Category: Latest News

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. 

What Changed?

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.

Financial Implications   

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

The BC Government announced this morning an expedited process to fast-track approval for expanded service areas for manufacturers (including winery tasting rooms/lounges), food-primary licensees and liquor-primary licensees (those who are permitted to reopen). This process is designed to allow licensees to expand their current \”red-lined\” service areas in order to accommodate public health orders and protocols such as social-distancing requirements. 

The press release is here: Patio, Service Area Expansions Support Re-opening. Online applications can be made here: Covid Temporary Extension Application

The BC Provincial Health Officer has posted a new health order that permits the reopening of restaurants, certain liquor primaries and manufacturer tasting rooms, all effective Tuesday May 19th, with restrictions on operations and capacity. Note that most bars/nightclubs that do not offer meal service must remain closed.

In addition, an order posted yesterday requires that all BC employers (i.e. all businesses with staff) also must create and post (including on your web site) a COVID19 workplace safety plan. See the Worksafe BC site for details on this.

The original order contained some differences between the restrictions applicable to different categories but that order has now been revised to create consistency. For the most part, the significant restrictions contained in the reopening order now include:

• Must create 2 metre separation between patrons who are not in the same party.
• Maximum 6 customers per table.
• Maximum 50% of usual capacity.
• No events at establishment that include more than 50 people (I read this as per event, not as an overall capacity maximum).
• If practical, maintain contact info of patrons for contact tracing purposes.

Please read the order for full details. There is no expiry date on the order and it is not effective until May 19th so reopening cannot occur until then.

Article Updated May 21st to reflect revised and reissued health order.

We are pleased to announce that our InterProvincial Winery Compliance subscription (available through our sister web site, Alca Intelligence) has been expanded and now includes additional subject areas in addition to InterProvincial Shipping Compliance. As a result, we have renamed the subscription as the \”BC Winery Compliance Subscription\”. 

The subscription now provides access to information in multiple categories. More are planned in due course. The subject areas now include: 

InterProvincial Shipping Compliance (3 separate articles – this is the original subject area)

Agricultural Land Commission Compliance (1 article – including an explanation of the problematic new 5% development rule)

BC Winery Compliance (3 articles – including explanations of the rules related to contract manufacturing and the differences between commercial and land-based wineries)

As before, the subscription is an annual service which provides immediate access to all information on the web site plus 12 months of email notifications related to any significant changes in the covered subject areas. Sign up for the BC Winery Compliance Subscription here.

Finally, additional information related to COVID19 is also available on the Alca web site (free access for these resources).

The following articles have now been posted to our sister website, Alca Intelligence. They provide updated and more detailed analysis and thoughts on the possible consequences for the wine sector from the COVID19 pandemic. The articles include many references to other media sources that I have found to be authoritative and useful. I hope that these articles will be helpful for wine industry businesses in formulating ideas and planning for the months ahead.

• COVID19: Predictions and Analysis – Is an updated and more detailed version of an article originally posted on WineLaw.ca. Now provides more specific information on the potential length and type of ongoing restrictions and how they may affect the industry.
• COVID19: Restrictions Affecting the BC Wine Industry – Provides a listing of and links to the relevant provincial orders and policy changes that are currently affecting the wine industry in British Columbia.
• COVID19 Statistics: Comparisons to Other Jurisdictions – Ongoing and updated statistics on how the various West Coast wine jurisdictions are doing in the battle against the pandemic including comparisons to other places worldwide.

All of these articles are part of our sister website which normally provides subscription-based compliance information for the wine industry (relating to interprovincial shipping, licensing, marketing and the Agricultural Land Commission). However, all COVID19-related articles are accessible free of charge (no subscription needed). 

This is a follow-up to my earlier post. As noted there, these predictions are obviously speculative.

Current Restrictions

As discussed previously, the current societal restrictions (lock-downs, business closures, social distancing, event size limits) have produced dramatic effects for the wine industry:

• A collapse in sales to restaurants/bars/hotels, which entire sector is bearing the full brunt of the fight against the pandemic.
• An increase in sales to the retail sector due to consumers switching to wine consumption at home.
• An increase in online (direct to consumer) sales due to consumer preferences for product delivered to homes.
• The closure of winery tasting rooms, although many on-site stores are still operating for online sales and \”curb-side\” pickup.
• The closure of restaurants located at wineries. 
• The cancellation of traditional promotional events such as winemaker dinners and larger tasting events, both in respect of trade and consumer events.
• The cancellation of on-site winery events including consumer-focused ones (such as wine club release parties) and social events (such as weddings).

