The recent announcement that the Ontario government is considering the privatization of the LCBO may be a "game changer" for the future of retail liquor sales in Canada. As you know, Alberta already has a completely private system at retail backed up by a goverment controlled wholesale operation (which is contracted out to a private operator, Connect Logistics). It is also rumoured that the government of British Columbia is currently considering increased privatization at the retail level.

Privatization has always made sense and makes even more sense right now. Provincial governments are strapped for cash and wrestling with large deficits. Selling off government liquor stores would provide a large infusion of immediate cash which could be used to reduce the deficits and fund necessary social programs like education and health care. Furthermore, privatization would not affect ongoing liquor "tax" revenue. I had an interesting conversation with one of B.C.'s most respected private operators, Randy Wilson of Liquor Plus, recently. He estimates that the BC government could raise over $500 million in immediate cash if they sold off all government liquor stores with sales of less than $10 million annually. That would leave the government with a small cadre of "Signature Stores" which would be easier and more efficient to operate. The annual revenue that the government gets from liquor sales would not be affected (and could even increase) because the government would retain its monopoly on wholesale operations and could continue to impose its "liquor markup/tax" (which is where all the money is made) at that level.

Privatization would free the government from the cost (which currently totals about $300 million a year) and risk of operating a large chain of retail stores. For example, within the current government store system, the government (and taxpayers) don't make their money until the product is sold and the risk of theft/breakage continues until sale. In a private system, the government would already have been paid for all of that product and the risk of theft/breakage would fall on the private operators. Randy Wilson estimates losses attributable to these factors as currently being about $30 million annually.

The retail sale of liquor is not (and really never has been) a "core government service". There are hardly any countries in the world where the government operates retail liquor stores and there are no others that have a significant wine industry. The longstanding justification for government involvement in the retail side of the liquor business is the 90 year old "Prohibition-era" reasoning that "government control" at the retail level will reduce "problems" with alcohol. However, there is no reliable evidence for this: the incidence of problem drinking is not reliably any lower in government control jurisdictions than in private retail ones ... and many countries with low rates of problems (such as the Mediterranean countries) have never had government control. In B.C., "government control" is illusory as government liquor inspectors don't have any jurisdiction to enforce our liquor laws in government stores. Besides, even if there were any alleged benefits to government control, we now have way more private retail liquor outlets in B.C. than government ones ... so any alleged benefits from government control at the retail level are easily bypassed.

The process of privatization should raise issues for government, however. In my opinion, it is critical that governments implement privatization in a manner that would guarantee competition and would ensure that stores be sold to responsible operators. It shouldn't be too hard to do this. For example, a government could create privatization guidelines along the following lines:

  • No sale of all or substantial parts of the business to a single private operator. This would create a private monopoly ... which is the only thing worse than a government monopoly.
  • A level retail playing field should also be created in order to ensure fair competition between the various private stores and the government stores and ensure the public benefits from a healthy and competitive marketplace.
  • In order to ensure healthy competition, single operators (or related groups) could not purchase more than a set number of stores. The overall retail landscape could not be dominated by a single operator (or related groups).
  • In order to ensure responsible operation, customer satisfaction and increased selection, sales of existing stores could be limited to operators with a minimum set amount of experience with and/or knowledge of the liquor industry (e.g. 5 years might be reasonable).
  • Enforcement of existing regulations regarding liquor sales (e.g. no sales to minors or to those who are intoxicated) could be stepped up to ensure that private operators continued to operate their businesses responsibly.

 

The Globe and Mail contained an editorial today in favour of the privatization of the LCBO arguing that the government monopoly had continued only because of "inertia, for fear of public rebuke and for the sake of cash flow". However, a related article in the Report on Business section indicated that Ontario may be considering either a sale of the total system (in order to maximize revenue) or a sale of a minor part (20%) of a "super crown corporation" which would hold various assets including the LCBO. In my view, these methods of sale are inadvisable because they would not replace the government monopoly with a healthy, competitive private marketplace. Canadian consumers want better selection and competition. They deserve a better more open system just like those in place in the rest of the world. Any privatization method that does not do this will not be popular in the long run.

If Ontario and BC do go ahead with privatization initiatives, then 3 of the major markets in Canada would effectively be privatized. In my view, this would be a significant victory for the BC wine industry. It will likely then be much easier for wineries to get their products into retail stores, particularly in other provinces. A loosening of monopoly control may also open the way for a resolution of the ongoing shipping law problems which prevent wineries from direct shipping to consumers in other provinces.

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