WineLaw.ca

Much of my professional life revolves around work related to liquor policy and regulation. Because of this, I am intimately familiar with the policy rationales and approaches that created Prohibition about a hundred years ago … and which also led to its well-chronicled failure. One might think that Prohibition and the Covid pandemic have little in common. However, I am increasingly coming to think that they do … and that our collective failure to learn from the history of Prohibition is causing society to make similar mistakes in our responses to the pandemic, particularly at this later stage.

 

Let me explain. Prohibition was implemented in order to deal with societal problems that stemmed from the over-consumption of alcohol. It was recognized that some people drank too much and that this resulted in harm to family life, social life and work. At the time, some governments (mostly in North America) determined that the most appropriate policy response to this issue was to ban the sale of alcohol to everyone. 

 

Some refer to this as a “noble experiment”. While there may have been good intentions on the part of the proponents, it is now universally recognized that the effort was a colossal mistake which resulted in significant economic damage to the hospitality industry, a massive disruption to social life, and widespread non-compliance with laws that were viewed as unfair and inequitable by many who had consumed alcohol in moderation for years without issue. Due to inequitable enforcement of the laws, there was significant reputational damage to the justice system. 

 

The root of the problem was the mismatch of the policy response to the nature of the problem. A minority of people had a problem with alcohol consumption … but government responded by banning the sale of alcohol to everyone which was both an “over-reaching” response (i.e. affecting far more people than those who actually had a problem) and a “nanny state” approach wherein the state decides what is good for you rather than letting you decide for yourself. Indeed, many would argue that it made the problem worse for those with addiction issues … since they continued to drink illegally, often at greater expense and with unregulated and unsafe products.

 

While there are some obvious differences between alcohol-related problems and an infectious disease, I am worried that our societal response to Covid has become tainted by similar thinking. At the beginning of the pandemic, we didn’t understand the nature of the threat. Back then, it was justifiable to create broad sweeping restrictions to try and stop the problem while we figured out exactly what we were dealing with. But two years into this, we now know infinitely more about the nature of the problem and the risks to people. Effective policy responses should target the problem and not create unnecessary collateral damage that will damage society and harm our quality of life.

 

We now know that the risks posed by Covid are dramatically weighted toward certain age groups. Like it not, this is a discriminatory virus that threatens some demographics much more than others. In addition, vaccination has miraculously transformed the nature of the threat and the attendant risks for nearly all groups. Indeed, the New York Times recently reported on a detailed British study (in the peer-reviewed British Medical Journal) which concluded that the risks for fully vaccinated people under the age of 65 are now less than those posed by influenza. As such, the nature of the problem has changed significantly during the past two years.

 

Many governments, businesses and organizations seem to be having trouble creating measured responses that both recognize and target the present risks related to Covid while minimizing unnecessary collateral damage. Sometimes the balance between these two measures is so off kilter that ‘the cure may have become worse than the disease’. It seems to me that a new approach to pandemic era policy making may be needed which is informed by our historical experience with liquor policy making. For example, wouldn’t it make more sense to learn from the past and consider the following.

 

Make Sure That the Policy Response Accurately Targets the Problem. Governments, organizations and businesses should not create over-reaching responses that fail to hit the target (as they did during Prohibition). For example, a federal Canadian “global travel advisory” on Covid recommends that Canadians avoid all travel, everywhere in the world without taking into account the prevalence of Covid at the destination, the means of travel, or the individual circumstances of the traveler, all of which are directly relevant to whether or not there is, indeed, any real and appreciable risk to either the traveler or to Canada upon that individual’s return. This policy is both over-reaching and reflective of a “nanny-state” mentality. Many businesses and organizations have similar policies.

 

React to Changed Circumstances. During Prohibition, governments stayed the course even when it became clear that the ‘solution’ was producing little positive results and lots of negative ones. Effective policy responses to the pandemic also require critical thinking and nimble reaction times. If it has become clear that the risks related to Covid have changed then governments and organizations should adjust policy responses accordingly. For example, any consideration of moving school or university on-line should recognize that there is little to no appreciable risk (in terms of serious illness or death) for younger age groups.

