DTC for 2016 - Canada's "Granholm" Revolution?

From a wine lawyer's perspective, 2016 is shaping up to be what could be an exciting year in Canada. There are two significant court cases likely to be decided this year, from opposite sides of the country. Either one of these cases could significantly change the regulatory landscape for the wine industry in Canada.

In this sense, Canada could see a decision which may eventually have "Granholm-like" significance. Granholm v. Heald was the 2005 U.S. Supreme Court decision that opened the U.S. wine market to direct to consumer shipping by holding that a state could not discriminate against out of state wineries if it allowed in-state wineries to direct ship to consumers. In the recent Silicon Valley Bank "State of the Industry 2016" report, it was commented that the U.S. wine industry "really dodged a bullet" due to the Granholm decision because the decision "knocked the legs out from protectionist state laws that favored in-state wine producers". The subsequent rapid expansion of the direct-to-consumer wine market greatly helped small wineries who found it difficult to obtain distribution because of a consolidation of distributors and the growth of grocery/big-box wine sales.

The first Canadian case is the New Brunswick case of R. v. Comeau. In this case, Mr. Comeau crossed over the provincial border from his home province of New Brunswick to purchase some beer and spirits in Quebec, where they are cheaper. He was nabbed by the RCMP on the way back. Rather than paying the fine, he chose to fight the charges. As a result, a constitutional challenge has now been made to the New Brunswick law that prevented Mr. Comeau from importing the alcohol. The details of the case are here: Canada's Complex Liquor Laws Under Spotlight in N.B. Trial. This case was argued last year and a decision is expected this spring.

The second case is more recent. Up until last year, Alberta's taxation system for alcohol was non-discriminatory. All alcohol was subject to "flat tax" (volume based) markups that applied equally regardless of where the alcohol was produced. However, in the most recent Alberta budget, the NDP government chose to depart from the previous approach and to apply lower markups to beer that was produced by craft breweries in those provinces that had signed the New West Partnership (BC, AB, SK). Craft beer produced in other provinces is now subject to higher markups. Predictably, Ontario's craft breweries were not pleased. One such brewery, Toronto's Steam Whistle Brewery, was sufficiently upset to hire legal counsel and to take action (details here: Steam Whistle Granted Injunction Against Alberta's Protectionist Beer Tax). They have subsequently obtained an injunction to delay the imposition of the discriminatory markups until such time as a full hearing is held. A court date has now been set for July of this year, at which it is expected that a constitutional argument will be made that one province cannot impose discriminatory markups on alcohol products produced in another province. This is a very similar argument to the one that was successful in Granholm.

If one or both of these cases is successful, there could be "Granholm-like" effects for the wine industry and for Canada's liquor boards. If restrictive inter-provincial liquor transport laws are struck down in the Comeau case, then Canadians may become free to order wine and other alcohol from anywhere in the country. If discriminatory provincial markup policies are struck down in the Steam Whistle case, then Canadian liquor boards will no longer be able to impose taxes or markups on out of province producers that they do not apply to in-province producers. The latter development would fundamentally change BC's current policies since they currently exempt BC producers from liquor board markups on many products. 

There will be a full discussion of the above cases at the BC Wine & Liquor Law Conference in Vancouver on Monday, February 22nd ... including a presentation from the lawyers that argued the Comeau case in New Brunswick.

Secondary Tasting Rooms: WA vs BC

Wine media in Washington state is reporting on a Bill that would increase the number of secondary (off-site) tasting rooms for WA wineries to a new maximum of four: see Washington Wineries Ask Legislature for More Tasting Rooms. Secondary tasting rooms have proved to be extremely successful in Washington since a legislative change in 2000 which introduced the current allowance of two off-site tasting rooms per winery. The change allowed wineries to locate tasting rooms either in downtown wine area towns (e.g. Walla Walla) or closer to urban markets (e.g. Woodinville, which now has 130 tasting rooms just northeast of Seattle). These changes have meant that wineries could increase sales in their DTC channel which is, by far, the most profitable retail channel for the wine industry. Meanwhile, here in B.C., the provincial government has accepted a recommendation of the liquor policy review that secondary tasting rooms should be permitted. However, to date, there has been no announced timeline for implementation and wineries are unable to operate even a single off-site tasting location. 

Media Reports on Ontario Supermarket Wine Plan

The Toronto Star is reporting the details this morning of the Ontario government's plan to roll out wine sales in supermarkets: Ontario Uncorks Plan for Supermarkets. The plan calls for a phased roll-out of wine sales in supermarkets with an equal number of licenses to be issued at each stage for: a) "Ontario-only" wine, and for b) the sale of all international wines. In the first year, 35 licenses of each type would be issued (70 total). In 2019, 40 more licenses of each type would be issued (80 more for a cumulative total of 150). At the end of the phase-in period, all licenses would permit the sale of all types of wine. There is no limit to the number of licenses eventually issued. The licenses would permit the sale of wine on regular supermarket shelves (does not require segregated store within a store). The issues surrounding this plan and BC's supermarket plan will be discussed at the upcoming Wine Law Conference in Vancouver, to be held on February 20th. Please attend the conference for a full analysis of the issues.

