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?

BC Throne Speech: Expand Free Trade, Regulatory Reform

Today's BC Throne Speech advocated freer trade between Canada's 3 western provinces as well as within the Pacific Northwest to Washington, Oregon and California. As you know, no industry is affected more adversely with artificial trade barriers than the wine industry. Wine still cannot be shipped from wineries direct to consumers in other Canadian provinces and any wine coming across the border is subject to unreasonably high liquor board markups and a glacially slow distribution system. Let's hope the BC government is serious about fixing these trade issues. In addition, the throne speech promises a sweeping review of various regulatory bodies such as transit and electricity. While liquor distribution was not specifically mentioned, perhaps it will also be included? After all, the LDB costs $300 million annually to run. That's a lot of cash that could be used for social programs.

U.S. States Consider Retail Liquor Privatization

Cash strapped state governments in the U.S. are also considering increased privatization of liquor retail in order to raise money to fight ballooning deficits. The basic argument is correct: government makes money from liquor retail by imposing taxes (or hidden taxes) at the wholesale level. Government involvement at the retail level is actually a drain on the wholesale revenue because the private sector can run retail operations more efficiently and less expensively than government can. This is true in B.C. and in most U.S. states with government involvement in retail. If government got out of the retail side, it would actually generate more money to fund social programs or fight deficits. Retail is simply not a "core government service". Pretty basic economics really. No doubt there will be more to come on this issue.