As has been widely reported in the mainstream media, the BC Government has revised its previously announced wholesale pricing formula (which would have significantly increased the prices for all wine over about $15 - see previous story) and replaced it with a new formula which is intended to "align" end consumer retail prices with what they are today (see press release: Minister's Statement on Wholesale Wine Prices for Industry). The announced change was a reduction in the second tier "liquor board markup" from 67% under the old formula to 27% under the new one ... a significant change of 40 percentage points.
I have now analyzed the formulas and provide both wholesale and retail price comparisons in the following PDFs for wine at various price points under both the old and new systems: Price Comparisons $7-$12; Price Comparisons $15-$25 and Price Comparisons $30-$70. There are some interesting issues that arise from the comparisons.
Wholesale Prices for LRS Stores. If wholesale prices for wine are compared for LRS private retail stores under the old and new systems, it is apparent that wholesale prices will go down for all wine that currently retails for less than about $15 (see the PDFs for examples). In contrast, wholesale prices will go up slightly for wine that currently retails for $20 or more.
Wholesale Prices for IWS Stores and Government Stores. Wholesale prices will go up significantly for all independent wine stores as they will now be paying the same wholesale prices as LRS stores (i.e. effectively losing the additional wholesale pricing discount that they previously had). Government liquor stores previously did not pay wholesale prices at all. Under the new system, they will purchase at the same wholesale prices as both LRS and IWS private stores.
Retail Profit Margins for LRS Stores. Under the old system, the LRS wholesale discount was 16% off government store retail prices. This meant that if an LRS matched government store prices, its profit margin was 16%. However, this is a very thin margin for the retail business and most LRS stores chose to retail for higher than government store prices to create a healthier margin. Under the new system, the margin will be better for LRS stores for wines currently retailing for less than about $15. At the very bottom end of the price spectrum, margins increase to about 21-22% (based on current government store pricing). However, for wines that currently sell for about $20 and above, the retail profit margin is slightly reduced to between 15-16%. As noted this is a very thin margin. Grocery stores usually run on something in the 30% plus range. Most normal retailers run somewhere in the 40% plus range. Costco (likely the most efficient retailer in North America) runs on a 14% margin.
Retail Profit Margins for IWS Stores and Government Stores. IWS Stores previously had a 30% margin if they matched government store prices. Under the new system, their margin will be cut significantly to the numbers noted above for LRS stores. Government stores will also have to run on these same profit margins which would appear difficult as the declared operating costs for government retail stores are 17-18% (i.e. the operating costs of the stores may exceed the profit margin).
Predicted Effects on Retail Prices in LRS Stores. It is possible that the least expensive wine may get cheaper under the new system as wholesale prices go down somewhat for LRS stores at the lower end of the price spectrum. However, for wines above $20, wholesale prices increase slightly ... so it may well be that pricing in LRS stores will not change much as stores seek to balance their profit margins across the price spectrum.
Predicted Effects on Retail Prices in IWS Stores and Government Stores. IWS Stores will have to raise their prices as their wholesale prices will go up significantly for every price point. The Government has indicated that end consumer prices in Government Stores will stay the same. However, for this to be achieved, the government stores would have to stick to a margin of 15-16% for wines above about $20. As noted above, this margin is below their declared operating costs and it would mean that the stores would lose money on these sales. It is possible that Government Stores may seek to shift their product mix to lower price points in order to create sustainable margins.
Restaurants/Bars/Hotels. Despite being some of the largest wholesale liquor customers in BC, restaurants/bars/hotels continue to be denied wholesale pricing. These "hospitality" customers still have to pay full retail prices and are restricted in terms of whom they can purchase from (government liquor stores and approved BC manufacturers such as wineries). The lack of a wholesale discount puts the hospitality industry at a competitive disadvantage as compared to our neighbours in Alberta and Washington state.
Move to Pre-Tax Pricing. Government stores have announced that they will change their shelf pricing to pre-tax pricing. It remains to be seen whether LRS and IWS stores will follow suit ... although it would seem likely since this is the standard form of pricing for other retail sectors and there may be a "psychological" advantage to lower pre-tax shelf prices.