same thing).
  • Correction, the only government regulation is to set a minimum retail price.
  • Any other beer retailers must sell at the price set by TBS.  Therefore it is effectively a monopoly if competitors cannot undercut on price.

There is no other jurisdiction in the world that licenses a private company to have a monopoly on alcohol sales and then to have no regulation or oversight on pricing.  It’s madness.  And here’s one more point that will make you sit up.  The Beer Store also supplies bars, restaurants, etc. for selling on to consumers.  Since that activity is effectively wholesaling, the price charged will be somewhat less than the price consumers pay, right?  WRONG!  TBS charges up to 30% more to drinking establishments than to retail customers.  They are out of control.  You can see the actual numbers in the recent C.D. Howe Institute report on “The Need for More Competition in Ontario’s Alcoholic Beverage Retailing System”; check out Table 1.

The Truth about Grocery Store Sales of Beer

Starting December 15, 2015, grocery stores are commencing sales of beer to the public.  What we gain is some more outlets selling beer.  That’s good.  More importantly, there’s finally some competition for TBS, right?  Wrong again.  As pointed out in the previous section, the new retailers must sell their beer at the same price as TBS in order to protect it from serious competition.  Here are a few more interesting points:

  • The new retailers can only obtain their beer inventory through the LCBO.
  • There was a bidding process to obtain the right to sell beer at a grocery store.  The regulations required that the retailer’s application stipulate a profit margin of between 3% and 9.9%.  Well, just imagine how successful you would be if you went with the high end.  Therefore the retailer will only have a margin of a few % and the LCBO retains almost all the profit for acting as a middle man.
  • The beer sales counters can only be open during the same hours as the LCBO or TBS, not grocery store hours, so you’ll often go and find beer unavailable.  That surely doesn’t contribute much to the convenience factor.
  • Beer cannot be sold in any package larger than a six-pack, a rule also designed to protect TBS.
  • Stores must have at least 10,000 square feet of food retail space, and must sell a complete range of fresh and packaged foodstuffs.  These rules are designed to shut convenience stores out of the market.

All right, that’s enough about beer – you get the idea.  The government has designed the system to protect the big boys while appearing to increase competition.  The only advantage to the consumer is a very modest increase in convenience while the huge advantage to the government is that they may be able to fend off some lawsuits that are challenging their right to monopolize the business and inflate prices.  Now let’s see what the implications for wine sales might be.

Grocery Store Sales of Wine

At the moment the enabling of grocery stores to sell wine is up in the air because of the purported additional complications in this market, related to the North American Free Trade Agreement (NAFTA).  The possible problem is that there is an exemption in NAFTA that grandfathers winery owned stores that existed before NAFTA came into effect.  At that time many different wineries had retail stores (they were only allowed one each) that were stand alone or on the premises of supermarkets, for example.  Because the number of stores was then fixed in perpetuity, larger wine companies started buying up the little guys in order to gain the retail store space, thereby limiting competition.  We have now reached the point where 260 of the 292 stores are owned by just two companies:  Constellation Brands (the “Wine Rack”) and Andrew Peller (the “Wine Shop”).  This situation has put most small producers at a disadvantage in the marketplace, perhaps contributing to the decline in Canadian wine sales over the past 40 years.

The rule (and I think there is something similar in the Canada-European Union Comprehensive Economic and Trade Agreement, or CETA) is based on the premise that additional stores selling only Canadian wine would put foreign producers at a disadvantage.  But grocery stores wouldn’t be limited just to Canadian wine, so this sounds like a bogus argument to slow down the process until the LCBO figures out how to hamstring the grocery stores so much that the LCBO makes as much money as ever for less work.  Legal opinion seems to agree with me.

So, heaven only knows what the LCBO is plotting (the government basically takes their marching orders from the LCBO in the area of alcoholic beverage sales) but you can be sure that increased competition is the least of their concerns.  We are supposed to find out more early in the New Year.

A False Dawn

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Over the past few months the LCBO has been making a lot of noise about how it is growing and changing to provide greater service to the Ontario consumer.  However, if you look at the grandiose announcements and press releases more carefully, it is clear that this is the false dawn of a new era at the LCBO.  In fact they are playing their same old tricks of kill the competition and feed propaganda to the consumer.

