Ontario’s liquor sales conundrum

The C.D. Howe Institute released its report on beer and wine sales in Ontario, today, advocating for a more liberal approach and allowing beer and wine to be sold in other outlets, such as supermarkets and convenience stores. You can read the report here.

I have a grudging respect for the C.D. Howe Institute, but not always an agreement with their conclusions, because I feel they are seldom as free of right-leaning ideologies as I would hope. But the report is a good read, nonetheless. It has a local significance in that we have seen three craft breweries open in Collingwood this term and their well-being is important to our local economy.

Coincidentally, the Beer Store was an exhibitor at the recent AMO convention*, and made presentations (as well as handing out reports) that proved a counterpoint to the C.D. Howe study. It’s a battle of conflicting figures and facts being tossed about.

Of course, The Beer Store (TBS) has a vested interest in keeping its near-monopoly on beer sales. Contrary to what some folks think, the Beer Store – we knew it as Brewer’s Retail when I was growing up – is not a government outlet like the LCBO. It’s privately owned; although it’s technically designated “not for profit” some reports say it managed to garner $700 million in “incremental profits” every year for the past few years.

This figure is challenged by Jeff Newton, President, Canada’s National Brewers, who writes:

The Beer Store does not make $700 million a year in profit; it actually makes no profit, a fact that can be confirmed by reviewing the corporation’s publicly available financial statements.

The so-called 2013 study that produced this erroneous claim was funded by the convenience store lobby association and has since been proven false by two former assistant deputy ministers of finance in the Ontario government.

What the convenience store lobbyists claimed to be a $700-million profit was actually shown to be higher Ontario beer taxes. The report debunking this claim can be found at ontariobeerfacts.ca/files/studies/earnscliffe_comparison.pdf.

Well, if The Beer Store itself isn’t making those profits, the brewers who own it are, according to the CD Howe report:

The Beer Store enjoys significant economies of scale. These factors combined allow brewers to earn what we estimate to be $450 to $630 million in additional profits compared to what would have occurred in a competitive retail market similar to that in Quebec.

Nothing against profits, mind you: they keep the brewers in business. But maybe we could shave off a couple of points to allow some of the smaller, Ontario brewers to get a bit more of the action. Encourage local, home-grown craft breweries.

Over the past few years, TBS has been the subject of considerable political controversy over its practices and policies that, some companies say, are prejudicial against small, craft breweries. The ownership of The Beer Store is also controversial because it is now an international conglomerate, not even Canadian:

…when you buy beer at The Beer Store, you’re actually supporting massive corporations based at least in part in the States, in Brazil, in Belgium, or in Japan — regardless of the brand of beer you actually buy.

The Beer Store, as you probably already know, is actually owned by Labatts, Molson-Coors, and Sleeman, and however Canadian these household brands may sound, they’re not. Molson isn’t really just Molson anymore. It’s Molson-Coors, a company with equal ownership in Canada and the United States. Labatt Brewing Company is owned by Anheuser-Busch InBev, a Belgian-Brazilian multinational company headquartered in Leuven, and, since 2006, Sleeman has been owned by Japanese brewer Sapporo.

As the owners of The Beer Store, these three brewers are not only taking in an astounding 79.2% of the market share of all beer sold in Ontario, but they also gets to make up standards and fees to which any other brewer must adhere if he or she wants the store to stock his or her products.

There have been calls in the media to end the “quasi-monopoly” of The Beer Store, which will of course be further fuelled by the C. D. Howe report, as this article in Metro News reported:

The C.D. Howe Institute is just the latest to add its voice to a growing chorus advocating a liberalization of alcohol sales in Ontario, including the Ontario Convenience Stores Association. But the Liberal government has consistently put the boots to the idea.

“A major component of the lack of competition is the disadvantage faced by small Ontario wineries and breweries relative to the larger producers,” the report says. “Three large brewers own The Beer Store, which dominates retailing of beer, while two large wineries enjoy the right to sell their wines in major off-winery stores: the Wine Shop and the Wine Rack.”

A recent article in the Montreal Gazette noted:

The Beer Store’s control of the retail beer market produces extra profits for big brewers in the range of $450 million to $630 million a year, the institute says. The Liquor Control Board of Ontario’s onerous rules have kept the domestic wine industry down. Both favour big producers and make life hell for small ones.

