A blizzard of critical media coverage of the wholesale purchasing policies of the LCBO by Ontario’s Auditor General (see LCBO Prices Higher Than They Should Be: AG and Welcome to Suckerville, Ontario) has prompted me to write the following short summary of liquor economics in Canada. By the way, the BCLDB and the LCBO are partners in crime on these issues – they both have essentially the same pricing policies – which are contrary to consumers’ best interests.
Wholesale Purchasing Policies. The Ontario Auditor General was correct in his criticism of LCBO wholesale pricing policies. One would think that liquor monopolies, with large buying power, might negotiate volume discounts that would either benefit their customers with lower prices or, at least, provide greater profits to their governments. They don’t do this. Instead, they adopt a “backwards” fixed pricing strategy that simply gives the supplier extra profit for no reason (described well in this Toronto Life blog post and by Tony Wilson in this article which shows how the BCLDB does the same thing).
Retail Price Policies. The LCBO and BCLDB also control retail prices by setting fixed retail shelf prices for all products. In Ontario, there is no competition for government stores but even in BC, where we have private stores, there is no price competition because the BCLDB fixes the wholesale prices for the private stores at levels that are only just below the full RETAIL price in the government stores. End result: zero competition and higher prices for consumers.
How Liquor Boards Make Money. The liquor boards make nearly all of their money from imposing “liquor board markup” on all liquor products at the wholesale level. These markups are extremely high by global standards. For wine in Ontario, the markup is about 100%. For wine in BC, the markup is 123%. For spirits in B.C., it is 170%. Predictably, it’s not hard for the monopoly liquor boards to make lots of money with this system. The BCLDB makes about $1.2 billion per year in “gross profit”. Even after paying a hefty $300 million per year in its own operating costs, it is able to send almost $900 million in “net profit” annually to the provincial government.
There Is a Better Way ... with Lower Prices. The problem with the markup system is that, as a monopoly, a liquor board has zero incentive to operate efficiently (see above) … and the government could make more money without the liquor board. How would the government make more money? It could simply swap out the “liquor board markup” for a liquor tax set at a rate that would generate the same amount of revenue or more. It could then leave the liquor business to the private sector, which would operate it with competition and efficiency, resulting in lower prices and better selection. This is pretty much what the Alberta government did when it privatized its liquor system (and what the Washington state government is in the process of doing). When faced with questions about liquor board policies, politicians usually respond with pat answers about using liquor revenue for health care or education. This is simply misleading. Statistics Canada reports that in 2009, the Alberta government made about $185 per person from liquor revenue from its privatized system and in 2010, it made about $192 per person. In contrast, in Ontario, its provincial government made about $144 per person in 2009 with a government control system and about $143 per person in 2010. That means that the Ontario system made almost $50 LESS per person than the privatized system. The simple truth is that liquor board systems are very expensive to run and are inefficient – provincial governments could generate MORE money for education and health care if they simply collected taxes on liquor and let the private sector run the liquor business. [Update Jan 2/2012: an LCBO spokesperson emailed me and disputed these Stats Can figures but so far has not sent me anything that negates the Stats Can numbers. Incidentally, in 2010, British Columbia was the only province in Canada to actually have a decline in liquor related revenue which went down 1.5%.]