WineLaw.ca

Wine media in Washington state is reporting on a Bill that would increase the number of secondary (off-site) tasting rooms for WA wineries to a new maximum of four: see Washington Wineries Ask Legislature for More Tasting Rooms. Secondary tasting rooms have proved to be extremely successful in Washington since a legislative change in 2000 which introduced the current allowance of two off-site tasting rooms per winery. The change allowed wineries to locate tasting rooms either in downtown wine area towns (e.g. Walla Walla) or closer to urban markets (e.g. Woodinville, which now has 130 tasting rooms just northeast of Seattle). These changes have meant that wineries could increase sales in their DTC channel which is, by far, the most profitable retail channel for the wine industry. Meanwhile, here in B.C., the provincial government has accepted a recommendation of the liquor policy review that secondary tasting rooms should be permitted. However, to date, there has been no announced timeline for implementation and wineries are unable to operate even a single off-site tasting location. 

The Toronto Star is reporting the details this morning of the Ontario government\’s plan to roll out wine sales in supermarkets: Ontario Uncorks Plan for Supermarkets. The plan calls for a phased roll-out of wine sales in supermarkets with an equal number of licenses to be issued at each stage for: a) \”Ontario-only\” wine, and for b) the sale of all international wines. In the first year, 35 licenses of each type would be issued (70 total). In 2019, 40 more licenses of each type would be issued (80 more for a cumulative total of 150). At the end of the phase-in period, all licenses would permit the sale of all types of wine. There is no limit to the number of licenses eventually issued. The licenses would permit the sale of wine on regular supermarket shelves (does not require segregated store within a store). The issues surrounding this plan and BC\’s supermarket plan will be discussed at the upcoming Wine Law Conference in Vancouver, to be held on February 20th. Please attend the conference for a full analysis of the issues.

The upcoming BC Wine & Liquor Law Conference will provide a comprehensive regulatory update on many issues facing the wine and liquor industries in British Columbia. The conference will take place on Monday, February 22, 2016 at the Metropolitan Hotel in downtown Vancouver (this is the beginning of the \”Vancouver International Wine Festival\” week). The agenda includes coverage of: the ongoing changes to BC\’s liquor laws (including those focused on BC\’s retail environment, wholesale pricing structure and distribution system), as well as interprovincial shipping, developments in the discussions around new British Columbia appellations, new water management laws, liquor host liability for wineries, and some views from south of the border on distribution in the U.S. and the use of social media for direct sales. There is a discounted tuition fee of $300 USD for those working in the wine or liquor industries. Full information and registration is here: Law Seminars BC Wine & Liquor Law Conference.

The Saskatchewan Government has announced some major changes to its retail system for liquor, contingent upon the Brad Wall government being re-elected in April 2016. Details on the changes can be found here: SLGA – Future of Liquor Retailing and in this PDF: Future of Liquor Retailing Backgrounder. If implemented, there will be some very significant changes to to the liquor retail system in Saskatchewan that can be contrasted with the changes being made here in British Columbia:

Expansion of Private Retail. Saskatchewan plans to convert 40 of its existing 75 government liquor stores to private retailers. In addition, it will issue licenses for 12 new private retail stores in communities that have been designated as underserved. The end result of this expansion will be that the government retailer will only operate 35 stores. Saskatchewan currently also has 4 private liquor retailers, 190 rural liquor stores, and 450 \”off-sales\” locations. Saskatchewan is not introducing liquor sales in grocery stores. By contrast, BC\’s changes have included an expansion of government liquor retailing through extended hours as well as the introduction of wine sales in a limited number of supermarkets. There has been no increase in the number of freestanding private liquor retailers in BC.

Level Playing Field. Saskatchewan is planning to introduce a new wholesale pricing system for liquor such that all retailers (both government and private) pay the same price for all products. British Columbia has also done this to some extent, with the one exception that BC\’s new supermarket wine vendors, as well as its existing VQA stores, currently pay significantly less at wholesale than everyone else. In addition, Saskatchewan will permit restaurants/bars/hotels to buy liquor from any retail source that they choose. By contrast, BC still requires that these customers purchase only from government channels. Saskatchewan will also create consistent business operation rules (e.g. hours of operation, pricing, discounts) for all retailers. 

