Month: May 2012

On Tuesday, there was a historic opportunity for the House of Commons to vote on and pass Bill C-311 which would amend the 80 year old law that prohibits the inter-provincial shipment of alcohol so as to allow the shipment of wine in certain circumstances (a personal use exemption). The passage of this Bill would provide great benefits to Canada\’s thriving wine industry and to Canadian wine consumers who have long suffered under a prohibition era rule which makes it illegal for them to order wine from another place within their own country. The Bill was thought to have all party support and the wine industry was excited that finally it would be rid of an archaic law which has no place in modern society. Unfortunately, the historic opportunity to fix this was delayed when a number of federal NDP MPs created a fillibuster and used up all of the time allotted for the Bill, thus preventing the vote (see story: BC wineries shackled by NDP MPs). Since the House will break for summer recess shortly, any further progress in the Bill could have been delayed until at least the Fall. Fortunately, Nova Scotia Liberal MP, Scott Brison, stepped in to save the day by providing more time for Bill C-311 next week on June 6th. The NDP has subsequently apologized for the fillibuster, claiming that it arose from a \”communications error\”. Happily, it now appears that all-party support has been restored and that the Bill will pass next week and head to the Senate. The Globe provides coverage of the story here: Proposed Changes to Wine Law Back on Table in Ottawa and CBC also has this story: Canadian Wine May Flow More Freely if MPs Get Their Way.

Good news despite yesterday\’s set backs (see: NDP Delays Wine Shipping Law Reform). Liberal MP, Scott Brison, has saved the day by stepping in and providing more time for Bill C-311 next week. Hopefully, the Bill will now pass before summer recess. Thank you, Scott Brison.

An opportunity to reform Canadian wine shipping laws (see earlier story: Canadian Wine Shipping Law Reform Comes Closer) was lost today when federal NDP members used up all of the allotted time for debate on the Bill and prevented a vote in the House of Commons. The sponsor of the reform Bill (C-311), Dan Albas, had implored the House to pass the Bill today in order to help the Canadian wine industry and Canadian wine consumers. Passage of the Bill would have amended the 80 year old post-prohibition law which prevents the shipment of wine between provinces for personal use. Unfortunately, due to the delay, the Bill will now likely be delayed until at least the Fall.

This week is a significant one for the reform of wine distribution and regulation in the Pacific Northwest. It\’s interesting to look at the changes that are happening in the neighboring jurisdictions of British Columbia and Washington state, particularly as those changes relate to the modernization of regulatory frameworks that stem back to Prohibition. Here\’s a summary of what\’s happening.

Washington State. On Friday June 1st, Washington will completely privatize its liquor distribution system, moving to \”open state\” status after decades of being one of a diminishing number of \”control states\” in the U.S. (for more info, see Tom Wark\’s article: Should Alcohol Bureaucrats Be Dissing the Will of the People?). Up to now, Washington maintained overall control of liquor distribution in the state through the use of government wholesale distribution warehouses and by restricting the sale of spirits to government operated liquor retail stores. Beer and wine, however, has long been available in grocery stores and private retailers following earlier reforms. The new system, which was mandated by last November\’s successful Initiative I-1183, will remove all government participation in the wholesale and retail liquor business. Instead, Washington state will move to becoming a tax collector and regulator, functions that lack the conflict of interest inherent when the state is also involved in the business that it is supposed to be regulating. The taxation/regulation function is the system that nearly all governments in the world follow, particularly those where there is no legacy of Prohibition.

The New York Times ran an excellent story on the switch-over yesterday, which notes that there may actually be a \”dry\” period in some areas of a few days this week during the transition: A Taste of Prohibition As Liquor Stores Go Private. No doubt, there will be much commentary and analysis after the fact on the impact of the changes. However, for consumers, the major questions center on pricing and selection. Washington consumers currently enjoy beer and wine prices that are often about 50% less than those in B.C. However, their spirits prices, while lower than in B.C., are higher than in other U.S. states, particularly those in California. Initiative I-1183 requires the introduction of new percentage based state licensing fees for spirits at both the wholesale and retail levels which were projected to increase state liquor revenue by 50%. Come Friday, consumers will be able to see whether those fees have increased end pricing at retail and/or whether competition has had an effect. It may be difficult to separate these factors in any analysis of price changes. 

British Columbia. Here in Canada, changes are also on the horizon, albeit of a different nature from our southern neighbor. On Tuesday May 29th, Bill C-311 (which would amend the Importation of Intoxicating Liquors Act to permit the inter-provincial shipment of wine for personal use in certain circumstances) will return to the House of Commons for third reading and, hopefully, a final vote before heading to the Senate. If and when this Bill passes, Canada will finally jettison its Prohibition-era constraint on shipping wine from one province to another: a problem that has been mostly solved in the United States through two decades of reform efforts and one very influential Supreme Court decision (Granholm v. Heald). This federal level change would be hugely beneficial to the expansion of the Canadian wine industry and the development of Canadian food and wine culture in general.

