Category: Latest News

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.

Interesting political moves in the U.S. may end up having a beneficial effect for Canadian wine consumers and, perhaps, a broader effect that is harder to quantify on the Canadian wine industry. This story in the San Jose Mercury News indicates that there is currently a coalition of U.S. wine producing states that are lobbying Canada to eliminate its excessive border charges on Canadians bringing back wine from the U.S. As most wine enthusiasts know, the charges at the border verge on the ridiculous. In BC, anyone exceeding their miserly duty free allowance of 2 bottles generally has to pay an extra 100% tax and markup in order to bring any additional bottles back. Most Canadian wine lovers hate this system, as do U.S. wineries who lose a lot of potential sales due to the markups. The U.S. effort is described in more detail in this press release from New York Senator Charles Schumer who is lobbying on behalf of the NY wine industry.

This effort could have broader implications for the BC (and Ontario) wine industries. Currently, wine purchased directly from BC wineries escapes all BCLDB markup while wine purchased by a BC wine consumer directly from a Washington (or Oregon or California) winery is subject to full markup at the border. The differential treatment creates serious trade agreement problems which should have been addressed years ago. Unfortunately, the economic consequences of bringing BC and Canadian policies into compliance could be far-reaching and, frankly, I am very concerned about the effects on the BC industry. For consumers though, this is likely to be good news … the large numbers of BC consumers who are sourcing their wine through Alberta (which has sensible border markups) would finally be able to stop doing so.

UPDATE (Feb 17 2010): This issue has now been covered by the trade publication, Wines & Vines: Canada\’s Wine Duties Hinder Trade. You may also wish to review this related analysis: BC Wine & Trade Agreement Trouble.

A story in the St. Catherines Standard by wine industry reporter, Monique Beech, indicates that Ontario will join British Columbia in removing the \”Cellared in Canada\” (CIC) designation from marketing in retail stores and from the labels of wine bottles. The BC LDB has already changed is signage in retail stores to remove the CIC description and replaced it with the more accurate \”Bottled in British Columbia from International and Domestic Wine\”. Consumer surveys had found that the old CIC labelling was misleading to consumers, many of whom thought they were purchasing 100% Canadian wine when they bought this product.

Update (Jan 27, 2010): This story has now also been covered by Wine Spectator: Canadian Wine May Soon Be More Canadian. An interesting point brought up in this article was that the CEO of Andrew Peller admitted that 60% of his company\’s revenue comes from CIC wines. Considering that CIC wines are the least expensive segment, that would mean that by volume, probably 70% or more of sales are CIC.

Two new articles raise some interesting questions about the future of liquor distribution in Canada.

The first is an article just published in the January edition of Ottawa Life which thoroughly outlines the many historical and structural problems with the liquor monopoly in Ontario, the LCBO. The author, Michael Pinkus, has no doubt added considerable weight to the privatization arguments that are already being discussed in Ontario.

I reported on this earlier and have been following the discussions in the Globe and Mail (the only Ontario news source easily obtained in BC). What is surprising, actually stunning, to me is that a number of people have written into the Globe with the opinion that it would be foolish to privatize the LCBO because it rakes in so much money for the government every year. One of the letter writers was an economics professor who implied that he would flunk any of his students who suggested a short term sale at the expense of long term revenue.

Time for a reality check … let\’s do Liquor Taxation 101. Provincial Governments in Canada do NOT make money from liquor because they operate the retail stores. They make money from liquor because they impose very high \”liquor board markups\” at the wholesale level. These markups are basically hidden taxes which are included in the price of the bottle at the retail level. British Columbia (which has more private stores than government ones) and Alberta (which has all private stores) both include these markups at wholesale. The Provincial Governments make their money regardless of whether the sale is made in a government store or a private store. In fact, the revenue that government makes from liquor on a per capita (per person) basis for 2007/2008 was as follows: $192 for BC, $190 for Alberta, and $139 for Ontario. So you can see that in the provinces with privatized or partly privatized systems, government actually makes far more money than in Ontario (38% more money in BC and 37% more in Alberta). So I am afraid that the only one flunking this economics test is the professor.

The second article is forthcoming. Ian Blue, Q.C. of the Toronto law firm, Cassels Brock, has written a follow-up article to his earlier article \”On the Rocks: Section 121 of the Constitution and the Constitutionality of the Importation of Intoxicating Liquors Act\”. The earlier article argued that Canada\’s archaic shipping law restrictions are unconstitutional according to modern legal standards and should be struck down. The follow up argument is fascinating and was mentioned briefly at the Wine Law Conference that was held in Vancouver in November. Mr. Blue focuses in on an ancient Supreme Court of Canada case, Gold Seal, that was decided many, many years ago and which upheld the restrictions. However, Mr. Blue raises some very interesting questions about the legitimacy of this decision. He has found evidence that the Federal Minister of Justice at the time as well as two Supreme Court judges may have acted improperly in relation to the decision and that the authority of the case may have been undermined. Watch for this article in the upcoming issue of the Advocates Quarterly, No. 36.

Vancouver Province provincial affairs columnist, Michael Smyth, wrote a good column in this past Sunday\’s paper entitled \”Expensive Booze Only Benefits the Tax Man\”. I spoke to Michael on this issue before he wrote the column and he quoted me. Michael hits the nail on the head in this column … it is very unlikely that BC would see any benefits from raising the taxes on liquor in this province which are already at absurdly high levels by international standards. It is simply not acceptable for government to penalize a responsible wine drinker with tax levels of 130+ percent. Drinking wine in moderate amounts is actually good for you. We do not impose these levels of tax on other activities which are fine if done normally but which can be harmful if they are abused (e.g. eating junk food, driving a car). Why is it ok for wine drinkers?

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.

A very interesting development in Ontario … the cash-strapped Ontario provincial government has hired two banks to perform a broad review of Ontario crown corporations including the Liquor Control Board of Ontario (LCBO) with a view to selling some off in order to generate much needed revenue. A previous review done for the Ontario government recommended the sale of the retail arm of the LCBO, indicating that the government could maintain liquor tax revenue easily with a privatized system and had no real reason to be in the retail liquor business. If Ontario does privatize the LCBO, that would likely set off a wave of privatization across the country.