The work it takes to reach these conclusions is complex and assumes Ontarians would act like people in other provinces if Ontario’s alcohol sales were liberalized in similar ways. That’s not guaranteed. Yet it’s plain that nobody would set up the system we have now — a near-monopoly on beer sales in the hands of the biggest private brewers and a market for wine and hard liquor dominated by a Crown corporation that partially regulates its competitors — if we were building it from scratch.

Successive Liberal governments have rejected recommendations to pursue any sort of de-regulation or selling off the LCBO, even the relatively mild suggestions of the C. D. Howe report: “We recommend that Ontario reform its system of alcoholic beverage retailing to allow sales of wine and beer in grocery and convenience stores, as in Quebec; further open up beer retailing by licensing other retail outlets; and license off-winery stores to all wine retailers.”

It’s all about the money: the LCBO alone brings in $1.74 billion a year to the province’s coffers. With a $12+ billion deficit, it’s a no-brainer that any government would want to keep the goose to keep laying the golden eggs. But the report doesn’t say kill the goose: it says give the goose a bigger yard to roam in.

The Beer Store doesn’t make it easy – or cheap – for small entrepreneurs and local brewers. According to Ben Johnson in Blog.to:

A report from the Fraser institute entitled, “The results of beer regulation in Ontario” recently detailed those fees:

There are two fees that TBS charges breweries to have their products sold in its store. The first is a one time listing fee with a base charge of $2,650.14 plus $212.02 per store that the product is sold in. This amount is paid per product that the brewery would like to sell. For example, if a brewery had six distinct brands of beer and wanted to sell each brand in packages of 6, 12, and 24, they would need to pay a listing fee for 18 products. The second is what TBS refers to as a “handling fee.” This fee is charged at between $43.40/hectolitres and $49.40/ hectolitres or between $3.65 and $4.15 for every case of 24 beers. Both of these fees only apply to non-owner breweries.

So the big brewers profit not just from sales of their own massively popular beers and the sale of other beers in The Beer Store, but also just for letting other breweries sit on their shelves.

Jeff Newton counters this:

… the Beer Store system is very beneficial to small brewers. They can list as many brands in as many Beer Store locations as they chose, they are charged lower retail service charges and they are free to set their own selling prices.

Almost 25% of the 400-plus brands sold by the Beer Store belong to small brewers and Ontario small brewer sales have increased by 67% in the last five years alone, making them the fastest growing category in the system.

The Fraser Institute report adds:

If a non-owner brewery wishes to avoid TBS, and thus avoid selling through its competitor’s outlet, but finds the LCBO to be too limited of an option, the only remaining alternative that is permitted by regulations is an on-site brewery store. A licensed brewery may apply for a permit to sell its product directly to the public but only on the brewery’s premises (Liquor Licence Act s.22.1). This has the obvious drawback that many breweries are not located in a retail friendly area and it severely limits the number of available outlets for customers to access the product. For a non-owner brewery that wishes to reach a wider customer base, selling from the brewery site is not a practical alternative to TBS.

It gets murkier when you realize that your local pub or restaurant actually pays more for beer than you do at the same Beer Store, and don’t get a discount for volume purchases (which is why their beer costs so much more). Laura Strapagiel writes on Canada.com:

Ontario bar and restaurants licensed to sell alcohol are paying more for the exact same 24 pack of beer you can pick up at the Beer Store. Brewers are allowed to set separate prices for retail sales and licensee sales, and licensees are paying almost $10 more per pack of the biggest brands.

The discrepancies are most apparent among the big brewers — Labatt (owned by Anheuser-Busch InBev), Molson-Coors and Sleeman (owned by Sapporo). Brands that sell at the Beer Store get to set their own prices, although those three brewers are also the owners of the Beer Store.

According to prices listed on Aug. 4, 24 bottles of Canadian costs $35.95 on the retail side bu $45.75 for licensees. In fact — and price fixing conspirators take note — all of the Beer Store’s major top brands cost the same for licensees, with Labatt’s 50 and Blue as well as Molson-Coors’ Export and Coors Light all costing $45.75.

Despite the uniform prices, the cost to retail shoppers isn’t so consistent. Shoppers pay $43.95 for Labatt 50, $1.80 less than licensees. Labatt Blue is marketed as a discount brand by the Beer Store, costing just $30.95 for 24 bottles. Licensees, however, pay just as much for Blue as those other “premium” brands.