At the provincial level, the Government of B.C. is also in the process of re-examining its liquor distribution system. The Government has already passed some smaller reforms including caterers\’ licenses and has mused about joining the civilized world by permitting corkage (which is currently illegal). However, the biggest possible change is the \”Distribution of Liquor Project\” (DLP) which essentially asks private companies to bid on the management of the government wholesale distribution system and also to provide ideas on how to re-structure it. However, B.C. has chosen to look to Alberta for the distribution model for the DLP rather than Washington. The DLP proposes that BC replace the \”government monopoly\” distribution system with a single private operator under contract to the government. This type of modified \”control state\” structure was rejected in Washington and the process in B.C. has already been criticized by various groups here. However, while the DLP will reduce competition at the wholesale level, it does provide an opportunity to address many structural problems in the current government run system including supply chain inefficiencies, limits on product selection, conflicts of interest and a byzantine wholesale pricing model. B.C. consumers have been negatively affected for decades by these problems, which along with excessive levels of taxation, have resulted in some of the highest prices for wine in the western world. It is currently too early in the DLP process to comment on any possible effects on pricing.

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The bottom line on these changes is an interesting comparison. Washington will now join the majority of the world by rejecting the Prohibition-era control mentality and becoming an \”open or free state\” with respect to liquor regulation. British Columbia, on the other hand, has chosen to update the control mentality a bit rather than jettison it. B.C. will remain as a \”control state\” albeit one that may become more efficient. In both jurisdictions, the ultimate success of any changes will ultimately be judged by consumers (and voters) on the basis of pricing and selection. We\’ll have to wait to see on that one in both places … although answers from Washington may come as soon as this Friday.

Bill C-311, which would amend the Importation of Intoxicating Liquors Act to permit the inter-provincial shipment of wine for personal use in certain circumstances (see earlier story: Reform Process for Wine Shipping Law Begins) will return to the House of Commons in Ottawa this Tuesday, May 29th. The Bill will then, hopefully, receive third reading and pass a final vote in the House before it goes to the Senate (see this update from its sponsor, Dan Albas MP). A rally to support the Bill was held at Poplar Grove Winery in Penticton this past Friday with Dan Albas, and BC Premier, Christy Clark, both in attendance (see Politicians Rally Around Wine Bill).

It is important to remember that the amendment, if and when it becomes law, will permit each province to define the amount of wine that is a reasonable amount for personal consumption. As a result, if real progress is to be achieved, it is essential that the provinces set realistic limits for what is a reasonable amount. As one of two leading wine producing provinces (and as the only one that is actively supporting this Bill), British Columbia is in a unique position to take leadership on this issue and to establish a precedent for the other provinces in advance. It is hoped that British Columbia will act soon on this matter. I have long argued that the limit should be 24 cases per person per year. This limit is almost the same as the 2 cases per person per month limit that they have in Oregon (both CA and WA have no limits for personal consumption). However, an annual limit would more easily accommodate wine tourism since occasional visitors would be able to take advantage of the larger exemption available on a fewer number of seasonal trips.

British Columbia is seeing rising support for its wine laws to be changed so as to permit corkage (allowing customers to bring their own wine into restaurants for service with a meal). Corkage is permitted in many jurisdictions including our neighbours, Alberta and Washington, and is generally regarded as being beneficial to a thriving food and wine culture. Tinhorn Creek winemaker, Sandra Oldfield, hosted a \”BC Wine Chat\” on twitter on Wednesday evening which was so active that it registered as a trending topic in the region: see Globe and Mail story \”You\’ve Gotta Tweet For Your Right to BYOB\”. This morning, CBC radio covered the story, with Sandra advocating for change and with Ian Tostenson of the BC Restaurant and Food Association also indicating that his organization supported change. Tostenson indicated that he expects government to act in this matter \”soon\”.

Update (May 28, 2012): The Minister Responsible for Liquor, Rich Coleman, stated on CKNW over this past weekend that it was likely that the government would act on this issue within the next 30-60 days.

The history of the BC wine industry has included many extensive debates surrounding the use of the \”VQA\” certification for wine, which was originally designed to provide a quality indicator for consumers of BC wine. Many wineries are part of the VQA program but others (mostly smaller producers) have opted out. The requirements for the use of the VQA certification are currently contained in the Wines of Marked Quality Regulation. The VQA debates have surfaced again as some wineries have raised issues with respect to the propriety of VQA standards relating to packaging, varietals and taste tests (the latter of which has probably been the subject of the most debates since inception). On packaging, the current VQA rules only permit packaging in glass bottles. Some wineries (such as Summerhill and Okanagan Crushpad) have sought to use other forms of packaging in an attempt to address consumer demand particularly as it relates to the environment and a wine\’s shelf life after opening. However, these wineries have been unable to apply for  VQA designation for wines packaged in alternative formats (such as bag-in-box) even though the same wine is also sold in bottles with VQA certification. The VQA rules also prevent certification for wine made from any grape varietals that are not contained in Schedule 5 of the Regulation. This has presented a problem for wineries such as Terravista Vineyards in Penticton which is making a tasty wine from the Spanish varietal, Albarino, which does not appear on the list. Finally, of course, the taste test issue has re-surfaced again (how could it not?): read Chris Coletta\’s interesting post on all of these subjects (It\’s Time for the BC Wine Industry To Do Some Fresh Thinking) along with Tom Di Bello\’s comments.