 

Do Not Automatically Revert to or Continue Earlier Responses. Throughout Prohibition, successive governments simply ‘inherited’ the (failing) policy response and continued with it. Effective crisis management requires constantly re-thinking our responses and adapting them. Many governments and organizations are not doing this. For example, the government of Quebec just re-introduced a province-wide curfew, a measure that virtually ensures indoor socialization while limiting people from congregating outdoors where it is safer. Have we not learned from the early stages of the pandemic that this did not work and likely made things worse? 

 

Question Policy Responses Based on Ideology or Dogma. Initial policy responses will often be based on an assessment of what works and a strident commitment to doing that despite predictable opposition. Sometimes this is helpful in the early days as it makes it clear to the public or your customers where your government or organization stands. However, it’s important to realize that in the face of rapidly changing science or societal effects, you can be proven to be wrong. If you’re wrong, it’s important to come clean and admit it. You will lose trust if you doggedly pursue a policy response once everyone else realizes that it makes no sense. This happened during Prohibition … and is starting to happen again for certain pandemic responses. For example, here in my home province of BC, our (mostly sensible) provincial health officer adopted a determined position against rapid testing early in the pandemic which continued until about a week ago. A recent swamping of the BC testing system by Omicron cases forced the government to replace (the previously unassailable) PCR tests with (the previously questionable) rapid tests. The about-face would have looked better if it included an acknowledgement of earlier error.

 

Do As I Say Not As I Do. During Prohibition, there were many examples of authority figures breaking the rules, or even profiting from them. Here in BC, the Prohibition Commissioner was arrested for bootlegging. We have already seen this happening throughout the pandemic with numerous politicians and business leaders. It’s important to create policies and rules that everyone can reasonably follow, including the rule makers. It is disastrous to create unworkable policies that no one respects and everyone dodges.

 

I am optimistic that society will get a handle on the pandemic in 2022 and that things will improve significantly. However, just like the post-Prohibition period in North America, there is a real danger that governments and businesses may prolong the societal pain and disruption if they do not change the nature of their policy responses and act more quickly to changing circumstances and reduced risks. Here in BC, it took almost 100 years following the repeal of Prohibition for restaurants to be allowed to have a “happy hour”. Hopefully, that is not an indicator of how long we’ll be forced to endure pandemic related travel restrictions. I used to love flying! 

Globally, the wine industry has suffered through one of the most challenging years ever due to the continued effects of the pandemic, consequential supply chain disruptions and numerous extraordinary climate-related events. The BC wine industry has not escaped the turmoil and continues to face challenges on multiple fronts. This report summarizes and highlights some of the issues, particularly those related to harvest and grape prices.

 

Input Costs & Grape Prices

 

The cost of producing wine in BC continues to rise, posing challenges for producers. Input costs have risen considerably over the past year fueled by labour shortages, shipping cost increases and strong demand for grapes. As a result, prices have risen for everything from glass bottles to oak barrels. Grape prices continue to be robust, benefiting independent growers and rewarding wineries who own their own vineyards. 

 

Review of prices last year (in 2020-2021)

 

According to the BC Wine Grape Council, in 2020 the two highest volume red grapes produced in BC were Merlot and Pinot Noir. The two highest volume white grapes were Pinot Gris and Chardonnay. The average short ton price for Merlot in 2020 was just over $2900. The average short ton price for Pinot Gris was just below $2300. While prices will vary widely depending upon varietal, vineyard and farming practices, generally, the average prices for most red vinifera varieties was in the range of $2900-3200. For whites, the average price was in the range of $2200-2700. 