And the retail experience at The Beer Store is, well, okay but hardly the apex of customer service or retail bliss. Most of the stores I’ve been in are utilitarian, rather than welcoming. But, hey, I’m there to buy beer, not make a lifestyle decision about furniture, clothes or a new puppy. Is it any more enjoyable to stand in a line at, say, Home Sense than The Beer Store? But in Home Sense, all brands get equal exposure. Not so in The Beer Store, as Ben Johnson writes;

…the “exposure” being offered is typically no more than a spot with all the other brands on the wall of labels. Thanks to the The Beer Store’s lack of any real “browsing experience” or signage, it’s highly unlikely a consumer will wander into the get-in-and-get-out set up of a Beer Store and come out with a new craft brand that seemed interesting.

What little “marketing” does happen at the Beer Store likewise only serves to help the big guys. The “Ice Cold Express” for example, that wall of refrigerated beer, is really just a showcase of brewers with a willingness to shell out some more money for the right to be there (and guess who has that kind of dough to spend?).

Other “marketing” measures like “The Big Ten,” that list of The Beer Stores’ top sellers, also serve to further compound the problem by helping the big guys continue to push their own brands–because they are already the best-selling beers.

Ever see “Ten Ontario Beers You Should Try” or “Ten Great Craft IPAs” listed at The Beer Store? Not bloody likely, and you probably won’t any time soon.

In Confessions of a Beer Store Employee, Jeff Lagerquist writes sarcastically,

The Beer Store is the only place where bottles and cans can be redeemed for their deposit. While the not-for-profit Beer Store makes a pretty penny managing recyclables, there is no monetary incentive for the company to improve its retail experience. Of course, the Beer Store is beholden to its big brewer parents who are reluctant to invest in store-level infrastructure. After all if Molson Coors Brewing wanted to spend money to make the store nicer, that could help the competition like Mill Street Brewery sell some cases. And we can’t have that.

I have to admit that TBS’s recycling is the cat’s meow for me: where else could I take back my empty cans of British beer and empty wine bottles every four to six months, and get enough back for another bottle or six-pack? I laud them for taking on this environmental issue.

For me the CD Howe report’s most telling statement is this: “Ontario’s system of alcoholic beverage retailing is a legacy of World War I and the heyday of the temperance movement in the 1920s.” Any system that old has calcified and needs rejuvenation.

But let’s be clear: there are three issues here and they can each be dealt with independently: breaking The Beer Store’s quasi-monopoly status; de-regulating wine and beer stores to allow sales in a wider range of retail and grocery outlets; and selling the LCBO (or breaking its monopoly). My own view is, simply put: yes, yes, no.

I would not break up The Beer Store – just make it easier for small, Ontario breweries to sell their products outside the Beer Store framework and make it easier for them to get placement in the LCBO.

By the same token, I’d do something similar for Ontario wineries: open up retail opportunities outside the confines of the LCBO and the existing but limited grocery-store wine shop system.

I wouldn’t sell the LCBO because it actually serves us better than a province of small, independent retaillers because it can bring in a bigger variety of product at a lower cost. I would just make it easier for Ontario products to get shelf space. (Although I would personally do some serious butt-kicking in the LCBO’s tequila-buying office to teach them how to select 100% agave products and get them on the shelves instead of the crappy mixto they like to stock…)

As for regulation solutions, my own preference would be to allow wider sales of Ontario-made wine and beer in other outlets. The qualifier being that the product must be manufactured in Ontario. I lean towards even more stringent restrictions: it must be made with Ontario produce, and not be a mix or blend of anything made outside Ontario (if that product is grown or produced in sufficient quantity). However, the administration might be cumbersome: we might have to make exceptions for things like hops, barley, yeast, etc. So at least it should be manufactured in Ontario. No imports.

While the CD Howe report makes many good points, I doubt it will spark an open debate at the government level. There’s simply too little interest within the Wynne cabinet to change the status quo and probably too much pressure from the corporate lobby to retain it.

* Association of Municipalities of Ontario; an organization to which the town belongs, that represents more than 400 municipalities across the province, except Toronto, which chose to quit, to go alone and not cooperate with the rest of the province. AMO hosts an annual convention, which I usually attend.

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