Privatizing LCBO Wine Sales – Be Careful What You Ask For!


To paraphrase Winston Churchill the LCBO is the worst form for selling beverage alcohol in Ontario, except for all the others that have been tried.  Having worked with over 100 different beverage alcohol jurisdictions I have seen the good, the bad and the truly horrifying from a consumers point of view.  There is no question that there are a lot of things that could and should be improved at the LCBO but privatizing the system is not one of them, particularly in a time where the government is trying to rein in a $14 billion deficit.


 


I learned a long time ago to be careful what you ask for because you just might get it.  With that in mind I would offer a counterpoint to the advocates of privatizing the LCBO entirely or even adding the private sale of wine to sale at the LCBO.


 


More Store Locations:  The short answer is yes there will be more stores but don’t expect them to carry the selection one finds in most LCBO stores.  That is what happened in every case where privatized beverage alcohol occurred.  Entrepreneurs and large chains moved in aggressively to open outlets but not all succeeded.  If one looks at either Alberta or BC, the most cited alternatives you would see that yes the number of outlets grew but the average size of most stores is about the size of a large convenience store and they carry far fewer items than a typical LCBO store. 


 


For the most part the outlets focus on low cost items that are in high demand.  In the case of BC where they compete with the government BCLDB stores you will find they have a lot of what in the industry calls “pocket sizes” or mickies, 200ml and 375ml along with low priced wines and spirits that are not found in the BCLDB stores.   What duplicate items there are, are market leaders in every category.  A broad cross section of premium wines and spirits is not their claim to fame.


 


The reason for the low priced non BCLDB listed wines and spirits is that they can be marked up a lot more than is the case for items that are sold in BCLDB stores where there is a reference price.  There is only a small discount offered to them on items sold in BCLDB stores so once an item is listed in the government stores the private outlets have little interest in selling  or promoting them. 


 


The other oft cited example is the grocery or Depanneur segment in Quebec.  Here again there are a lot of stores with very little selection.  There are apparently over 11,000 outlets outside the SAQ and while most supermarkets carry beer and wine the majority of stores are small convenience stores the size of a 7 -11 but again the selection in the case of beer is market leaders only.  It should be noted that all wine sold in these stores must be produced in Quebec and not available in other markets and therefore they are bulk imported wines which are bottled in Quebec.  Even in the case of the grocery chains such as Metro you are looking at a single aisle of wines, not a complete store.


 


Greater Product availability:  This is something that is touted by the Ontario Wine Council in their current “My Wine Shop” campaign.  This however is a fallacy if one looks at both the current private wine stores owned by the big wineries and at what is happening in other provinces.  As stated earlier most stores in Alberta and BC are the size of a large convenience store and carry perhaps 750 items, about what you might find on both sides of an aisle in a large supermarket chain store.  The large Alberta stores such as The Great Canadian Liquor Store, owned by Loblaw’s, have perhaps double that number of items but this is still far fewer than most urban LCBO stores. 


 


And what in fact do they carry?  They carry the big brands that sell and there is no reason to believe that if private wine and beer sales were allowed in Ontario, it would be any different.  No private enterprise that wants to stay in business is going to carry the vast array of domestic wines offered by the members of the Ontario Wine Council.  The demand simply isn’t there to justify it.  Instead they will carry the big sellers to maximize their profits. 


 


If one goes into a standalone Wine Rack or Vineyard Estates store which are owned by the two biggest Ontario wineries, Constellation/Vincor and Peller Estates respectively you would find no more than about 150 different wines and in the case of the kiosk stores found in supermarkets which are owned by the various wineries, you are looking at no more than about 100 different items, probably closer to 50.


 


With 124 active commercial wineries having at least 10 to 20 different wines each you would fill a store if you listed all Ontario wines, something that the Wine Council originally advocated but can’t be done because of the NAFTA agreement.  Hence their including imported wines as well in their current campaign.  When you add imported wines to the mix the chances of expanded distribution for lesser known Ontario wines becomes even more of a pipe dream, particularly if you are going to maintain and/or grow the LCBO contribution to the government.


 


Government transfers will either be maintained or grow with the addition or transfer to a private store system.  Tim Hudak and others have suggested that somehow we can maintain the $1.6 billion transfer payment the LCBO sends to the government this year, up some $300 million from last year but it is difficult to see how this can happen based on experience in other markets, without a significant increase in retail prices.  Beppi Crosariol in his December 15th article in the Globe & Mail on the situation states that “Ontario would retain full control over markups … as Alberta does under its fully private liquor retail system”.  In point of fact Alberta does not control retail mark-ups only the price which goods are sold to the retail store.  The store is then allowed to mark the goods up as they see fit.  What he also fails to mention is that the system in Alberta uses a flat tax based on alcohol content that has not changed materially since the retail system was privatized over 20 years ago.  This has meant virtually no change in the dollar contribution to the Alberta government’s coffers in this time while Ontario’s ad valorum tax has meant huge growth in the contribution by the LCBO to government revenues.  In fact a recent study by The Canadian Center for Policy Alternatives and The Parkland Institute comparing the Alberta to Saskatchewan system suggested that Alberta has lost some $1.5 billion due to forgone revenue and lower tax rates.


