Private Affairs

I find that there are two connotations of the word “private” when applied to the LCBO.  First, there are the continuing calls for privatization of the LCBO’s business.  In fact, it seems to be routine for every political party to call for privatization while in opposition.  Right on cue, we have recently heard that familiar call from the Conservative party.  However, as soon as a party takes over the government, the idea is always dropped.  The closest we came to anything happening was in 2005 when the government of the day set up a blue ribbon commission to study and recommend the best future direction for the beverage alcohol business in the province.  The unanimous recommendation of the panel was for full privatization, so naturally the report was put on ice and any further discussion was quashed.  Since it was no longer up for public discussion, it effectively became “private” as well (the second connotation of the word).  Fortunately, the report is still available for perusal on line.  So, let’s take another look at the report and the panel’s recommendations in more detail and try to get a better idea of what the options might be.

There were four members of the Beverage Alcohol System Review Panel (BASRP), none of whom had any financial interest in the industry.  The chairman was a former Vice-Chair of the LCBO, so its workings were well understood.  The other members were a former Commissioner of the OPP, a corporate CFO, and a senior banking executive.  Therefore the major concerns of social responsibility and revenue generation were also well represented.  The terms of reference were to undertake a broad review of the beverage alcohol system and recommend how to get better value for consumers and government.  Any recommendations had to maintain or enhance each of these five factors:

  • Socially responsible storage, distribution, sale, and consumption;
  • Convenience, variety, and pricing for the customer;
  • Value to the taxpayer;
  • Reuse and recycling;
  • Promotion of Ontario products.

In order to fulfill their mandate, the panel members began by studying options from many other jurisdictions in Canada, U.S., U.K., Australia, and New Zealand, alongside an operational analysis of the present system in Ontario.  Then they put this information together to identify a number of viable options for Ontario.  Each of these options was subjected to analysis, both qualitative and quantitative, as well as risk analysis.  Five options were identified as the most promising and one was unanimously selected as the final recommendation.  The five options are described in the following table:

1LicensingRetailers and wholesalers are licensed by public sale for five year periods, and pay an annual fee;
Limit the number of retail outlets;
Set a minimum price level.
2Retain/ImproveStatus quo with improvements recommended by an operations review
3DivestmentSell LCBO assets to a non-profit beverage alcohol authority (monopoly) or through a public offering
4Joint VentureLCBO, BRI, and winery stores merge into a single organization
5CompetitionPrivate retailers and wholesalers are licensed while the LCBO, BRI and winery stores remain in business in direct competition

Now I’d like to look at the advantages and disadvantages of each of these systems, especially in terms of the five factors (listed above) that need to be maintained or enhanced.  I’m going to skip a discussion of social responsibility and recycling since both of these can be handled by legislation and enforcement policies that are essentially independent of the distribution and sales model.  The focus is really on value to the customer and value to the taxpayer, with a nod to access to Ontario products.  A summary is provided in the next table, following which I’ll elaborate on some of the most interesting or controversial points (Note:  in this table the advantages are in bold while the disadvantages are in italic).

System OptionValue to the CustomerValue to the TaxpayerAccess to Ontario Products
1 - LicensingImproved price and selection through competition;
Limits on number of retail outlets may limit specialty retailers;
Minimum pricing policy may limit consumer advantage.
Increased revenue (est'd. $200M/year);
Removes operational and investment risks from having government in the retail business.

Improved access to the system for small producers.
2 - Retain &
No improvement and prices may even rise.Politically easy - no disruption;
Potential for increased revenue through reduced costs and increased prices;

Government remains in retail with associated risks and investment requirements.
No improvement.
3 - DivestmentNo improvement in competitive landscape, pricing or convenience.Big chunk of change for the government;
But, payment is one-time only;
Government remains in retail with associated risks and investment requirements.
Uncertain pricing and access for small producers.
4 - Joint
No improvement in pricing or convenience;
Competition landscape even worse that at present.
Rationalization of store locations and product offerings, providing operational efficiency;
Government remains in retail with associated risks and investment requirements.
No improvement.
5 - CompetitionIncreased competition;
Improved pricing, selection, and access.
Increased government revenue;
Complete restructuring not required.

Profitability of LCBO uncertain as competitors would have much lower operating costs and LCBO cannot easily transform its very high cost structure;
Government remains in retail with associated risks and investment requirements.
Improved access to the system for small producers.

