The New Deficit Fix: Privatize Liquor Stores?

The recent announcement that the Ontario government is considering the privatization of the LCBO may be a "game changer" for the future of retail liquor sales in Canada. As you know, Alberta already has a completely private system at retail backed up by a goverment controlled wholesale operation (which is contracted out to a private operator, Connect Logistics). It is also rumoured that the government of British Columbia is currently considering increased privatization at the retail level.

Privatization has always made sense and makes even more sense right now. Provincial governments are strapped for cash and wrestling with large deficits. Selling off government liquor stores would provide a large infusion of immediate cash which could be used to reduce the deficits and fund necessary social programs like education and health care. Furthermore, privatization would not affect ongoing liquor "tax" revenue. I had an interesting conversation with one of B.C.'s most respected private operators, Randy Wilson of Liquor Plus, recently. He estimates that the BC government could raise over $500 million in immediate cash if they sold off all government liquor stores with sales of less than $10 million annually. That would leave the government with a small cadre of "Signature Stores" which would be easier and more efficient to operate. The annual revenue that the government gets from liquor sales would not be affected (and could even increase) because the government would retain its monopoly on wholesale operations and could continue to impose its "liquor markup/tax" (which is where all the money is made) at that level.

Privatization would free the government from the cost (which currently totals about $300 million a year) and risk of operating a large chain of retail stores. For example, within the current government store system, the government (and taxpayers) don't make their money until the product is sold and the risk of theft/breakage continues until sale. In a private system, the government would already have been paid for all of that product and the risk of theft/breakage would fall on the private operators. Randy Wilson estimates losses attributable to these factors as currently being about $30 million annually.

The retail sale of liquor is not (and really never has been) a "core government service". There are hardly any countries in the world where the government operates retail liquor stores and there are no others that have a significant wine industry. The longstanding justification for government involvement in the retail side of the liquor business is the 90 year old "Prohibition-era" reasoning that "government control" at the retail level will reduce "problems" with alcohol. However, there is no reliable evidence for this: the incidence of problem drinking is not reliably any lower in government control jurisdictions than in private retail ones ... and many countries with low rates of problems (such as the Mediterranean countries) have never had government control. In B.C., "government control" is illusory as government liquor inspectors don't have any jurisdiction to enforce our liquor laws in government stores. Besides, even if there were any alleged benefits to government control, we now have way more private retail liquor outlets in B.C. than government ones ... so any alleged benefits from government control at the retail level are easily bypassed.

The process of privatization should raise issues for government, however. In my opinion, it is critical that governments implement privatization in a manner that would guarantee competition and would ensure that stores be sold to responsible operators. It shouldn't be too hard to do this. For example, a government could create privatization guidelines along the following lines:

  • No sale of all or substantial parts of the business to a single private operator. This would create a private monopoly ... which is the only thing worse than a government monopoly.
  • A level retail playing field should also be created in order to ensure fair competition between the various private stores and the government stores and ensure the public benefits from a healthy and competitive marketplace.
  • In order to ensure healthy competition, single operators (or related groups) could not purchase more than a set number of stores. The overall retail landscape could not be dominated by a single operator (or related groups).
  • In order to ensure responsible operation, customer satisfaction and increased selection, sales of existing stores could be limited to operators with a minimum set amount of experience with and/or knowledge of the liquor industry (e.g. 5 years might be reasonable).
  • Enforcement of existing regulations regarding liquor sales (e.g. no sales to minors or to those who are intoxicated) could be stepped up to ensure that private operators continued to operate their businesses responsibly.

 

The Globe and Mail contained an editorial today in favour of the privatization of the LCBO arguing that the government monopoly had continued only because of "inertia, for fear of public rebuke and for the sake of cash flow". However, a related article in the Report on Business section indicated that Ontario may be considering either a sale of the total system (in order to maximize revenue) or a sale of a minor part (20%) of a "super crown corporation" which would hold various assets including the LCBO. In my view, these methods of sale are inadvisable because they would not replace the government monopoly with a healthy, competitive private marketplace. Canadian consumers want better selection and competition. They deserve a better more open system just like those in place in the rest of the world. Any privatization method that does not do this will not be popular in the long run.

If Ontario and BC do go ahead with privatization initiatives, then 3 of the major markets in Canada would effectively be privatized. In my view, this would be a significant victory for the BC wine industry. It will likely then be much easier for wineries to get their products into retail stores, particularly in other provinces. A loosening of monopoly control may also open the way for a resolution of the ongoing shipping law problems which prevent wineries from direct shipping to consumers in other provinces.

