- Written by Mark Hicken Mark Hicken
- Category: Latest News Latest News
- Published: 17 March 2010 17 March 2010
The BCLDB has announced that it is raising the minimum price at retail for spirits from $30.66 per litre to $31.66 per litre as of May 2nd. This means that the minimum retail price for a 750 ml bottle of spirits will go up from $23.00 to $23.75. Since the BCLDB sells about 25 million litres of spirits per year, this means that they will effectively be raising prices for BC consumers by $25 million. As you will note from my recent comment on the budget, the BCLDB is projected to miss its revenue target by $24 million for the current year ... so is this the way that they hope to get the money back?
Sadly the answer is no. While consumers will have to cough up the extra $25 million, the LDB will actually only realize a part of the increase and the government will get even less. The reason is that the LDB uses a fixed markup formula to establish retail prices: any price increase on the shelf will automatically result in an upward rise in the wholesale price paid to the supplier.
Here's an example. If you apply the fixed markup formula to a $23 bottle of spirits, the wholesale cost works out to be about $4.00 (yes, there is a stunning amount of tax). However, it is actually possible for the LDB to buy spirits cheaper than this. For example, they could buy vodka for about $3 a bottle which would work out to a retail price of about $18 once the formula is applied. But because of the minimum pricing policy, the supplier would simply "work backwards" from the minimum retail price using the fixed markup formula and increase the wholesale price to $4. As a result, the consumer will overpay and the government loses out on extra revenue. This is what will happen on this minimum pricing increase. Suppliers will work backwards from the new $23.75 minimum price and simply increase the wholesale price to the LDB so that the fixed formula generates the new price. The suppliers will get a windfall - the government will lose out on extra revenue - and consumers will overpay.
By the way, and from a policy perspective, this is why "minimum pricing policies" are a bad idea for any liquor products - wine, beer, or spirits.