The only two options that are advantageous to the consumer are 1-Licensing and 5-Competition (which includes licensing but does not eliminate the LCBO).  I have always been a proponent of the Competition option because it seemed to provide the best of everything.  Perhaps that was at least in part because I was tired of hearing the LCBO constantly telling us how good they are.  If they are so superior, then there should be no problem permitting competition because the LCBO would just grind their competitors into the ground!  Now, however, I have been set straight by the BASRP.  They assert that the LCBO cost structure is so heavy, with gold-plated stores and unionized staff being paid top dollar for stocking shelves, that they would fold under the pressures of real competition.  This drives home the point that the government should not be in the retail business in the first place.

The recommended option is Licensing.  In this scenario, the government sells off the LCBO’s physical assets and then auctions licences to private concerns for the right to retail or to wholesale beverage alcohol.  Because the licences would expire after five years and bidding would again take place, and because there would also be annual fees, the panel estimated that the LCBO would net $200 million more than they currently make.  That was in 2005 so the figure would likely be higher now.  The two most important requirements, consumer value and taxpayer value, are both satisfied.  Now, in order to deal with the other requirements,especially social responsibility, the panel does suggest imposing some restrictions.

First, they propose an upper limit on the number of retailers allowed, both within a region and within the province as a whole.  This idea is intended to allay concerns over social responsibility, as they claim that fewer retail outlets reduce consumption.  However, their own data does not appear to support that claim.  The following graph plots consumption/person/year versus population per retail outlet for many of the external jurisdictions that were studied.  If the claim were true, then the data should show a clear drop moving from left to right.  In fact, the data fall into three groups.

Dependency of alcohol consumption on number of retail outlets. Greater population/outlet means fewer outlets (right end of axis). The data fit into three general groups but there is no overall trend.

The data fall into three main groups.  Group 1 (Iowa and Quebec at the bottom, UK and Australia at the top) shows the opposite trend to what might be expected – this trend likely has more to do with cultural differences than with access to supply.  The bulk of the jurisdictions (several US states plus New Zealand) fall into Group 2 where there is no discernible correlation.  Finally, Group 3 (all of which are Canadian provinces) shows relatively low consumption rates but almost no dependence on accessibility.  In fact, government controlled Ontario, at 760,000 people per access point, had the same consumption rate as the fully private system in New York state, at 95,000 per access point.  Once again, the position of Group 3 on the graph is likely a result of culture (since they are all the same country) rather than any direct correlation.  All in all, there does not appear to be a strong reason for limiting the number of retail outlets.  But, if that helps with making a change in the system politically palatable, then OK.  It’s something that can easily be fine tuned at a later date.

The other important restriction is to set a price floor.  This is trickier.  Like it or not, it is perfectly reasonable for a licensing body to restrict the number of licences.  However, price control of private industry is another matter entirely.  Now, if there is a flat minimum price in order to prevent a lot of “two-buck Chucks” from appearing, then the situation is not too bad because that is the market space where cheap booze could be an issue.  But if it is the markup that is regulated, then it’s a different problem.  Then there is little chance for price competition, case discounts, and sale prices, even for premium products where mass market over-consumption is much less of a concern.  Value to the consumer is significantly impaired.

Still, even with these flaws, the recommendations of the BASRP would be a huge improvement over the current situation.  Let’s put these proposals back on the table.  Let your MPP know what you think, for example through  Turn this private affair into a public discussion.

What Goes Around Comes Around

One of the most significant trends in the winescape over the past few years has been the movement to “natural” wines.  Since two interesting books on the subject have published within the past year or so, I thought it was worth taking a closer look at the phenomenon and even attempting to understand what it’s all about.  The two books, by the way, are “Naked Wine” by Alice Feiring, and “Authentic Wine”, by Jamie Goode and Sam HarropRight away you can see one of the problems – nobody agrees on a common name for the style, partly because no one seems to be able to come up with a universally accepted definition.  It’s one of those wine terms like “terroir” that everyone understands but no one can clearly define.  But what the hell – here goes…

It’s easier to say what natural wine is not than what it is.  In general, human input is limited to the minimum necessary to obtain the desired fermented grape juice.  It is not over-ripened, over-extracted, or over-manipulated.  None of the 60+ additives permitted (e.g. in the U.S.) is used except for some sulphur, but even that is controversial – more on that subject later.  These precepts apply both in the vineyard and in the winery, so natural wine is not equivalent to organic wine, although organic or biodynamic principles are generally applied.  Naturally occurring yeasts create the alcohol.  In a nutshell the modus operandi is “nothing added, nothing taken away.”  Now, of course, some input from the winemaker is required because if you simply leave a bucket of grapes out in the barn, you will eventually end up with very expensive vinegar.  There is crushing, possibly destemming, pressing, selection of fermentation tank, temperature control, pigeage or batonnage or not (usually not), allowance or suppression of malolactic fermentation, barrel aging, filtering (usually avoided), fining, and use of sulphur.  Now you see the problem with the term “natural” and why the search is on for a better handle.  In a way, this movement returns to the more traditional practices of the past (hence my title for this post) but employs ultra clean techniques (not always so traditional!)