So what’s been happening?  Let’s look at some new LCBO initiatives and try to understand what they really mean, beyond all the hype and government pronouncements.

First we heard, in late 2012, that the KGBO would be increasing access to their products by opening ten “Express” outlets attached to major supermarkets and the like, similar to the way winery stores are currently located; the first will open some time in 2014.  Such an attempt at so-called increased access is pitiful – ten stores?  That’s hardly 1% of the existing number of outlets, including Agency Stores.  In fact, the LCBO wants to restrict access, as then Finance Minister Dwight Duncan made quite clear during the announcement, stating that he wished to “…make sure we don’t have alcohol on every street corner in Ontario.”  (This is certainly a  differentiator from private industry, which would commit the unpardonable sin of placing stores where the market and the demand are.  If there is more demand a store opens; if demand wanes, a store closes, whether it is on a street corner or not.)  So increased access is not the objective of these “Express” outlets – then what is it?  Well, the locations give a clue.  They will clearly compete with winery stores and maybe put them out of business because of the LCBO’s broader selection.  That fulfills the twin related goals of killing the competition and reducing independent sales by wineries (independent of maximum LCBO profits, that is).  Of course, these locations beg the question:  Isn’t is silly to to have a separate retailer right next door to, say, Loblaws, who could do a much more efficient job of stocking and retailing, with more convenience and lower cost to the customer?

A related move by the LCBO took place this summer when they revealed their plans to place “Our Wine Country” VQA boutiques within selected stores.  Let’s once again give the finance minister (this time Charles Sousa) a chance to explain:  “These new stores will give smaller wineries increased access to larger markets.”  OK, the smaller wineries, who can’t ordinarily get SKU’s in the mother ship, as well as limited production labels from Ontario wineries in general, should have better access to consumers.  Of course, the first few of these corners will best fulfill the stated goal and reach the largest number of customers by locating in the major population centres (the “larger markets”) of Toronto, Ottawa, Hamilton, and London, right?  So then why are they are being located in St. Catharines, Niagara Falls, and Windsor?  Wait, aren’t those cities all in wine country where locals already have access to limited production wines?  If one were cynical, one might almost think that the aim (again) is to limit competition and reduce the amount of direct sales by wineries.  I did hear a contrary view from one small winery proprietor who pointed out that most people, even in wine country, don’t head to a winery for something to accompany their evening meal; they just stop at the LCBO.  But through VQA boutiques her products could reach that audience.  Perhaps, but the selected locations really put paid to that idea.  It is increasingly clear that the LCBO considers Ontario wineries to be a nuisance.  They cut into profits and the sooner they are put out of business the better.  After all, then they would be in a true monopoly position and could just sell millions of bottles of Fuzión and make tons of money with little effort.

Just to underscore this message, and here’s my third point, we find that the LCBO/Ontario government combine has found yet another way to stick it to Ontario wine producers and Ontario consumers.  As described in an earlier post, federal Bill C-311 now allows the private importation of wine from one province into another for personal use.  This action should finally remove that ridiculous impediment to trade that makes it illegal to order wine from one province for delivery in another, as if the provinces are separate countries.  No wait, you can freely move goods between countries in the European Union, so we have been even more regressive than sovereign nations!  But now, problem solved, right?  Wrong.  Implementation of C-311 is still subject to the whim of the importing province.  So far, according to Free My Grapes,only BC and Manitoba allow wine to be shipped directly to their residents from a winery in another province.  Nova Scotia is in the (slow) process of changing their rules.  Even the territories have made no change to the federal statutes governing wine purchases, although it was the federal government that changed the rules!  Most other provinces are dragging their feet, especially Ontario, whose Premier Wynne who has been quoted as saying that she would not allow the LCBO to open up the borders.  In fact, there is a legal grey area here as there does not appear to be a statute restricting the import of wine, only an LCBO policy.  For more on the convoluted legal status, check out Mark Hicken’s article.

Now, it has been pointed out, most recently by Rod Phillips in Vines magazine‘s October edition, that few people wish to order wine by the case, especially from out of province, so this is a bit of a non-issue.  That  may be a valid point, but if so, why not get rid of what is a needless barrier to interprovincial trade?  If it does not harm, but helps a few, then let’s go for it.