Discounts on Wholesale Pricing. Saskatchewan will allow individual retailers or retail chains to negotiate lower wholesale pricing from suppliers through incentives (see below). Presumably, this could be based on volume or other factors. It will also allow suppliers to set \”system-wide\” discounts at the wholesale level. In contrast, British Columbia only allows \”system-wide\” discounts. 

Inducement and Trade Practice Rules. Saskatchewan will eliminate its prohibitions on inducements (financial incentives provided to retailers from suppliers such as co-op advertising that are common in other retail sectors). The only restriction in SK will be that incentive/inducement arrangements cannot exclude competitive products. In contrast, British Columbia has not reformed its inducement and trade practices rules (a 2010 industry consultation appeared to indicate that it would do so but that did not happen).

Changes to Liquor Board Markups. Saskatchewan has introduced a new system of liquor markup at the wholesale level which will generate the \”wholesale prices\”. Retailers will then set their own retail level prices themselves with varying retail level profit margins. This system is basically the same as BC\’s new system. However, the new markups for wine in SK are dependent upon alcohol level and are higher. For wine that has 14.5% alcohol or less, the markup will be 94% on the first $12.50 per litre of supplier cost and then 53% markup on the remaining value. Wine that has an alcohol level higher than 14.5% is treated the same as spirits with a markup of 125% on the first $25 per litre of supplier cost, 83% on the next $12.50 per litre of value and then 56% on the remainder. These markup levels are considerably higher than the levels imposed in British Columbia (89% on the first $11.75 per litre of value, 27% on the remainder for all wines). For wines that are over 14.5% alcohol (which would include many New World wines as well as pretty much all fortified wines such as sherry and port), the resulting consumer prices in SK will be extremely high (certainly higher than in BC and significantly higher than in AB). 

None of the above changes will actually be made unless the current SK provincial government is re-elected in April 2016.

Saskatchewan is now open for DTC shipments of wine (and spirits) from BC. However, the customer must obtain an authorization permit from the SLGA which is valid for one year. The maximum quantity of wine per shipment is 9 litres (one case) but multiple shipments during the year are permitted. Upon receipt of a shipment, the customer must pay a significant markup to SLGA which for wine is $5.25 per 750 ml bottle. See the SLGA info page here: Direct Shipment of Wine.

Charges against FedEx for shipping BC wine to Newfoundland were dismissed today by a court in St. John\’s. The charges had originally been laid against FedEx as a result of a shipment of BC wine to that province last year. FedEx\’s lawyer argued that there was no case against FedEx because: a) the federally regulated courier company was not subject to provincial liquor restrictions, and b) there was evidence that the Newfoundland liquor board had set up the case by having the wife of a liquor corporation executive order the wine in question. The prosecutor agreed that there was no case. The judge dismissed the charges before FedEx\’s counsel had an opportunity to make any constitutional arguments. FedEx\’s lawyer has asked that the Newfoundland liquor corporation pay FedEx\’s legal fees in the case (a decision on the costs issue will not be made until late September). See CBC report here: FedEx Accuses NLC of Set-up to Protect Wine Monopoly and this longer report from the St. John\’s Telegram: FedEx Contraband Wine Case Uncorked. Following the decision, FedEx Canada issued a series of tweets indicating that it believes that all Canadian provinces should remove interprovincial shipping restrictions. This case is interesting because FedEx argued that, because it is a federally regulated business, it was not subject to provincial laws affecting interprovincial transport. It appears that the Crown accepted that there was no reasonable likelihood of conviction, at least partly due to this. If this argument is correct, then provincial governments and liquor authorities would not be able to prevent couriers from transporting interprovincial shipments of wine or other alcohol. Unfortunately, there was no definitive ruling on this question … but there appears to have been no real arguments made against FedEx\’s position.