 

Anecdotal evidence 2021

 

2021 was a challenging year for grape-growing due to wildfires and labour shortages. In addition, the “heat dome” in early summer contributed to below optimal fruit set resulting in lower than average crop yields. Nevertheless, the weather was good and quality appears high. Producers are still assessing the manner and extent to which wildfire smoke in certain areas may have affected the vintage.  Anecdotal reports from the field indicate that this year’s grape prices will either be consistent with last year’s, or in many cases, higher due to demand. Indeed, for vintners dealing with smaller lot production (e.g. “esoteric” grape varieties or grapes farmed organically), their grape costs may be considerably higher than the averages noted above.

  

Average Bottle Price and Sales

 

The average retail price for BC VQA wine in 2021 is about $19.20 according to Wine Growers of British Columbia (based on an average wholesale price of about $16 and retail markup of 20%). However, this number would include a large amount of wine produced by the “big 3” major players who have significant vineyard holdings of their own and/or long term leases (and thus who would be less affected by grape price changes). 

 

In contrast, analysis by Paul Rickett (of VARketing!) indicates that the average current price for 100% BC wine produced by independent wineries is somewhat higher: $18.19 wholesale (estimated $21.28 retail with that same 20% markup). More specifically, it breaks down for BC red wine to $21.70 wholesale (estimated $26.04 retail). And for white wine it is $15.68 wholesale (estimated $18.82 retail). Paul has produced a detailed report on BC wine pricing which could prove invaluable to wineries who wish to delve into these comparisons in greater detail (contact: pdrickett@hotmail.com).  

 

1% Rule

 

There is a “rule of thumb” in the North American wine industry that in order to recover production costs and generate a reasonable return for the winery, 1 ton of grapes ought to be priced at 100 times the retail price of the wine bottle that those grapes produce. So for example, a purchase of Pinot Gris grapes at $2300 a ton, should produce wine that retails for about $23 a bottle. If one uses that test on the grape cost averages above, it indicates that most BC reds should retail between $29-32 and whites between $22-27. Those projected prices are higher than the actual averages just noted. Even if one adjusts the retail margins upward to 30-35%, the numbers come closer but are still below the “100 times” metric. This would suggest that some, or perhaps many, BC wineries are not obtaining the pricing for their wines that would put them in line with North American winery average returns. 

 

Indeed, anecdotal evidence from some wineries confirms that production costs have risen to the extent that price adjustments may be necessary. At the very least, this would indicate that there is some considerable advantage for producers to own their own vineyards and control their production costs. We understand that, in many cases during this harvest, producers purchasing stock from growers received far fewer grapes than they were expecting. Presumably this may also contribute to decreased returns and additional cost pressures for some wineries.

 

Winery and Vineyard Prices

 

Despite the pandemic, the North American wine industry has seen continued acquisition, consolidation and investment activity. South of the border, there has been some very significant activity including the sale of Ste Michelle Wine Estates and a successful IPO by Duckhorn Wine Co. In BC, the activity has generated less headlines but has continued (e.g. Wild Goose, Stoneboat, Joie, Unsworth). Al Hudec reviewed some of this activity during a recent AIDV Canada webinar (https://www.aidv.ca/aidv-updates/).

 

Pricing remains strong, particularly for wineries with significant vineyard holdings. Recent activity indicates that planted vineyards in prime areas are fetching about $300,000 per acre. Prices have been consistently edging upward with growth of about 2% per month which is reflective of strong demand from existing producers and relatively new entrants, such as Frind Estate Winery which now has hundreds of acres of BC vineyard holdings, rivaling the established “big 3”.

 

We expect to see continued acquisition and investment activity throughout the remainder of this year and into 2022.

 

A PDF version of this report is available for download here.

 

Contact:

 

Mark Hicken: mark@ttgvine.com 604 868 1375

 

Tania Tomaszewska: tania@ttgvine.com 250 220 1745

 

BC\’s Provincial Health Officer has posted two new Public Health Orders which now require (as of September 13th) most wineries and liquor manufacturers to verify a customer\’s vaccination status before serving them: Food & Liquor Serving Premises Order and Gatherings and Events Order. I note that the orders make a distinction between manufacturer facilities that have seating (such as a tasting lounge) and those that do not (e.g. customers standing at a tasting bar for samples). The former are treated the same as restaurants and bars (and thus, proof of vaccination is required). The latter are treated like retail stores and are exempted from the order by the wording in paragraph M. I note that the requirement to provide proof of vaccination is necessary for the customer to be served … so it should be sufficient to ask for that proof once a customer is seated (i.e. not at the door) which may make logistics easier. More details on the vaccine card requirements are here: BC Vaccine Card. 

