The Biggest Change Since Prohibition…NOT!

Posted on December 15, 2015 by The Old Wineau

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.

LCBO Competition – an Oxymoron

Posted on February 10, 2013 by The Old Wineau

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:

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.
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.
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.
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.
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.
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.

Private Affairs

Posted on December 28, 2012 by The Old Wineau

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:

Option	System	Description
1	Licensing	Retailers 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.
2	Retain/Improve	Status quo with improvements recommended by an operations review
3	Divestment	Sell LCBO assets to a non-profit beverage alcohol authority (monopoly) or through a public offering
4	Joint Venture	LCBO, BRI, and winery stores merge into a single organization
5	Competition	Private 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 Option	Value to the Customer	Value to the Taxpayer	Access to Ontario Products
1 - Licensing	Improved 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 & Improve	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 - Divestment	No 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 Venture	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 - Competition	Increased 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 MyWineShop.ca. Turn this private affair into a public discussion.

The Legacy of Prohibition

Posted on October 18, 2012 by The Old Wineau

Ontario suffered under the Ontario Temperance Act (“prohibition”) from 1916 to 1927. Although it was repealed over 80 years ago, its legacy is still with us. Repeal was not a reaction against temperance, since that concept still informs much government thinking. Instead it was a realization that the province could reduce expenditure (by eliminating all that crime arising from selling and drinking alcohol) and increase income because of the vast profits to be made by assigning the retail role to itself. What has been the legacy of that period and that transition?

A mass of information can be found at puncheddrunk.ca. One interesting point that you may not know is that, until 1975, the Ontario government tracked every person’s every alcohol purchase through the purchase order forms that each customer needed to fill out to buy alcohol at the LCBO. If Big Brother felt that you were buying too much, you were cut off from all purchasing, province wide. These surveillance forms were only phased out with the advent of self-serve stores in the late 1970’s.

Moving on to the present, my view on the current situation is as follows:

The government’s schizophrenic approach to temperance encourages a public attitude that alcohol is just a little bit naughty. As a result, over-consumption becomes a goal for younger consumers. The more mature approach would be to treat consumption as a component of everyday life where, for example, wine is an integral part of a good meal and a picnic in a public park can be accompanied by a picnic wine. Prohibitions should not be placed on alcoholic beverages themselves, but on the misuse (drinking and driving, drunkenness leading to violence, etc.);
All alcohol is equally demonized. Although the main impetus behind Prohibition was to curb the drunkenness arising from the consumption of whisky in saloons, the result was that beer, cheap wine, fine wine, cheap whisky, fine single malts, and fine cognac were all tarred with the same brush. Other jurisdictions (e.g. Quebec) have recognized the differences by, for example, allowing private beer and wine sales;
Prices are artificially high. It was recently disclosed in the Ontario Auditor General’s Annual Report that the LCBO sometimes encourages its suppliers to charge higher prices to the LCBO than to other customers so that it can maintain artificially high retail prices and thereby maintain the guise of “social responsibility.” This revelation has slid off the Teflon LCBO like water off a duck’s back because the government figures that it is in their interest not to interfere with or reprimand the LCBO in any way at all in case profits should be affected;
Prohibition is clearly alive and well in the guise of several legislative attempts to place warning labels on all alcoholic beverage containers. In this case, however, kudos to the government for resisting the pressure. Such an effort is superfluous nowadays as anti-drinking-and-driving campaigns and informational campaigns about the effects of alcohol on pregnant women have achieved universal and very public awareness. For the consumer, the downside isn’t really the additional expense per se, as trumpeted by the beverage industry. Instead, such legislation further solidifies the hold on the industry of large (often multinational) companies that can easily handle the label modifications and that have the ear of the government. Conversely, it marginalizes the small quality producer, whose product is generally used in exactly the kind of way that should be encouraged, i.e. as an integral part of a good meal.

Even in the United States, the former poster child for Prohibition, most states have decided that consumers of alcoholic beverages may actually be adults. Wine is sold privately, sometimes even on sale or with case discounts, and you can enjoy a rosé with that picnic in the park. The LCBO’s paternalistic attitude should be treated as the anachronism it is, with no place in our modern cosmopolitan society. There is plenty of legislation in place to deal with misuse of alcohol: by all means keep alcohol from young children, but don’t treat all adults as children too!

For more on this subject, you might want to take a look at this article by Connie Woodstock.

The Old Wineau

A jaundiced but experienced view of the world of wine

Tag Archives: Ontario