There is a lot of upside to natural wines.  Because manipulation is minimized, they tend to reflect the terroir much more accurately than “modern” wine making.  Over-ripeness, over-extraction, overuse of new oak, and a lot of other “overs” are avoided so that these wines are typically more food friendly.  The avoidance of pesticides, other vineyard treatments, and additives in the winery is appealing to adherents of the local/organic/slow food movements.  On the other hand, casual wine drinkers are often put off by the idiosyncratic, even “funky” flavours that can develop.  Most of all, the wines tend to be fragile, not handling temperature variation or travel well.  This characteristic arises from the minimalist use of sulphur.

Hard core natural wine producers use no sulphur at all, while others add a little at bottling to make the wine more robust for travel and storage.  As a reality check, it should be noted that the Demeter organization (the most recognized authority for biodynamic practices) permits up to 110 ppm for red wines and 140 for white wines, not a lot below the EU standards of 160 and 210 respectively.  Now the majority of natural wine producers are small scale farmers whose product does not travel far from its place of origin.  Thus there is far less stress placed on a somewhat unstable chemical soup.  Therein lies the main reason why so many wine lovers rhapsodize about the authentic terror-driven wine they tasted with the winemaker on site, while critics further afield are often much less enthusiastic as they focus on the major faults that they find.  In fact, Robert Parker famously called natural wine “one of the major scams being foisted on wine consumers.”  (Note that no one provides a reference for that quote – I haven’t been able to turn it up with a quick scan through my back issues of the Wine Advocate.  Does anyone out there know?)  On the other hand, one of Parker’s contributing critics, Neal Martin, states that he has “adored, indeed occasionally worshipped the wine of López de Heredia”, one of the most famous traditional, and in fact natural, wine producers in the world.  And so the controversy continues – for a fairly recent take on the issue, have a look at Eric Asimov’s January 2012 article in his New York Times column “The Pour”.

So how do we get a chance to try natural wines and form our own opinion without needing to travel to the source every time?  Well, it’s not easy in Ontario where the LCBO emphasizes big fruit-driven, often highly-manipulated wines.  To provide some contrast, a couple of months ago I researched through books, magazines, and websites and made a long list of some 1667 wines from 361 natural wine producers worldwide, with the majority being from France.  I then looked through the on-line listings for both the LCBO (Ontario) and the SAQ (Quebec).  There were 117 of the wines available in the SAQ, and just 46 in the LCBO (shame!)  However, at least there are some possibilities.  Therefore I recently gathered with some friends to taste a few of them and the results gave me reason to be optimistic.

Some of the earliest natural wine producers came out of Beaujolais, so that’s where we started.  From time to time the LCBO carries wines from Terres Dorrées, one of the most respected producers in Beaujolais.  We had a 2010 Morgon and compared it with another 2010 Morgon from Jean-Ernest Descombes, who operates under the Duboeuf umbrella and therefore employs a more modern style.  The tasters were divided as some preferred the spicy fruit-forward nature of the Descombes, while the majority voted for the Terres Dorrées, which was more complex, slightly earthy, and exhibited better balance.  Everyone agreed that it was the better bet as a food wine.

A much more dramatic contrast was provided by a pair of 2005 Riojas.  One was the Viña Cubillo from the aforementioned R. Lopez de Heredia while the other was a Maetierra Dominum Quatro Pagos.  Maetierra Dominum is an ultra-modern organic winery that employs Michel Rolland as a consultant, so it was expected to provide a nice contrast to the ultra-traditional Lopez de Heredia.  In fact, the contrast was striking, right from the colour.  The Maetierra was black, while the Heredia was a translucent garnet.  There was lots of oak, vanilla, and fruit in the Maetierra while the Heredia was complex, slightly oxidized, medium bodied, and dense with interest, not pigments.  Tasters were split on which they liked best, but again the votes went to the Heredia when potential food pairing was the main criterion.  The overall impression was that the Maetierra could have come from anywhere, while the Heredia could only have come from Rioja.

I should also recommend another good natural wine that the LCBO has stocked in the past – Montirius Le Clos Vacqueras.  There was still some available as of the date of this post, so pick up a bottle and compare with one of the more conventionally produced Vacqueyras.  The bottom line is:  if you want to learn about natural/authentic/traditional/naked wine, the best way is the usual way – try them and make up your own mind.