In a disappointing move for the Canadian wine industry, the Ontario government has delayed reform of its restrictive DTC policies for an entire year, to July 1st 2021. Previously, it had implemented regulatory changes which would have had the effect of removing the LCBO\’s prohibition over DTC wine shipments from other provinces on July 1st, 2020. There was considerable hope within the wine industry that the Ontario government would make this change in order to provide vital economic assistance to the wine industry during the pandemic and to finally give Ontario consumers access to wine from other provinces. Regrettably, this opportunity has been lost as the Ontario government passed a regulation yesterday which delays the removal of the restriction until July 1st of next year. This is a very unfortunate development as it misses a chance to remove an anachronistic interprovincial trade barrier on Canada\’s birthday. I note that the opening up of DTC opportunities in other provinces (BC, MB and NS all now allow it) has not produced any discernible negative effects and no loss of provincial revenue. I hope that Ontario will re-think this mistake, well before next year.
This article is intended to explain the recent change to BC’s alcohol pricing system for hospitality customers and to outline the implications for BC wineries. Particularly, it covers the financial consequences for stakeholders.
Prior to July 20, 2020 (and for decades prior to this), it was an LDB-mandated requirement that BC’s hospitality industry (restaurants/bars/hotels) purchase all alcohol for their businesses at either the full LDB retail price (for products listed in BCLS government stores) or at the hospitality price (for products not listed in BCLS government stores). The latter price was a price set by the LDB which approximated a retail price since it added a “hospitality margin” to the product’s registered wholesale price (i.e. the one offered to retailers). The hospitality margin varied from product to product but is thought by industry to average about 20%. The only exceptions to the above were: 1) land-based wineries were permitted to set their own hospitality price (i.e. they could sell to hospitality customers at their registered wholesale price if they chose to do so), and 2) hospitality licensees did not pay PST on their purchases since that tax is levied on the end-consumer during the final retail purchase.
The new system means that from July 20, 2020 through March 2021, hospitality licensees will be permitted to purchase alcohol at the same registered wholesale price that is offered to all retailers. In other words, restaurants/bars/hotels will now be treated as full-fledged wholesale customers of alcohol suppliers. This will create a normal wholesale pricing system, similar to those that exist nearly everywhere else in the world, including our neighboring jurisdictions of Alberta and Washington state.
What Happens In Other Places?
The previous BC pricing system was very unusual by global standards. In nearly all other jurisdictions (including all West Coast wine producing jurisdictions), wholesale customers include both retailers and restaurants/bars/hotels, just as they do for other non-alcohol products such as food supplies. This makes sense because these types of businesses buy large quantities of wine from their suppliers and should not be treated the same as a retail customer who comes in and buys a single bottle or case. If a wholesale price is offered to a retailer, there is no fundamental business reason why that price should not also be offered to a restaurant which may well buy significantly more wine than the retailer.
Indeed, wineries often already provide discounts to their best retail customers through wine clubs or volume discounts. If it makes sense to provide 10% or 20% off to a retail customer who buys 1 or 2 cases of wine per year, surely it makes sense to offer equivalent or greater discounts to a restaurant that buys much more. These are normal business practices throughout the global wine industry.
The financial implications of this are:
- Restaurants/bars/hotels will pay less for their alcohol purchases since they will now be placed on an equal footing with retailers. It is estimated by industry that they will save about 20% overall on their alcohol purchases.
- For products sold through the LDB distribution system, the LDB will make less money since they will no longer collect the retail margin or hospitality margin on sales to hospitality licensees.
- For products sold through direct delivery, suppliers will make less money if they were selling those products to the hospitality licensees at the full retail price or at a hospitality price that was greater than the wholesale price. As noted above, there would be no change for land-based wineries that had previously chosen to sell to hospitality customers at their normal wholesale price.
In respect of the above, it should be noted that the new model was specifically introduced as a response to the current COVID emergency. Hospitality licensees were ordered to close (or to restrict their business to take-out) for the past few months by the Provincial Health Officer. Although they are now being permitted to re-open with restrictions, their financial situation is grim due to accumulated losses during the closures and significantly reduced business during the re-opening period. Restaurants Canada is predicting that 50% of independent restaurants may declare bankruptcy within 3 months if they do not receive help. The situation for bars is likely even worse.