So how does the Ontario wine industry feel about this?  After all, if BC consumers can import Ontario wines while Ontario consumers cannot import BC wines, Ontario has the upper hand, right?  Well, aside from the extreme dog-in-the-manger nature of that attitude, it misses the point that if all provinces free up their rules, all wine producers are winners since there is a larger market outside of any one province (even Ontario, Premier Wynne!) than within.  And usually it takes some of the larger provinces to lead the way.  As for the producers themselves, some may take the narrow view.  More representative, however, is Hillary Dawson, president of the Wine Council of Ontario who, when talking about on-line ordering, reminds us that: “It’s actually called modern wine retailing. That’s what they do all around the world.”

To discuss the fourth and last recent development, I’m going to circle back to the question of access and availability.  A recent initiative from the Ontario Convenience Stores Association is a push to make beer and wine available at corner stores, as is already the case in Quebec.  They have so far collected 112,500 signatures for their on-line petition at freeourbeer.ca.  In 2012  a secret shopper study showed that convenience stores are significantly more diligent about checking for underage purchasers than either the LCBO or the Beer Store.  This study was based on cigarette sales in the case of convenience stores, but it highlights how store owners are more stringent than public institutions because their livelihood depends on following the law rather than being an arm of the lawmaking body, as is the case with the LCBO.  Imagine an industry where both the setting of the rules and the ultimate enforcement of the rules lies in the hands of the business owners themselves.  Ouch!

As for the contrary view, there are a few apologists out there drinking from the LCBO Kool-Aid.  An example is this article in the Toronto Star.  The key point made is the assumed loss of revenue; but that argument makes no sense since the province can place whatever taxes and licensing fees on the vendors that it wishes.  Revenue can easily increase.  The second argument is the old chestnut about not putting alcohol into the hands of minors; for the counter point, see the preceding paragraph.  Finally, that meaningless statistic is trotted out once again, that the LCBO denied 322,000 out of 7.8 million customers in a year.  But how many get through undetected?  With respect to that much more significant question, the LCBO is tellingly silent.  Finally, the Star columnist asks, how can these minimum wage convenience store clerks possibly have the training, time, and inclination to ask for ID?  Well, their jobs depend on it, of course!  They do it every day with cigarettes.

The final argument for sales by corner stores comes right from the LCBO playbook – they are doing it already!  There are some 218 Agency Stores in Ontario.  These are small stores licensed by the LCBO to sell LCBO products on their own.  It’s almost as if convenience stores were selling wine and beer!  Except that spirits are included as well.  There seems to be no problem with these clerks and cashiers taking responsibility for selling booze and asking for ID.  All of the LCBO and Ontario government arguments simply fall flat in light of the existence of Agency Stores.  And they are not just in the far north or other parts of the province remote from normal outlets.  I live in Ottawa and I counted over half a dozen Agency Stores in the greater Ottawa area.  So there is no new legislation required to enable wine and beer sales by corner stores.  All that is necessary is that the LCBO increase the number of Agency Stores and remove any rules they have about store location.

My conclusion is that the alcohol sales landscape in Ontario needs a complete overhaul.  The current system’s attempts at innovation are feeble at best and regressive at worst.  Now, the province did announce recently that it is once again assembling a blue ribbon panel to map out a future direction.  I expect the recommendation will be similar to the last time this was tried – full privatization.  Then will the provincial government follow through on the advice, or will the response be the same as before, to “deep six” any opinion contrary to their own?  Let’s be optimistic and hope that in a couple of years we will be toasting the true dawning of a new age of wine availability in Ontario.

LCBO Competition – an Oxymoron

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The LCBO hates being called a monopoly.  Their marketing machine will swiftly counter that label by pointing to their wide and varied competition – the privately run Beer Store, wineries and distilleries and their 472 outlets, brew-it-yourself shops, and…well, I guess that’s about it.  They’ll tell you that half of all beverage alcohol sales in the province are in private hands, in competition with the LCBO.  Of course, this assertion puts paid to the notion that privatization would be a bad thing, since it’s already here, but that’s another story.  The LCBO needs nominal competition so they can try to refute the notion that they are a monopoly but, since they are in any case a commercial business, what they really want to do is quash or at least stifle the competition in order to maximize their own sales and profits.  Of course they won’t admit to this goal, at least not publicly, but in the end actions speak louder than words.