 


A better model would be what has happened in BC and recently in Washington State.   In BC there is a discount on the price to the retailer on all items sold at the BCLDB of about 10% but the retailer is free to mark the goods up as much as they like.  In addition goods not sold in BCLDB stores have a fixed mark-up at which they are sold to the retailer but the retailer then is allowed to mark these goods up as they see fit, normally from 30% to 50% of the purchase price from the BCLDB.  That margin comes straight out of the BCLDB transfers to the province.


 


In the case of Washington State a referendum last Fall resulted in the entire system, both wholesale and retail being privatized.  Under the terms of the referendum private enterprise, namely beverage alcohol retailers and distributors had to guarantee the state’s profit for a minimum of 3 years.  To do this the state added a 17% tax on top of their sales tax for retailers and a 10% tax, dropping to 5% after 3 years at the wholesale level, provided a minimum of $150 million was raised by the wholesale taxes.  The net result has been a reported increase in retail prices of around 17% and a drop in consumer sales since the system was privatized in June.  In addition Washington State wineries which had similar favourable treatment by the Washington State liquor board in their stores are now complaining about their loss of distribution and increased costs of doing business in the state.


 


There is no question that the LCBO can do a lot of things better than it does now but from an Ontario winery perspective I would be very careful about asking for the system to be privatized.  At the moment they receive a lot of things no other category or country receive from the LCBO including a disproportionate share of shelf space, the first and best location in all LCBO stores, rebates on their sales to the LCBO, a dedicated key promotion period as well as an incubator program for small wineries that protect them from the “normal” LCBO listing policies plus a special unpaid monthly marketing program (Superstars) in the LCBO’s stores and Food and Drink magazine to name just some of the benefits.  That is unlikely to happen in a private store system.  The Wine Council has suggested they would like to level the playing field for Ontario wines in the LCBO but in point of fact it is already tilted heavily in their favour.


 


In summary I believe that the expansion of wine sales to private stores will not result in an increase in the number of wines available in Ontario, will increase the price of domestic wines sold through the private channel and decrease the revenue the LCBO transfers to the province each year with no corresponding increase from the private sector.  My advice to the Wine Council and others – Be careful what you ask for because you just might get it!

2 thoughts on “Privatizing LCBO Wine Sales – Be Careful What You Ask For!

  1. Liam

    Andrew,
    This is an excellent piece and your efforts certainly match the severity of the situation.

    I represent a very small Ontario agency and I write these comments in ‘pen name’ to protect my business.

    As an agent, I can vouch for the simple idea that without the LCBO, we wouldn’t have a business. The LCBO, despite its failings and bureaucracy, protect me as a small business by virtue of the fact that their mandate is to introduce new product (per their slogan ‘Discover the World’).

    Without the LCBO, the large agencies and mega-producers would gobble up the market, flood the aisles with cheap plonk and exaggerate prices for valuable/collectible products.

    I think the myths being spread by the Conservatives and other organizations are dangerous because they represent international conglomerates that want to steal the profits of alcohol sales from the public of Ontario.

    The LCBO can certainly do better. Most of their private ordering structure is manual. I have to do an endless amount of printing, scanning, signing, documenting and so on in order to get in a couple of orders. They need to automate their process for the benefit of all. Until they do, this structure is a barrier to entry intentionally set up to limit the success of new entrants to the market, thereby eliminating new supply options for consumers and restaurant owners.

    The LCBO needs to do more for smaller Ontario producers (and not Constellation, than you) by discounting the margin that they collect on product.

    The LCBO needs to support the massive and exceptional production of wine that’s coming from BC, Canada’s best wine region. The other day, I took a picture of BC wine, but the heading was ‘South Africa’ and the wine supplied was from the ‘two hills’: Mission Hill and Sand Hill. The is hardly fair representation of the bounty that exists in BC!

    Finally, the Liberal promise that the introduction of wine to select locations will increase ‘access’ is simply a crock and contradicts the mandate of social responsibility. All they’re doing is helping the big agencies pave the way in terms of business development and relationships at the expense of the public.

    If they really want to increase access, let me sell my wine online and directly to the consumer. Let me keep an inventory (I’m prohibited by law from keeping more than 20 cases of product for trade samples).

    I could go on, but right now, we MUST keep the LCBO public. It’s worth it!

    Reply

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