The Future of the Restrictions

The strategy of most governments is to control the number of infections (and hospitalizations) through the use of the restrictions such that the medical care system is not overwhelmed (i.e. \’flattening the curve\’). As noted previously, in China it took 3 months of very significant restrictions to \’turn things around\’ (or \’flatten the curve\’ sufficiently to ease the restrictions). The longer term goal would be a gradual easing of the restrictions in North America, including BC. However, scientists are warning that the relaxation of restrictions too quickly, could cause a \’second wave\’ of infections and problems creating a recurring cycle of problems and re-imposed restrictions. As such, and barring a miracle cure/vaccine or a radical change in government policy, it appears that the most likely outcome is a continuance of some level of restrictions for at least 2-3 months, with a possible gradual easing over a longer number of months (Bill Gates has predicted a shutdown of 6-10 weeks). What are the implications of this for the wine sector?

• Restrictions on hospitality businesses might continue for many months albeit perhaps with some easing. As a result, sales to this sector may continue to be negatively affected.
• Sales to the retail sector would likely stay strong, although the surge may level off somewhat.
• Online DTC sales would likely stay strong.
• Winery tasting rooms may not be able to re-open or may have delayed openings. The traditional tasting room model may not be allowed … rather, they might be restricted to appointments or other models that could incorporate limits on the number of customers present at any one time. Winery \’tour bus\’ models may not be possible.
• Winery restaurants may not be able to re-open, or could be subject to restrictions.
• Traditional promotional events may not be possible or may be restricted to smaller numbers.
• On-site winery events may not be possible or may be restricted to smaller numbers.

A second, potentially more optimistic scenario, is that mass testing and increased protection of vulnerable groups (following a successful effort to \’flatten the curve\’) results in better and more targeted management of any ongoing cases and outbreaks. This strategy seems to have worked in some other countries, such as South Korea and Singapore, which have not had to impose such significant broad societal restrictions. Nevertheless, these countries have relied on monitoring and compliance programs which are more intrusive than anything seen to date in North America (e.g. GPS or technology based location reporting to enforce self-isolation or quarantine). This approach could conceivably allow for a faster relaxation of the restrictions – and a faster return to \’normality\’.

Your Sales Channel Mix

Wineries may need to review their past sales channel mix and actively re-calibrate it. If a high percentage of sales was to the hospitality sector (including an on-site restaurant), you may need to find other channels for most of this wine. Similarly, if a high percentage of sales came from \”walk-in\” tasting room traffic, you may need to re-think. This is of obvious concern if the restrictions continue into the summer tasting-room \’high season\’.

Planning Ahead

Here are a few ideas:

• Treat your existing customer lists as the \”holy grail\” (you were doing this before, right?). You may be able to increase sales to your loyal clientele through promotions and/or effective direct marketing. For example, one winery that I visited recently sent me both a hand-written thank you note and a corkscrew in the mail a few weeks after I visited.
• If you don\’t have a wine club, think about starting one.
• Upgrade your DTC capabilities. If necessary, re-vamp your web site and online sales processes. If you haven\’t added free shipping, do so now.
• Create a \’Plan B\’ for your tasting room. If it can re-open, could you do \’appointment only\’? Could you make it work with restricted numbers?
• Create a \’Plan B\’ if you have a restaurant. If it can re-open, could you do \’take-out only\’? Could you do \’picnic packs\’?
• Think about what alternate marketing you would do if dinners and tasting events do not resume. Can you work with your existing retailers? Can you ramp up online marketing? Think about wine clubs. Think about joint marketing initiatives.
• Think about re-scheduling winery events. Adopt a flexible cancellation policy.
• Cross your fingers … and hope that things get under control sooner rather than later.   

The world is dramatically different today than it was 10 days ago. The new world is one of closed businesses, canceled events, work from home, serious hygiene and social distancing. Our collective health is the prime concern, as it must be. Governments and businesses are working round the clock to implement public health measures that will hopefully minimize the worst scenarios. Because we are in uncharted waters, however, we simply don\’t know what will actually happen … and any look toward the future must be largely speculative. Nevertheless, I have attempted to catalogue some thoughts below regarding the business and legal implications of this new world for the wine industry. I hope that these are helpful.  