The new alcohol pricing model is intended to provide the sector with some of the vital financial assistance that they need to survive. A choice to do nothing would be a choice to let large segments of the hospitality sector collapse. Unfortunately, it is a dire situation: if the sector does not receive help, much of it will simply not survive and vital distribution channels for wine will be significantly reduced or, in some cases, disappear entirely. The Government’s decision to forego some LDB revenue to help the hospitality sector should be commended. This is a policy change that is directly aimed at helping businesses survive and preserve jobs.
It is correct that some suppliers will also forego revenue as a result of the change (although the impact will vary depending upon the previous pricing as noted above). Wineries that were previously selling to hospitality licensees at full retail price (or at a hospitality price that was greater than the registered wholesale price) will make less money under the new system. However, this change is necessary to save the hospitality distribution channel from grave short-term damage and to preserve it so that wineries can keep selling wine in this channel in the long term. In addition, and as discussed above, the new model actually creates a normal wholesale pricing system which is the global standard for the wine business. In the long term, this is where the province needs to go … and how the BC wine industry needs to operate in order to thrive.
Those wineries that had chosen to previously sell into the channel at their registered wholesale price will not be affected (i.e. they were already effectively operating under the new model). However, other wineries may need to re-calibrate their wholesale price strategy or distribution channel mix in order to adapt. If a winery can absorb a loss in revenue in order to support the hospitality distribution channel, then that would constitute a valuable investment in the continued viability of the channel for that winery. If they cannot, then an adjustment in wholesale price across the board or increased emphasis on the DTC channel could be considered and/or may be necessary.
In any such calculation, I would urge wineries to think long-term. The BC wine industry without the support of its vibrant restaurant, bar and hotel partners would be greatly diminished. Please reach out to your hospitality customers. They have historically been your partners and some of your best marketers and ambassadors … but right now, they need your help and support!
Final Comment on Process (& Full Disclosure)
As the former Chair of the BTAP Panel (which recommended the implementation of a change to hospitality pricing in its report), I note that this change was part of a balanced set of recommendations that has had consensus support for the past 2 years from the liquor industry, including representatives from BC’s winery sector, craft distillers and breweries. The Panel continues to work on its original recommendations and upon new issues. While change is rarely free from turbulence, I am proud of my involvement in this work … and strongly believe that this is the right policy change at this time. Again, thanks to Minister David Eby, his ministerial staff, the LDB and the LCRB for making this happen.
The BC Government announced a ground-breaking and positive change for the hospitality industry today by moving to a normal wholesale pricing model for alcohol sales to restaurants/bars/hotels (i.e. the hospitality industry). This change has been sought in BC for decades and was a recommendation of the Business Technical Advisory Panel Report. It will allow the industry to purchase alcohol at normal wholesale prices rather than full retail prices (as they have been required to do in the past). This change (from July 2020 at least until early 2021) will dramatically reduce the cost of alcohol purchases (likely about a 20% cost savings overall) for hospitality industry customers and place them on a level playing field with their competitors in other jurisdictions. The change will be incredibly important for the industry as it seeks to recover from the COVID shutdowns and to rebuild their businesses. Purchases under the new model become effective at the end of July (announced date is July 20th).
Major thanks to Minister David Eby, his ministerial staff, and all of those at the LCRB and LDB who worked incredibly hard to make this change happen. Kudos as well to the industry stakeholder members of the Business Technical Advisory Panel who have invested much time and energy on this. This is truly a landmark government policy shift which will provide vital economic help to the hospitality industry at a time of dire need.
Press Release and Details are here: Province Expands Measures to Support Restaurant, Tourism Industries
Of note to wineries and other manufacturers: direct delivery sales to hospitality customers should switch to your normal wholesale price (i.e. same price as for private retailers) as of the date that the new model becomes effective (land-based wineries may have been doing this earlier). This change will provide much-needed economic help to the hospitality sector (i.e. some of the industry\’s best customers).
BC\’s Provincial Health Officer, Dr. Bonnie Henry, has amended her previous order that was applicable to licensed premises. The new rules remove the previous limit of 50% maximum occupancy. The revised rules allow opening at any capacity under which the physical distancing rules can be maintained. In addition, the new order applies to all licensed premises so all licensees may re-open regardless of license type as long as they can follow the rules.
The full order with the new rules is here: Provincial Health Order for Liquor Licensees