The wine industry trade publication, Wines & Vines, has just posted an excellent article on border trade issues: Canada\’s Wine Duties Hinder Trade. In my view, this is a serious problem which could cause difficulties for the BC wine industry in the short term. I have posted a related analysis which should highlight the issues, problems and potential consequences: BC Wine & Trade Agreement Trouble. I would be very interested to hear back from the industry on these issues.
Effective yesterday, February 15 2010, the BC LCLB has increased the distance separation requirement for new or transferring LRS licenses (licensee retail stores – i.e. the newer style private retail store license) from 500 meters to 1000 meters. This will make it more difficult for licensees to transfer store locations if there are other LRS stores in the vicinity. The policy rationale stated in the LCLB Policy Directive 10-02 is to \”provide greater market certainty for LRS operators and prevent further market saturation\”. It is true that existing operators will get \”greater market certainty\” because they are effectively being provided with a 2 km radius government shield from competition. It is likely that existing LRS store operators will be pleased as this makes it difficult if not impossible for competitors to open stores in the immediate vicinity of an existing store. This change may have been made to partly compensate LRS owners for a possible increase in competition resulting from the recent \”uncoupling\” of their licenses from the liquor-primary licenses (bars/pubs) with which they were previously associated. However, consumers are unlikely to be impressed as this policy further restricts selection and price competition. Government policy does not prevent cigarette vendors, fast food outlets or gas stations from opening close to each other … since when it is a \”core function of government\” to prevent competition in the retail liquor business?
Today\’s BC Throne Speech advocated freer trade between Canada\’s 3 western provinces as well as within the Pacific Northwest to Washington, Oregon and California. As you know, no industry is affected more adversely with artificial trade barriers than the wine industry. Wine still cannot be shipped from wineries direct to consumers in other Canadian provinces and any wine coming across the border is subject to unreasonably high liquor board markups and a glacially slow distribution system. Let\’s hope the BC government is serious about fixing these trade issues. In addition, the throne speech promises a sweeping review of various regulatory bodies such as transit and electricity. While liquor distribution was not specifically mentioned, perhaps it will also be included? After all, the LDB costs $300 million annually to run. That\’s a lot of cash that could be used for social programs.
Cash strapped state governments in the U.S. are also considering increased privatization of liquor retail in order to raise money to fight ballooning deficits. The basic argument is correct: government makes money from liquor retail by imposing taxes (or hidden taxes) at the wholesale level. Government involvement at the retail level is actually a drain on the wholesale revenue because the private sector can run retail operations more efficiently and less expensively than government can. This is true in B.C. and in most U.S. states with government involvement in retail. If government got out of the retail side, it would actually generate more money to fund social programs or fight deficits. Retail is simply not a \”core government service\”. Pretty basic economics really. No doubt there will be more to come on this issue.
Two news stories are in the headlines today, both of which are indicators of important issues facing the wine industry in BC. The first is a an editorial in the New York Times supporting NY Governor David Paterson\’s attempts to open up that state\’s retail wine business so that its existing \”standalone liquor store\” provisions are removed and that state supermarkets also be permitted to sell wine and beer. Here in BC, we are still struggling to get our retail system to New York\’s current stage. Currently, we still have an unworkable mix of government retail and private stores all serviced by the government wholesaler who is in a conflict of interest. Just this past December of 2009, our laws were amended (sensibly) such that private stores no longer need to be associated with a bar or hotel license (hallelujah). However, all of those stores are bound by standalone provisions … similar to New York\’s current laws. Supermarket sales are not even on the agenda. The second issue is the global glut in the wine industry. Australia\’s wine industry has grown by leaps and bounds over the last decade. However, global economic conditions and uncontrolled growth have resulted in a serious glut of wine in Australia. Australian regulators and wine industry groups are trying to figure out how to reduce production by 25% in order to restore economic balance to the industry. So far, BC\’s wine industry has escaped these global problems due to our protectionist system which creates inflated retail prices disconnected from the world economy and which discourages competition by making entrance to the market exceedingly difficult. However, the BC industry should be watching these issues carefully. Sooner or later, our system will have to change in order to comply with Canada\’s trade obligations. When that happens … look out.