The WTO has announced last week that a \”mutually agreed solution\” has been found for the Australia-Canada wine trade dispute which involved challenges to various measures related to the sale of wine in British Columbia, Ontario, Quebec and Nova Scotia. As such, this long-running trade dispute has come to an end. The formal announcement is here: Report of the Panel.  The final \”report\” does not provide much information on the settlement of the dispute although aspects of this were discussed in my earlier post here: Federal Excise Tax Exemption & Certain Provincial Preferences for Canadian Wine To Be Eliminated. In addition, the EU has posted a lengthy submission that relates to this dispute and which sheds light on many of the issues and positions of the parties which is discussed further here: Uncorking Canada\’s Import Measures on Wine. As discussed in this article, it is possible that these long-standing issues may well reappear in future trade complaints involving Canada.

The Okanagan wine industry is likely relieved after seeing today\’s announced \”BC Restart Plan\”. A phased reopening over the next few months will likely have the province back to normal by the fall … and will provide significant help to the wine and hospitality industries earlier than that. The gradual reduction of restrictions is summarized clearly in this BC Restart Plan Chart (downloadable from this site). The government news release is here as well as a link to the entire media presentation: BC Media Presentation on Restart Plan.

The new Public Health Order (dated May 24, 2021) is here: Food & Liquor Serving Premises Order. Related guidance for the industry is located here: Province-Wide Restrictions. I note that at the time of writing this the earlier Gatherings & Events Order (dated May 7, 2021) had not been properly updated to reflect the updated restrictions indicated by government below.

In summary, the major changes that affect the industry are:

• Today: indoor dining is permitted with the same rules that were in effect prior to the \’circuit breaker closure\’. In other words, physical distancing requirements and a maximum of 6 people to a table. Note: the recommendation that the 6 should be from the same household has been removed. Travel is still restricted but now permitted within your health region (so travel from the Lower Mainland to the Okanagan is still NOT permitted). Organized gatherings are now permitted with up to 10 people indoors and up to 50 people outdoors. 
• June 15th (earliest expected date): Liquor service is expected to be extended until midnight. Organized gatherings are expected to be expanded to allow up to 50 people indoors. Travel between health regions is expected to be permitted (i.e. travel from the Lower Mainland to the Okanagan will be allowed).
• July 1st (earliest expected date): Indoor dining group limits are expected to be removed. Organized gathering limits are expected to be expanded even further and to permit \”fairs and festivals\”. Canada-wide travel is expected.
• September 7th (earliest expected date): Expectation is a return to \’normality\’ or something close to that. 

A couple of recent articles (one mainstream media, one academic) provide interesting perspectives on recent Covid-Related Public Health Orders as well as providing a potential way forward for the hospitality and liquor sectors in terms of limiting Covid transmission during reopening. The first article is from the Washington Post. It describes how a California restaurant is using the latest scientific research on Covid transmission to create a safe dining environment by implementing ventilation and air quality technologies (How One Restaurant\’s Experiment May Help Diners Breathe Safely – also reprinted here at the SFGate site). The second is an academic study on Covid transmission from MIT (Covid19 Indoor Safety Guidelines – which includes an academic paper, supporting info, and even a web-based app to calculate risk) in which researchers provide fascinating models of Covid transmission risk – again based on ventilation and air quality. 

The articles are \’related\’ in that they are both premised on the ability of Covid19 to travel via aerosol particles in the air, which makes the virus more easily transmissible. Both also conclude that ventilation, good air quality and mask use are the best ways to restrict transmission risk … and to make it safe for people to gather again in appropriately ventilated spaces. 

