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Further Analysis: BC\’s New Liquor Regime and Wine Culture

As of April 1st, BC\’s retail and wholesale liquor environment will change significantly. I am concerned about the effects on BC wine culture of some aspects of the reforms because, in my view, they negatively affect the economics of the wine business in this province. In order for BC\’s food and wine culture to thrive, we need a healthy economic model for the wine business in all of its aspects. We need healthy and thriving wineries. We need healthy and thriving wine retailers, particularly the smaller ones who source hard to find wines … and we need a healthy and thriving restaurant business so that residents and tourists can enjoy a good glass of wine with their meals. Unfortunately, I think that some of the changes will inhibit these businesses, not support them. Here\’s why …

Wholesale Pricing and Retail Margins. The new wholesale pricing formula creates a single wholesale price for all retailers, which is a good objective if implemented properly. However, the new system imposes a very high level of \”liquor board markup\” (tax) at the wholesale level. This means that the wholesale prices for all retailers are very high. As a result, and if end consumer prices stay the same, there is very little room for retailers to add in a margin to cover their operating costs and generate some profit. It appears that the retail level margins under the new system would be about 15-16% for all but the very cheapest wine if end prices stay the same. This is a very low margin that is unworkable for nearly all retailers (including both private and government stores) because it is insufficient to cover their operating costs (e.g. rent, labour, admin etc …). To put it bluntly … the wholesale level taxes are far too high … and the structure needs to be redesigned (preferably with a flat tax on wine) to allow all retailers to operate and thrive. If this is not done, BC will simply lose an even greater chunk of its wine business to Alberta and Washington state.

Effect on Private Retailers. I described the consequences of the above for the different classes of retailers in a previous post (Analysis: BC\’s New Wholesale Pricing Formula). In addition, Shea Coulson has just written an excellent article that focuses on the negative effects on the small independent wine stores (Further Problems with BC Liquor Pricing: Ignoring the Independent Wine Stores). The bottom line, however, is that most private sector retailers will have to do something to recover their margins. They could raise end consumer prices. They could reduce selection and focus on moving pallet loads of cheaper wine (where the margins are better). Or perhaps they could focus on \”exclusive\” products where they can increase the margin. None of these options is good for wine culture in BC … we will eventually face either higher prices or reduced selection, or both. A healthy wine culture requires healthy retailers … and they cannot exist on unworkable margins.

Effect on Government Stores. The declared operating costs for the retail division of the BCLDB were 17.2% of sales for last year. They are projected to be 18% of sales for the current year. As a result, the operating costs exceed the retail level margin for almost all product. This means that government stores will likely lose money system-wide with the new margin structure if end consumer prices stay the same. The government has dictated to the BCLDB that prices should stay the same but this is obviously unsustainable. Will taxpayers subsidize the operation of government stores? Will the stores raise their prices? Or will they seek other ways to raise their margins, as described above? In addition, the BCLDB has announced that it will open nearly all of its stores on Sundays starting April 1st and install refrigeration in many of them. These factors will cause a further increase in operating costs … and potentially even greater losses.  It is hard to see how this environment will be beneficial for anyone.

Level Playing Field. One of the objectives of the reforms was to create a \”level playing field\” for all retailers. in theory, this is admirable. Unfortunately, the new system is not level. Sales to \”hospitality customers\” (restaurants/bars/hotels) are reserved for government stores. Co-op advertising (shared cost advertising between supplier and retailers) is reserved for government stores. The LDB\’s wholesale division is still in a conflict of interest because it supplies both its own government stores and the private sector, with whom it is in direct competition. And, as noted above, government stores will be operating with a profit margin that does not cover their declared operating costs … it is hardly fair to expect small private retailers to compete with a dominant retail chain that is losing money. Once again, it will be challenging for a healthy retail wine sector to thrive in this environment.

Hospitality Customers. Despite a re-design of the system, restaurants/bars/hotels still do not have access to wholesale pricing. They are still forced to pay full retail prices, which means that end prices on wine lists are far too high. This puts the entire hospitality sector at a competitive disadvantage to neighbouring jurisdictions. And, as noted above, they still have no choice as to where they buy their product. This is not good for wine culture in restaurants/bars/hotels.

Supermarket Wine Sales. As I have noted previously (BC Supermarket Model Applies to 100% BC Wine), it is my view that the \”BC wine on regular shelves\” model is a violation of Canada\’s international trade agreement obligations. The benefits of the model seem to be minimal for most BC producers … and the potential catastrophe from a successful trade challenge (e.g. loss of direct delivery) would surely outweigh any benefits. In addition, until now, BC was at the forefront of opening our borders to wine from other jurisdictions … this appears to be a move in the wrong direction when we are trying to persuade other jurisdictions to open up their borders to BC wine.

It\’s unfortunate that the second part of the liquor policy review changes have so many concerning issues. The first part of the review was a model of good public consultation and engagement. It resulted in 73 sound recommendations for change that have been or are being implemented, for the most part, by the Liquor Control & Licensing Branch. Perhaps government will come around and fix some of the above issues … or at least commit to a meaningful consultation process with the affected stakeholders. In the mean time, I worry about the effects on small private wine retailers, on the wine programs in restaurants … and on BC\’s reputation as a place with a thriving food and wine culture.

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\”S.S. Liquor Policy Review\” Sinks – BC Wine Culture Feared Lost

VICTORIA, BC. March 20, 2015 5 pm.

The “S.S. Liquor Policy Review” ran aground on a small island in Georgia Straight late Friday afternoon en route from Victoria to the mainland. Tragically, the ship took on water quickly and sank before rescuers arrived. The island is a known marine hazard and is clearly marked on charts of the area as “The Isle of Lack of Consultation”. Early indications are that the ship hit the island due to conflicting navigational information from its two onboard guidance systems, colloquially known as LDB Wholesale and LDB Retail. It appears that a software update known as “Flat Tax” had not been installed, which would have prevented the errors.

The ship went down with all souls aboard, including prominent socialites “BC Food & Wine Culture” and “BC Hospitality Industry”. Also lost was considerable cargo including 12 independent wine stores, the workable profit margins from hundreds of other retail stores and the business models from restaurants throughout the province. The captain of the ship was not aboard, having travelled from Victoria earlier in the day by a private sector helicopter.

Vessels from BC Ferries and Translink were in the vicinity but, unfortunately, were using the same faulty communications systems as the stricken ship and did not receive the distress call. Despite the enormous popularity of the route in its first year of operation, recent sailings had been plagued with mechanical difficulties causing a loss in confidence. Government appeared unprepared for the disaster and, thus far, has indicated that the route will not be replaced. A spokesperson stated: \”we have no backup plan … for the moment, consumers should make the trip from Victoria via Washington state or Alberta\”.