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BC LDB Privatization: Opportunity for Reform?

The BC government’s decision to privatize the wholesale operations of the BC LDB (BC’s government liquor monopoly) represents an opportunity for reform of the current liquor distribution system. The project has been named the “Distribution of Liquor Project” (DLP). Information sessions on the DLP were held last week. Many aspects of the DLP remain undefined as it is using a "negotiated request for proposal" process under which the government is essentially asking companies to bid on the management of the wholesale distribution system and also to provide ideas on how to re-structure it. There is little doubt that the current system needs fixing. Here’s a summary of some of the most obvious problem areas where the DLP might provide changes.

Supply Chain Efficiencies and Delivery Times. Under the existing system, a case of wine entering BC is handled too many times as it goes through the supply chain from producer to consumer. The DLP proposes to consolidate the liquor storage warehouses with the LDB distribution warehouses, thus removing unnecessary elements of transport and warehousing from the system. This change would reduce costs within the system and be more environmentally friendly. It should also mean that product can be delivered directly from the single warehouse to the licensee, reducing delivery times and making management of stock easier for all licensees.

Control Over Imported Product. The current system requires that importers work with the LDB every time that they wish to order product into the province. This requirement means delays of days, weeks or even months while purchase orders are approved. The DLP would see the LDB entirely removed from the purchasing process. Importers could order what they want, whenever they want, without delays. In addition, the importers would own and control their product entirely at the wholesale level, restoring a more normal degree of business operations to the wholesale supply chain.

Product Selection. The current system limits the distribution of many products, in particular those wines which are exclusive or which are imported in smaller amounts ("Spec" products). Such products are currently held in warehouses to which no one has access (not even the importer), and cannot be “released” until they are ordered by a retailer or other licensee customer. Since there is no freely available listing of these products, no access to them, and since they can’t be ordered in anything but full cases, many languish in the warehouse for far too long, which drives up costs and reduces selection. This system will likely change as a result of the DLP … hopefully with a new process that will improve access to product and make ordering easier.

Conflict of Interest. The LDB has an obvious conflict of interest in the current system since it acts as the wholesaler for all licensees in the province and also runs a chain of retail stores with which the private stores compete. This conflict has been the source of many complaints over the years. The DLP changes things such that a new private operator will run the wholesale distribution business. While the new private operator will not be completely independent of the LDB … it has been stated that all wholesale customers will be treated equally and that the LDB stores will just be one of many wholesale customers of the new operator.

Wholesale Pricing. At present, BC has an unusual wholesale pricing structure for wine (and all liquor) which is based on a “backwards” method of determining wholesale pricing by using an inconsistent array of “discounts” which are based on the full retail price charged in LDB stores and which vary wildly by license type (e.g. restaurants get 0% discount, thus paying full retail price for all wine, while private retailers get between 10% and 30% off the prices of their main competitor depending upon what type of license they have). This system prevents competition and results in hospitality industry wine pricing which is way out of line with neighbouring jurisdictions. The DLP is presently silent on reform of the wholesale pricing structure, but it would make sense for government to also fix this system at the same time. The minister has previously indicated that government will do this and create a “level playing field” for all licensees. However, it remains to be seen if and how this will be accomplished. The implementation of a normal wholesale pricing system as part of the transition would likely be the most beneficial long term change that the government could make.

Retail Pricing. BC currently has very high retail prices for wine by global standards due primarily to high taxation (markups) and secondarily due to a lack of competition plus inefficiencies in the system. There is currently insufficient information to make any predictions upon the DLP's effect (if any) on retail pricing.

Competition. As in any area of business, competition generally results in lower prices. While BC has a mixed liquor retail model of government and private stores, there is very little real competition because of the wholesale pricing model described above (under which the LDB essentially controls pricing throughout the system) and because of various government policies which limit the issuance of new retail licenses. If the DLP results in changes to the wholesale pricing structure, then there might be some increased competition at the retail level. However, it seems unlikely that the government would alter the retail licensing model to issue additional licenses. On the negative side, the DLP removes competition at the level of liquor warehousing since it will replace the current system of multiple liquor storage warehouses with a single operator. 

The DLP has a short time line for completion with April 2013 being the transition date to a new system. It will be interesting to see how the process develops and whether the potential for reform and improvements is realized. Let’s keep our fingers crossed.