The methodology in the articles provides some interesting context for the current Public Health Orders affecting the liquor industry and hospitality sectors in BC (and other places). For example, if this reasoning is correct, then:

• Restrictions that make a distinction between indoor and outdoor gatherings would appear to have a scientific basis, except for the fact that they may be over-reaching or under-reaching depending upon how well ventilated the particular space is.
• Restrictions that make a distinction based upon the time that someone spends within a space would also appear to have some basis, since shorter times would lead to less exposure. 
• For example, in BC, our current Public Health Orders prohibit all indoor dining and permit patio dining. While basically sound, this would seem to be an overly simplistic approach since some \”indoor\” spaces are probably as well ventilated, or almost as well ventilated, as outdoor spaces. For example, in the Okanagan, I can immediately think of two restaurants whose \”indoor\” spaces are extremely well ventilated: anyone who has eaten at the Hooded Merganser in Penticton will know that when the patio doors are open, it is breezy, if not windy, given the restaurant\’s proximity to (above) the lake. Similarly, the Miradoro restaurant at Tinhorn Creek is perched high above the valley and when the patio doors are open, it is extremely well ventilated. There are similar examples in Vancouver (e.g. Ancora at False Creek) and, no doubt, elsewhere in the province. Indeed, in many places, the ventilation for a guest sitting \’indoors\’ next to an open window is probably as good as if the guest was sitting \’outdoors\’.
• A new BC \”Guideline for Outdoor Dining\” document creates a complicated set of rules for qualifying spaces … which partly reflect the above principles, but which are not precisely focused on ventilation and which could still exclude well ventilated outdoor or indoor spaces (including spaces that were previously ok). I note that the most recent PHO Order on Liquor Serving Premises includes some of these new guidelines. By contrast, I note that new rules for \’open air\’ dining in WA state are specifically focused on air quality level measurements so they \’follow the science\’ more closely. 
• BC\’s current restrictions on wine tasting pose similar issues. Under the current rules, it is permissible for customers to taste inside if they are standing, but not if they are sitting. They can taste outside either standing or sitting. Given the reasoning above, there may be some justification for the distinction because tasting outside is relatively safe and those customers who are standing inside might spend less time within an indoor space than those who are sitting … but again the restrictions are probably overly simplistic … because with indoor spaces, it is the time spent indoors that matters along with the ventilation. The virus does not care whether the customer is sitting or standing.
• Another relevant factor, which is not mentioned in the articles, is whether or not customers and staff have been vaccinated. This would also obviously affect safety and risks (i.e. indoor seating is for those who have been vaccinated??).

In respect of the above, and more broadly in respect of \’following the science\’, perhaps the Public Health Orders should be drafted so as to target ventilation and/or time indoors more precisely, rather than relying on categorizations such as \’indoors/outdoors\’. The \’science\’ now seems to point to ventilation and time as the key factors … if this is correct, then a more focused order might be framed such that outdoor dining or tasting is permissible … and that indoor dining or tasting can also be permissible if time limits are imposed on customers for remaining inside or if that particular space can be demonstrated to have good air quality and ventilation characteristics. According to these articles, such characteristics are not that difficult to measure … and relatively simple steps such as mandating that doors and windows are kept open could make a significant difference as to whether or not a space is \’safe\’.

Regardless of the above, and for the near future at least, these are very interesting scientific studies. If nothing else, and if only to protect both customers and staff, it would seem wise for all hospitality and liquor businesses to maximize ventilation … keep the doors and windows open whenever possible!

Today\’s Federal Budget included a spending announcement directed at Canadian wineries. Page 217 of the Budget Document indicates that the federal government proposes to provide $101 million over two years starting in 2022 to \”implement a program for the wine sector that will support wineries in adapting to ongoing and emerging challenges, in line with Canada\’s trade obligations\”. The program will be run by Agriculture and Agri-Food Canada. Details of the program were not provided … but it appears likely that this program may be designed to  address the concerns of the Canadian wine industry surrounding the loss of the federal excise tax exemption, which is scheduled to occur in June 2022.