BC Wine Law Conference Provides Regulatory Update

The upcoming BC Wine & Liquor Law Conference will provide a comprehensive regulatory update on many issues facing the wine and liquor industries in British Columbia. The conference will take place on Monday, February 22, 2016 at the Metropolitan Hotel in downtown Vancouver (this is the beginning of the "Vancouver International Wine Festival" week). The agenda includes coverage of: the ongoing changes to BC's liquor laws (including those focused on BC's retail environment, wholesale pricing structure and distribution system), as well as interprovincial shipping, developments in the discussions around new British Columbia appellations, new water management laws, liquor host liability for wineries, and some views from south of the border on distribution in the U.S. and the use of social media for direct sales. There is a discounted tuition fee of $300 USD for those working in the wine or liquor industries. Full information and registration is here: Law Seminars BC Wine & Liquor Law Conference.

Saskatchewan Announces Liquor Retail Reforms

The Saskatchewan Government has announced some major changes to its retail system for liquor, contingent upon the Brad Wall government being re-elected in April 2016. Details on the changes can be found here: SLGA - Future of Liquor Retailing and in this PDF: Future of Liquor Retailing Backgrounder. If implemented, there will be some very significant changes to to the liquor retail system in Saskatchewan that can be contrasted with the changes being made here in British Columbia:

Expansion of Private Retail. Saskatchewan plans to convert 40 of its existing 75 government liquor stores to private retailers. In addition, it will issue licenses for 12 new private retail stores in communities that have been designated as underserved. The end result of this expansion will be that the government retailer will only operate 35 stores. Saskatchewan currently also has 4 private liquor retailers, 190 rural liquor stores, and 450 "off-sales" locations. Saskatchewan is not introducing liquor sales in grocery stores. By contrast, BC's changes have included an expansion of government liquor retailing through extended hours as well as the introduction of wine sales in a limited number of supermarkets. There has been no increase in the number of freestanding private liquor retailers in BC.

Level Playing Field. Saskatchewan is planning to introduce a new wholesale pricing system for liquor such that all retailers (both government and private) pay the same price for all products. British Columbia has also done this to some extent, with the one exception that BC's new supermarket wine vendors, as well as its existing VQA stores, currently pay significantly less at wholesale than everyone else. In addition, Saskatchewan will permit restaurants/bars/hotels to buy liquor from any retail source that they choose. By contrast, BC still requires that these customers purchase only from government channels. Saskatchewan will also create consistent business operation rules (e.g. hours of operation, pricing, discounts) for all retailers. 

Discounts on Wholesale Pricing. Saskatchewan will allow individual retailers or retail chains to negotiate lower wholesale pricing from suppliers through incentives (see below). Presumably, this could be based on volume or other factors. It will also allow suppliers to set "system-wide" discounts at the wholesale level. In contrast, British Columbia only allows "system-wide" discounts. 

Inducement and Trade Practice Rules. Saskatchewan will eliminate its prohibitions on inducements (financial incentives provided to retailers from suppliers such as co-op advertising that are common in other retail sectors). The only restriction in SK will be that incentive/inducement arrangements cannot exclude competitive products. In contrast, British Columbia has not reformed its inducement and trade practices rules (a 2010 industry consultation appeared to indicate that it would do so but that did not happen).

Changes to Liquor Board Markups. Saskatchewan has introduced a new system of liquor markup at the wholesale level which will generate the "wholesale prices". Retailers will then set their own retail level prices themselves with varying retail level profit margins. This system is basically the same as BC's new system. However, the new markups for wine in SK are dependent upon alcohol level and are higher. For wine that has 14.5% alcohol or less, the markup will be 94% on the first $12.50 per litre of supplier cost and then 53% markup on the remaining value. Wine that has an alcohol level higher than 14.5% is treated the same as spirits with a markup of 125% on the first $25 per litre of supplier cost, 83% on the next $12.50 per litre of value and then 56% on the remainder. These markup levels are considerably higher than the levels imposed in British Columbia (89% on the first $11.75 per litre of value, 27% on the remainder for all wines). For wines that are over 14.5% alcohol (which would include many New World wines as well as pretty much all fortified wines such as sherry and port), the resulting consumer prices in SK will be extremely high (certainly higher than in BC and significantly higher than in AB). 

None of the above changes will actually be made unless the current SK provincial government is re-elected in April 2016.