Ontario Considers Privatization of LCBO

A very interesting development in Ontario ... the cash-strapped Ontario provincial government has hired two banks to perform a broad review of Ontario crown corporations including the Liquor Control Board of Ontario (LCBO) with a view to selling some off in order to generate much needed revenue. A previous review done for the Ontario government recommended the sale of the retail arm of the LCBO, indicating that the government could maintain liquor tax revenue easily with a privatized system and had no real reason to be in the retail liquor business. If Ontario does privatize the LCBO, that would likely set off a wave of privatization across the country.

BC Alcohol Price Study - Bad for Wine Industry

Recent recommendations from the Centre for Addictions Research at the University of Victoria have been in the news lately as they advocate changes to alcohol pricing in BC when the HST is introduced. See this recent media coverage in the Vancouver Sun which included a column by Pete McMartin. Randy Wilson of Liquor Plus provided a valuable counterpoint on this issue on CKNW's Bill Good Show today.

The wine industry has good reason to be seriously concerned about the recommendations in this report because they pay almost no attention to the well-established fact that moderate wine consumption is actually good for you.

The main recommendations of the report, and the reasons for them, are as follows:

  • Setting a minimum price for a "standard drink" of $1.50 at retail and $3.00 in restaurants/bars. This is based on an assumption that increasing the price of cheaper liquor will decrease consumption for problem drinkers.
  • Adjust liquor board markup so that lower alcohol content products have lower markups and higher alcohol content products have higher markups. This is based on an assumption that higher prices for higher alcohol products will encourage people to drink products with lower alcohol.
  • Use increases in revenue to address alcohol-related problems.

 

While the intentions of the report's authors are obviously genuine, this appears to be a case of poorly conceived public policy. Like the prohibitionists and temperance advocates of 90 years ago, the writers of this report make almost no distinction between the safe and beneficial moderate consumption of wine and other more harmful patterns of consumption (which by and large are limited to a tiny minority of BC drinkers - usually thought to be about 1%).

The first recommendation is questionable. BC already has some of the highest taxes on liquor in the world which often result in retail prices which are double those south of the border. If higher prices would reduce consumption, then we should already have significantly less consumption (and, by extension, less problems with alcohol) than in neighbouring jurisdictions - which we do NOT. In fact, countries like Italy and France which have drastically lower taxes and retail prices have far less problems with alcohol than we do. In any event, it seems unfair to penalize the large majority who consume responsibly for the sins and problems of a tiny minority. We do not adopt this policy rationale for any other behaviour with which a small minority causes problems (eating junk food, driving a car) - why is it ok for wine drinkers?

The second recommendation is dangerous for the wine industry. Problem drinking is not an equation that is as simple as "higher alcohol products = higher problems". Wine has a considerably higher alcohol content than beer or coolers. According to this recommendation, the markups on wine should be punitive to discourage wine consumption and encourage people to switch to "lower alcohol" beer or coolers. However, as most people know, the moderate consumption of wine is actually good for you. It's much more important to focus on responsible consumption than simply focusing on alcohol content. Why should a person who wants to drink one glass of expensive wine (or Scotch for that matter) be penalized for responsible consumption simply because the alcohol is higher? Which do you think is the healthier choice: 2 glasses of wine with dinner or many low alcohol beers?

The research behind this report seems questionable. For example, one headline element claims that the direct costs of alcohol exceeded government revenue by $57 million in 2002 based on "solid estimates". However, this looks like very dubious science. The claim is based on some Ontario research that attempted to calculate the total costs of alcohol and other drug abuse in Canada by totalling medical costs, law enforcement costs, and other social costs such as work disruption. The actual research acknowledges that the totals are estimates ... but if one looks at the research, it seems that, apart from the health care costs, the "estimates" are more akin to wild guesses ... for example, the estimated law enforcement costs are based upon a survey of the motivations of prison inmates and the work disruption and social costs are based upon assumptions which could be very inaccurate.

Most people will find the recommendations in this report to be counter-intuitive, particularly as they relate to wine consumption. We would all do well to remember that the failure to separate out moderate consumption from problem consumption was what led North America to the disastrous experiment with Prohibition ... from which we are still trying to untangle ourselves 90 years later. Don't get fooled again!

LRS Retail Licenses Decoupled from Liquor Primary

Effective Dec 2, 2009, licensee retail store (LRS) licenses (the newer private retail store licenses) have been decoupled from the liquor-primary (LP) licenses with which they were formerly required to be associated. See the LCLB LRS Policy Directive for details. From now onwards, the continued operation of the LP license is not required for the LRS license. Other restrictions on the operations of the LRS (including the "standalone" building requirement) remain but this change will allow greater freedom for LRS operators to move their operations and/or transfer them to other parties.