So how do they go about keeping a lid on the competition?  Let me count the ways:

  1. Expensive advertising.  How often do we see glossy promotional flyers from the LCBO in our newspapers or mailboxes?  And don’t forget the free and very attractive Food and Drink magazine.  Then there’s radio advertising – now that’s not so expensive, but then neither is the glossy stuff because the LCBO makes its suppliers pony up for most of that cost anyway.  For more details check out this article by Martin Regg Cohn in The Star.
  2. The LCBO can open a new store whenever it likes, but they and the Ontario government ensure that the number of private winery stores is capped.  Winery outlets can, however, be acquired, usually by big business buying out the boutique winery that owns the legacy retail licence.  In any case, the cap on numbers is clearly not enough, because the LCBO recently announced that they are initiating a program to place LCBO “kiosks” in large supermarkets.  That is precisely the space where we now see most of the winery outlets!  The first ten locations constitute a pilot project with many more in the planning stage.  This is not really a new idea – the LCBO has had agency stores for decades.  There are now 214 of these “stores within a store”.  They were originally meant to supply remote northern communities, but most of them are now located in the southern part of the province, as evidenced by this list.  The only real change is that these kiosks will be in large supermarkets in large cities, rather than in small stores in small towns and cities.
  3. I remember when you couldn’t get beer in the LCBO.  Those times have certainly changed as more and more beer is available there, effectively taking business away from the privately run Beer Stores.
  4. What about lesser known ways of buying alcohol?  For example, Ontario residents can buy directly from the private importers, or agents, but those agents are handcuffed by the rule that they can only sell to the public in quantities of at least 6 bottles, and in practice only in full cases.  The LCBO gets its usual profit in any case, but without all the overhead costs.  The only way to buy (a few of) these wines in smaller quantities is through the Vintages Shop On Line program.  Agents must meet sales targets and do the advertising/marketing. That effectively ends up as advertising for the LCBO because there is usually no competition for a given product in any case.  Even LCBO promotions (see above) are paid for by suppliers.  The agent also takes the hit if a product is discontinued and put on sale – 25% of the retail price comes out of the agent’s pocket.
  5. You are also allowed to order a case of wine from another country or province if you order through the LCBO (but see the next point).  However, you have to be willing to pay 3-4x the retail price in the country of origin!  And that’s only if the LCBO is gracious enough to waive testing and the associated $175 fee.  Importing can also take place through a wine club or similar organization, such as the Opimian Society.
  6. Now we get to the most ridiculous impediment to freer competition – restrictions on the movement of wine from province to province.  Only last year was the archaic post-Prohibition ban amended by Parliament, through Dan Albas’ Private Member’s Bill C-311.  It creates an exception for:

“the importation of wine from a province by an individual, if the individual brings the wine or causes it to be brought into another province, in quantities and as permitted by the laws of the latter province, for his or her personal consumption, and not for resale or other commercial use.”

That sounds good – both carrying wine with you and placing an order (e.g. on line) appear to be permitted.  The kicker is the phrase “as permitted by the laws of the latter province.”  In other words, the province must be on board as well.  So far, only BC, Alberta, and Manitoba appear to have acquiesced, according to Mark Hicken’s legal opinion.  Ontario is resisting, of course.  The same legal opinion suggests that silence implies tacit assent, but the LCBO has issued a statement contradicting that idea and limiting interprovincial “imports” to 1 case, brought in person only, not through ordering from a third party.  In the end, it is unlikely that they would risk a legal challenge to their untenable monopoly situation by prosecuting ordinary citizens acting reasonably.  A summary of the various liquor boards’ ultra-conservative viewpoints is given on the webpage of the Canadian Association of Liquor Boards.

A recent Harris-Decima poll found that an overwhelming majority of Canadians (82%) agree that they should be able to purchase wines from other provinces on-line.  If you would like to explore this issue further, check out Free My Grapes.

Whether it’s the Beer Store, winery stores, agents, or private importation, the LCBO has implemented measures to limit or reduce their market share, i.e. to crush the competition.  This is from an organization that already has a monopoly in sales of spirits and a near-monopoly in the sale of imported wines and beers.  This is from an organization that, in tandem with their cousins the AGCO (The Alcohol and Gaming Commission of Ontario), is able to set the rules for its competition.  What private business wouldn’t kill for that kind of power!  This situation does not serve the consumer well and needs to be changed.  Please let your MPP know what you think.