The Nova Scotia government has announced today that the province is now open for DTC wine shipments of Canadian wine purchased from a winery (retailer shipments and shipments of non-Canadian wine are still not permitted). See the press release here: Nova Scotia Opens Borders to Import Wine. As a result, Nova Scotia becomes the third Canadian province to publicly announce that it is open for interprovincial wine shipments. For a review of the situation in all provinces, see my DTC Shipping Update Page. 

As reported earlier, a dispute over meat labelling, has resulted in the WTO ruling against the U.S. and in favour of Canada and Mexico. The next round of the battle involves the possible implementation of retaliatory tariffs. Canada has requested permission from the WTO to introduce a 100% surtax on a number of products if the U.S. does not comply with the ruling (the products are listed here and include U.S. wine). If those tariffs were actually introduced, they would obviously have a very negative effect on the sale of U.S. wine in Canada since prices would sky-rocket. However, the U.S. Congress has already introduced a bill that would repeal the meat labelling law which appears to have broad bi-partisan support as well as support from the U.S. meat processing industry which sees the labelling law as too costly. 

Supermarket Roll-Out. The BC Government\’s plan to roll out limited alcohol sales in supermarkets has now launched with a single Save-On Foods store in White Rock (Surrey) being the first location. This store has been appointed as a third party operator for a BC Wine Institute license that permits the sale of only 100% BC VQA wines (i.e no imported wines). These licenses (there are currently 21) had previously only allowed for the sale of wine through freestanding VQA wine stores. Recent changes in government rules permit the transfer of those, and other licenses, into supermarkets. The rules are complicated and, depending upon the license type, may result in liquor sales either using a segregated \”store within a store\” concept (for beer, spirits and imported wines) or for \”wine on regular shelves\” if the licence is restricted to the sale of 100% BC wines (see: BC Announces Supermarket Wine & Liquor Rules). A second supermarket location was slated for the Urban Fare store on Alberni St. in downtown Vancouver but that opening is currently on hold due to compliance issues with the City of Vancouver\’s liquor policy. It is currently unclear how many, if any, of the other VQA store licenses may transfer to supermarkets … or how many other existing private retail or government stores will make the move into supermarkets.

The government has also recently passed and given Royal Assent to the Special Wine Store Licence Auction Act which contemplates the auction of an unspecified number of additional licenses that would permit the sale of 100% BC wine on regular supermarket shelves. It is rumoured that the number of licences to be issued under this Act will be 24, but that is not confirmed … and there is no announced time line for the implementation of this plan.

The above developments have given rise to concerns regarding both trade agreement compliance and wholesale pricing. Both the California Wine Institute and Wine Australia have already written to the BC Government and expressed their views that the \”BC wine on regular shelves\” supermarket model is not compliant with Canada\’s trade agreement obligations under both NAFTA and GATT. It is my view, as noted in earlier posts, that this model creates a trade violation that could give rise to serious consequences. In addition, other private retailers have raised concerns about the fairness of the model including the wholesale pricing currently being provided to the supermarket. The VQA stores have historically received, and still receive, a 30% \”wholesale discount\” (of which 26% goes to the store operator) and also operate under a consignment sales model from the wineries (i.e. no cost for stock). All other private retailers have substantially lower retail profit margins under the new wholesale pricing system (about 15-16%) and have to pay for their stock up front … which obviously provides the supermarkets with a significant advantage. 

Wine and Meat Labelling. In other news on the trade compliance front, a trade dispute relating to the labelling of meat products in the U.S. recently threatened to affect the import wine business in Canada.  The WTO has issued a final ruling that the U.S. violated their trade obligations on the meat issue and, as such, Canada was set to ask for the authorization of retaliatory tariffs on a number of products including U.S. wine. To its credit, the California Wine Institute supported Canada\’s position in this dispute and urged Congress to repeal the meat labelling law. Yesterday, Congress appeared to set the wheels in motion to do exactly that: see US Congress Starts Repeal Process for Meat Labelling Law.

New Liquor Statute for BC. Finally, the BC Government has also passed a new Liquor Control and Licensing Act, which will come into force by regulation at a later date.

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.