The following information has been updated based on the new markup formula that is proposed for wine, effective April 1st 2015 and which has been distributed by the LDB this past week. However, I am hopeful that this markup schedule may be revoked before it becomes effective as it will likely cause some prices to increase. The major change is that BC will replace its current "backwards" system of calculating wholesale prices for retailers (117% markup on the first $10.25 wholesale cost + 51% markup on the remainder ...  to generate govt retail price minus a variable "backwards" percentage discount = wholesale price for private retailers) with an upward system (actual supplier cost plus 89% wholesale level tax on the first $11.75 wholesale cost + 67% markup on the remainder = wholesale price for all retailers).

The chart below shows the approximate wholesale prices for various price categories of wine (standard 750ml bottles) under the current 2014 system for two categories of retailer, licensee retail stores (16% backwards discount off govt retail price) and independent wine stores (30% backwards discount). This system generates wholesale prices by going "backwards" from the fixed retail display price in government liquor stores

End Retail Price incl. taxes$8$10$15$20$30$40$100
Pre-Tax Price$6.96$8.70$13.04$17.39$26.08$34.78$86.96
LRS wholesale price (16% discount)                      $5.84$7.30$10.95$14.61$21.91$29.22$73.05
IWS wholesale price (30% discount)$4.87$6.09$9.13$12.17$18.26$24.35$60.87
Supplier Cost (est. incl. excise tax)$2.88$3.68$5.69$7.69$13.44$19.20$53.75

Under the new system (April 1, 2015), the wholesale price would be the same for both LRS and IWS (as well as government liquor stores). This table shows the new system (approximately) using the same bottles of wine referred to in the table above. It generates wholesale prices by going "upwards" from the supplier's cost (including excise tax), adding the new 89% wholesale markup ... and then letting retailers set whatever end retail price they want. The predicted end consumer price ranges below are based on stores maintaining the profit margins currently in effect for LRS and IWS (i.e. margins equivalent to between 16% and 30% backwards discounts, as described above).

Old System Retail Price $8$10$15$20$30$40$100
Supplier Cost (est. incl. excise tax) $2.88$3.68$5.69$7.69$13.44$19.20$53.75
89%/67% Wholesale Markup$2.56$3.28$5.06$6.84$11.00$14.86$38.01
Wholesale Price (all retailers) inc. .15 recycle fee$5.59$7.11$10.90$14.68$24.59$34.21$91.91

End Retail Price Range (incl. taxes)  

$7.65-9.19 $9.75-11.75 $15-18   $20-24   $34-40   $47-56   $125-151 

It had been rumoured that the new system would be equivalent to a 21-22% backwards discount. This has proved not to be true because the old formula (117%/51% to generate retail) has been replaced with a new formula (89%/67% to generate wholesale) that imposes higher markups on medium to high priced prices. As a result, while the new system provides margins equivalent to a 22% backwards discount on the lowest priced wine ($8 retail) the margins diminish quickly as prices rise, meaning that end consumer prices would likely rise for any wine at a price point of around $20 and above, if the schedule is implemented as published. 

Generally, and if this system is adopted, the following results could be predicted:

Licensee Retail Stores (currently get 16% backwards discount): will be somewhat better off if they are selling only low priced wine (about $15 and below) as their profit margins will increase slightly. Any wine sales at about $20 and above will show worse profit margins and so end retail prices would have to be raised to maintain profit margins.

Independent Wine Stores (currently get 30% discount): will be worse off as their profit margins will decrease considerably. In addition, the margins on medium to high priced wine are much lower under the new formula so retail prices would have to go up in order to maintain profit margins.

Rural Agency Stores (currently get 12% discount): will be better off as their profit margins will increase particularly if they only sell low priced wine.

Restaurants/Bars/Hotels (currently get 0% discount): will theoretically be in the same position as they will not be eligible to receive wholesale prices under the new system and will continue to have to buy through government stores. However, if a restaurant sells medium to high priced wine, it will have to pay more for the wine at retail and thus would have to raise end consumer prices in order to maintain profit margins.

Government Liquor Stores (no current wholesale price purchasing): will likely be accountable for profit/loss on an individual store basis based on new wholesale pricing system. GLS stores will continue to have an advantage over private retailers because all restaurant/bar/hotel sales must still be made through government stores. GLS stores would also have to raise end consumer prices on medium to high priced wines if they want to maintain profit margins.

I have not made any comparisons for beer or spirits. I have also assumed that the existing LDB fees such as volume markup and cost of service will be replaced (along with the old markup) by the new 89% markup since the new system is supposed to be simpler. If this is not the case, then the profit margins estimated above will be less than indicated for all categories of retailer.

The information currently released does not provide clues as to any possible effects on VQA stores and/or the separate direct delivery system for BC wine.

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