BCLDB Raises Minimum Price for Spirits

The BCLDB has announced that it is raising the minimum price at retail for spirits from $30.66 per litre to $31.66 per litre as of May 2nd. This means that the minimum retail price for a 750 ml bottle of spirits will go up from $23.00 to $23.75. Since the BCLDB sells about 25 million litres of spirits per year, this means that they will effectively be raising prices for BC consumers by $25 million. As you will note from my recent comment on the budget, the BCLDB is projected to miss its revenue target by $24 million for the current year ... so is this the way that they hope to get the money back?

Sadly the answer is no. While consumers will have to cough up the extra $25 million, the LDB will actually only realize a part of the increase and the government will get even less. The reason is that the LDB uses a fixed markup formula to establish retail prices: any price increase on the shelf will automatically result in an upward rise in the wholesale price paid to the supplier.

Here's an example. If you apply the fixed markup formula to a $23 bottle of spirits, the wholesale cost works out to be about $4.00 (yes, there is a stunning amount of tax). However, it is actually possible for the LDB to buy spirits cheaper than this. For example, they could buy vodka for about $3 a bottle which would work out to a retail price of about $18 once the formula is applied. But because of the minimum pricing policy, the supplier would simply "work backwards" from the minimum retail price using the fixed markup formula and increase the wholesale price to $4. As a result, the consumer will overpay and the government loses out on extra revenue. This is what will happen on this minimum pricing increase. Suppliers will work backwards from the new $23.75 minimum price and simply increase the wholesale price to the LDB so that the fixed formula generates the new price. The suppliers will get a windfall - the government will lose out on extra revenue - and consumers will overpay.

By the way, and from a policy perspective, this is why "minimum pricing policies" are a bad idea for any liquor products - wine, beer, or spirits.

Judge Criticizes Manitoba Wine Retail System

A recent judgment (Banville & Jones Wine Co. Inc. v. Manitoba Liquor Control Commission) from the Court of Queen's Bench in Manitoba deals with the difficult issue of the trade practices of a provincial liquor board when they act as wholesaler to both their own chain of retail liquor stores and to private retail wine stores. This judgment is the culmination of a long dispute between the private stores and the Manitoba Liquor Control Commission (MLCC) under which the private stores alleged that MLCC was acting in ways preferential to their own stores and which harmed the interests of the private stores. The judge described the dispute as "contentious" and introduced the dispute by commenting as follows:

Despite what was initially to be an operational relationship whereby the MLCC would facilitate a functioning co-existence with the private wine stores (and by extension, the variety and choice that would flow therefrom), the MLCC has instead chosen to compete head-on with the stores.  Complicating such competition is the fact that it takes place while the MLCC is simultaneously occupying, what is for the private wine stores, a suspicion-engendering position by which the MLCC regulates and controls significant aspects of how the MLCC’s competition is able to do business.  The resulting relationship is such that it produced from the arbitration panel, after having heard the evidence, the following clear and justifiable comment:

… This relationship, we think, has given rise to the problems which have led to the allegations in the Notice to Arbitrate and in the suspicions of the stand alone specialty wine store operators about the motives of the MLCC and, in particular, of Crawford.  It is, we believe, time to reconsider this relationship.

In the end, for technical reasons related to the applicable legal standard of review, the judge upheld an arbitration panel's award which favoured only one of the private stores' complaints. However, both the arbitration panel and the Court indicated strongly that an arrangement whereby a liquor board acts as wholesaler to both its own stores and to private stores should be avoided. At the conclusion of the judgment, the Court stated:

After having reviewed the entirety of the record, rife as it is with the undercurrent of animosity and examples of the contentiousness about which I wrote at the beginning of this judgment, I would be remiss if I did not make the following comments.

Although I have dismissed the [private stores'] appeal — largely on the basis of what I believe is a rigorous application of the appropriate standards of review — my determinations in that regard ought not to be seen as a judicial benediction of the conduct of the MLCC.  Although the members of the arbitration panel (unanimously or as a majority) variously made findings of fact and drew inferences to which I have deferred, there was, in the case of some of the allegations in the notice to arbitrate, evidence adduced that could have equally resulted in findings and inferences less favourable to the MLCC’s position.  I say that not for the purposes of second-guessing the arbitration panel (whose findings and inferences contained no palpable and overriding error), but rather to underscore its own conclusion that the time has come to revisit the relationship between the private wine stores and the MLCC. [emphasis added]

The judgment is interesting reading because it illustrates the formidable difficulties that private retail wine stores have when dealing with a wholesaler/supplier who is also their major competitor. At one point in the judgment, the court reviews evidence provided by the CEO of the MLCC whereby he candidly admits that the liquor board was surprised at the loss of business to the private stores and was unhappy about losing that business from its own retail stores.