Update (Dec 10, 2009): I have now reviewed the regulation that implements these changes. Although the liquor-primary coupling is removed, there is a new requirement that "in the opinion of the general manager, the licensee retail store does not appear to be associated with another business in the near vicinity". From a policy perspective, this seems rather odd ... the likely reason for this is to try and stop the transfer of LRS licenses to supermarkets and big box stores so that the Alberta experience is not repeated here. As you may be aware, Superstore, Costco and Safeway all have freestanding liquor stores in Alberta located near or next to their main stores and branded similarly.

FedEx: Update on Direct to Consumer Shipping

As you may have read here recently, FedEx recently announced that it was implementing a new "direct purchase" system so that consumers in British Columbia, Alberta and Ontario could order wine direct from U.S. wineries and have it delivered to their homes or businesses following payment of applicable liquor board markups/fees/taxes. The FedEx announcement was exciting for Canadian wine consumers because it seemed to indicate a new era of more open wine purchasing (albeit with rather steep fees in B.C.). Regrettably, it appears that FedEx did not obtain regulatory approval for this system in B.C. before announcing it (at least that's what the LCLB tells me). As such, it is unclear whether FedEx will be able to proceed with their plans in B.C. or in the other provinces.

However, this story highlights the major problems with Canada's wine shipping laws and policies. Here is a summary of the regulatory mess that we currently have.

Shipments Entirely Within a Province. Provinces such as B.C. and Ontario, which have wine industries, currently permit their own wineries to ship directly to customers but only within the same province (i.e. B.C. wineries can ship to B.C. customers but not to Ontario customers).

Shipments Between Provinces. The liquor boards in Ontario, Manitoba, and Alberta have recently threatened British Columbia wineries with "criminal enforcement" action under an archaic 1928 prohibition-era statute which prohibits the shipment of wine between provinces. As a result, B.C. wineries are unable to legally ship Canadian wine to the majority of Canadian wine lovers.

Shipments From Outside Canada. Wine lovers in B.C. are currently able to order wine from outside Canada and have it sent to them. However, upon arrival in B.C., the shipment will be held at Customs until the customer clears the shipment with the BCLDB. This is a cumbersome and expensive process under which the customer will be required to pay all of the various LDB fees, markups and taxes (which will be applied to the full retail price of the wine). One person who recently went through this process told me it was "nightmarish" - it took him hours to get the necessary paperwork right including multiple personal trips to Customs and the LDB. However, once all the money is paid, the wine will be released. I understand that there are similar processes in other provinces (although in Alberta, for example, the fees are much, much lower).

Wine Imported by Travellers. Consumers can also personally bring wine back with them from outside Canada if they do so while travelling (i.e. if you drive down to the U.S., you can bring wine back with you). As most people are aware, there is a miserly duty-free allowance of 2 bottles (750ml) per person. After that, you will have to pay liquor board fees based on the province into which you are bringing the wine. See "Bringing Wine Back to Canada After a Trip" for more info.

It appears that the FedEx "direct purchase" system is a streamlined version of the process described above for "Shipments From Outside Canada". Basically, FedEx is trying to lessen the regulatory burden by taking care of some of the paperwork and then delivering the wine directly to you once it is cleared. This seems to be a sensible goal. At first glance, one would think that nobody would care about this since the relevant government (liquor board) is getting all of its money. However, the system poses problems for the liquor boards because they are still taking the position that Canadian wineries can't ship directly at all. It doesn't look too good when U.S. wineries can ship and Canadian wineries cannot.

However, the underlying problem remains. For U.S. wineries, the liquor boards have effectively permitted a direct delivery system so long as the consumer agrees to pay the applicable fees and puts up with the cumbersome process (FedEx was just trying to make it easier). However, for Canadian wineries, the liquor boards have rejected their overtures to set up a similar reporting system and have instead relied on IILA to stop inter-provincial direct to consumer shipments completely.

Legally, I find this fascinating because there are no exemptions in IILA for shipments where the purchaser intends to pay the markups/taxes. Theoretically, the level of legality or illegality under IILA is the same if a consumer brings or ships wine across an international border versus an interprovincial border. The collection of markups/taxes at the border is a separate legal issue from the shipping prohibition in IILA. The practical reality has been that the liquor boards have allowed the international shipments because they have a way of enforcing the tax/markup collection at customs. Of course, they have no mechanism for guaranteeing that a customer pays the markups for an interprovincial shipment so they have tried to stop those completely.

This quagmire is all about the money. Isn't it about time we sorted it out?

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