Time Frame

How long will this last? We don\’t know. There are many differing estimates. However, news reports are currently indicating that it took China 3 months to \”turn the corner\” with severe restrictions. Barring a miracle cure or vaccine, the new world in North America will probably last at least that long and possibly much longer, since our restrictions are not as severe. In addition, public health experts are indicating that the maintenance of restrictions would likely be necessary in order to prevent a flare-up or resurgence, at least until a cure or vaccine is found. As a result, businesses, including those in the wine industry, must prepare and plan for the new world for the foreseeable future.

Consumption

Generally, people continue to consume alcohol during stressful or uncertain times, although they may not do so in the same ways or to the same extent as they did previously. The experience of Prohibition shows that liquor consumption will continue even in the face of blanket restrictions to stop it. As a result, liquor manufacturers including wineries may be in a somewhat better position than other business sectors. Nevertheless, the consumption patterns have already changed and will stay that way for some time as customers switch en masse from on-premise (restaurant/bar/hotel) consumption to off-premise consumption (home consumption from retailers).

Production

Hopefully, for most wineries, production will continue as normal. A welcome bit of good news was that the temporary foreign workers program will continue, although subject to self-isolation requirements (many wineries use this program for vineyard labour). There may be general shortages of skilled labour however.

Distribution

The hospitality sector is experiencing a grave crisis. As a result of both mandatory measures and changed customer behaviour, most of these businesses are either closed or operating at tremendously reduced capacity (e.g. take out only). Their situation is dire. Unfortunately, this sector is likely to continue to experience the brunt of the negative effects and be at the front line for the duration. Wholesale winery sales to the hospitality sector will obviously go down dramatically. Hopefully, there will be a sufficient amount of fiscal and regulatory support for this sector so that it can survive. These are some of your best customers. Unfortunately, it seems certain that there will be many casualties. In contrast, the retail sector is already experiencing a large increase in sales. Wholesale winery sales to retailers will likely go up (although likely not enough to compensate for the downturn on the hospitality side). So far, the retail distribution supply chain continues to operate normally. This will be critically important in the weeks ahead.

Direct to Consumer (DTC)

Some jurisdictions have ordered winery tasting rooms to close while permitting DTC sales to continue either in-store or through e-commerce. While BC has not ordered tasting room closures, the current BC health orders would make it difficult to operate a normal tasting room environment (due to capacity and distance separation). Due to changes in consumer behaviour, opening is likely not desirable anyway and could potentially create legal liability if operated incorrectly (most BC wineries seem to have closed their tasting rooms). Current regulations continue to permit on-site sales (many wineries are offering curb-side pickup or loading for pre-paid orders) and e-commerce sales with delivery. Unfortunately, the post-Comeau regulatory environment continues to make it difficult to serve many out-of-province customers (see Shipping Update). It is likely wishful thinking to hope that the provincial governments will resolve this any time soon.

Marketing: Expand DTC & E-commerce

Many forms of traditional wine marketing are unfortunately on hold. BC\’s current restrictions make it impossible to hold traditional winemaker\’s dinners or to have large scale tasting events (e.g. sadly, Top Drop was just cancelled). 

Wineries may wish to consider an evaluation and expansion of their marketing efforts (perhaps using tasting room staff) through DTC efforts, e-commerce and wine clubs. The changed consumer landscape has created a large increase in retail deliveries and a desire for products delivered to home. Reaching out to existing consumer lists and ramping up on-line advertising as well as social media are viable options although wineries should obtain advice on the marketing restrictions that relate to social media (and other advertising) if they are not clear on what those are. The expansion of wine clubs is also an option. Traditional wine club models can be promoted, particularly with \”% off\” promotions and/or free shipping. Less traditional club models might also be considered including working with other wineries, wine writers, wine experts and/or retailers. These latter options can provide additional marketing opportunities although they are subject to regulatory constraints on their structure. It is important to get proper advice in order to stay on-side.

Additional thoughts on the broader economic implications of the new world are in this Wine Economist article (the link at the end to the Rabobank report may be instructive).

Everyone is hoping that this new world will not last … and that events will be brought under control to restore some semblance of normality. When that eventually happens, we will all breathe a huge sigh of relief. This new world is one that none of us wanted. Let\’s work together to try and make it short-lived.