Of course, the structural problems that exist in Manitoba also exist here in B.C. The private wine and liquor stores here must also obtain their product from the BCLDB which is their major competitor. As readers will know from my previous comments, I think it makes more sense for government to get out of the retail liquor business entirely. However, if government wants to stay in it to any extent, there should at least be a complete separation of the wholesale and retail aspects of the business so that the LDB's current conflict of interest is eliminated. While the Banville judgment is only a single precedent, it provides a useful view from the bench as to how judges might view these issues in the future. The message is sensible and fair: don't permit a government monopoly wholesaler to also act as a retailer if it is supplying private stores with which it's retail operations compete.

 

BC's Budget - Effects on Wine Industry

The Liberal government introduced its budget for 2010 yesterday. There wasn't too much mention of wine or liquor. However, there were a couple of interesting points which will likely have some consequences for the industry.

As was reported earlier, the government confirmed that the introduction of the HST is not intended to affect "shelf prices" on wine (or other liquor). This is significant because the combined sales tax rate on liquor (which is currently 10% PST and 5% GST = 15% total) will actually go down when the combined HST rate (7% PST + 5% GST = 12% total) is introduced in July. One might have hoped that this would result in a modest reduction in retail prices. However, given the government's current financial situation, this was wishful thinking. As a result, the government has indicated that it will adjust liquor markup rates to eliminate any price reduction.

Unfortunately, this is not easy to do in a uniform way because BC wine (i.e. real BC wine not CIC product) is either exempt from markup (if it is sold through direct delivery) or has reduced markup applied due to the operation of the VQA rebate (if it is sold in LDB stores). It remains to be seen how the LDB will tackle this but it seems likely that BC wineries will benefit from the introduction of the HST because the sales taxes will go down by 3% and it will not be possible to increase markup on direct delivery wines since they are markup exempt. Since the government is intending to keep overall revenue the same, the corresponding increase in markup rates will likely affect imported wines to a slightly greater degree than BC wine. For example, if total direct delivery sales are around $80 million annually, then the 3% sales tax loss would be about $2.5 million. That money would then have to be recouped through larger increases in markup on CIC product, BC product sold through LDB stores, and imported wine. While the numbers are not large, this may produce a small benefit for BC wineries and, conversely, may pour some more fuel on the trade issues problems that I outlined in my earlier article.

It was also noted in the budget that the LDB will miss its revenue target for government by $24 million this year (the new forecast is $872 million down from $896 million). However, for next year the budget indicates that the LDB will generate $974 million for government, a big increase of over $100 million from the current year. No indication is made of how they are hoping to do this ... guess we will have to wait and see.

 

Wines & Vines Covers Border Issues

The wine industry trade publication, Wines & Vines, has just posted an excellent article on border trade issues: Canada's Wine Duties Hinder Trade. In my view, this is a serious problem which could cause difficulties for the BC wine industry in the short term. I have posted a related analysis which should highlight the issues, problems and potential consequences: BC Wine & Trade Agreement Trouble. I would be very interested to hear back from the industry on these issues.

BC LCLB Increases LRS Distance Separation

Effective yesterday, February 15 2010, the BC LCLB has increased the distance separation requirement for new or transferring LRS licenses (licensee retail stores - i.e. the newer style private retail store license) from 500 meters to 1000 meters. This will make it more difficult for licensees to transfer store locations if there are other LRS stores in the vicinity. The policy rationale stated in the LCLB Policy Directive 10-02 is to "provide greater market certainty for LRS operators and prevent further market saturation". It is true that existing operators will get "greater market certainty" because they are effectively being provided with a 2 km radius government shield from competition. It is likely that existing LRS store operators will be pleased as this makes it difficult if not impossible for competitors to open stores in the immediate vicinity of an existing store. This change may have been made to partly compensate LRS owners for a possible increase in competition resulting from the recent "uncoupling" of their licenses from the liquor-primary licenses (bars/pubs) with which they were previously associated. However, consumers are unlikely to be impressed as this policy further restricts selection and price competition. Government policy does not prevent cigarette vendors, fast food outlets or gas stations from opening close to each other ... since when it is a "core function of government" to prevent competition in the retail liquor business?