The BC government’s decision to privatize the wholesale operations of the BC LDB (BC’s government liquor monopoly) represents an opportunity for reform of the current liquor distribution system. The project has been named the “Distribution of Liquor Project” (DLP). Information sessions on the DLP were held last week. Many aspects of the DLP remain undefined as it is using a \”negotiated request for proposal\” process under which the government is essentially asking companies to bid on the management of the wholesale distribution system and also to provide ideas on how to re-structure it. There is little doubt that the current system needs fixing. Here’s a summary of some of the most obvious problem areas where the DLP might provide changes.

Supply Chain Efficiencies and Delivery Times. Under the existing system, a case of wine entering BC is handled too many times as it goes through the supply chain from producer to consumer. The DLP proposes to consolidate the liquor storage warehouses with the LDB distribution warehouses, thus removing unnecessary elements of transport and warehousing from the system. This change would reduce costs within the system and be more environmentally friendly. It should also mean that product can be delivered directly from the single warehouse to the licensee, reducing delivery times and making management of stock easier for all licensees.

Control Over Imported Product. The current system requires that importers work with the LDB every time that they wish to order product into the province. This requirement means delays of days, weeks or even months while purchase orders are approved. The DLP would see the LDB entirely removed from the purchasing process. Importers could order what they want, whenever they want, without delays. In addition, the importers would own and control their product entirely at the wholesale level, restoring a more normal degree of business operations to the wholesale supply chain.

Product Selection. The current system limits the distribution of many products, in particular those wines which are exclusive or which are imported in smaller amounts (\”Spec\” products). Such products are currently held in warehouses to which no one has access (not even the importer), and cannot be “released” until they are ordered by a retailer or other licensee customer. Since there is no freely available listing of these products, no access to them, and since they can’t be ordered in anything but full cases, many languish in the warehouse for far too long, which drives up costs and reduces selection. This system will likely change as a result of the DLP … hopefully with a new process that will improve access to product and make ordering easier.

Conflict of Interest. The LDB has an obvious conflict of interest in the current system since it acts as the wholesaler for all licensees in the province and also runs a chain of retail stores with which the private stores compete. This conflict has been the source of many complaints over the years. The DLP changes things such that a new private operator will run the wholesale distribution business. While the new private operator will not be completely independent of the LDB … it has been stated that all wholesale customers will be treated equally and that the LDB stores will just be one of many wholesale customers of the new operator.

Wholesale Pricing. At present, BC has an unusual wholesale pricing structure for wine (and all liquor) which is based on a “backwards” method of determining wholesale pricing by using an inconsistent array of “discounts” which are based on the full retail price charged in LDB stores and which vary wildly by license type (e.g. restaurants get 0% discount, thus paying full retail price for all wine, while private retailers get between 10% and 30% off the prices of their main competitor depending upon what type of license they have). This system prevents competition and results in hospitality industry wine pricing which is way out of line with neighbouring jurisdictions. The DLP is presently silent on reform of the wholesale pricing structure, but it would make sense for government to also fix this system at the same time. The minister has previously indicated that government will do this and create a “level playing field” for all licensees. However, it remains to be seen if and how this will be accomplished. The implementation of a normal wholesale pricing system as part of the transition would likely be the most beneficial long term change that the government could make.

Retail Pricing. BC currently has very high retail prices for wine by global standards due primarily to high taxation (markups) and secondarily due to a lack of competition plus inefficiencies in the system. There is currently insufficient information to make any predictions upon the DLP\’s effect (if any) on retail pricing.

Competition. As in any area of business, competition generally results in lower prices. While BC has a mixed liquor retail model of government and private stores, there is very little real competition because of the wholesale pricing model described above (under which the LDB essentially controls pricing throughout the system) and because of various government policies which limit the issuance of new retail licenses. If the DLP results in changes to the wholesale pricing structure, then there might be some increased competition at the retail level. However, it seems unlikely that the government would alter the retail licensing model to issue additional licenses. On the negative side, the DLP removes competition at the level of liquor warehousing since it will replace the current system of multiple liquor storage warehouses with a single operator. 

The DLP has a short time line for completion with April 2013 being the transition date to a new system. It will be interesting to see how the process develops and whether the potential for reform and improvements is realized. Let’s keep our fingers crossed.

The BC Government has announced that caterers will be granted their longstanding wish for liquor licenses: Caterers To Be Licensed to Serve Alcohol. If you are interested in the exact legislative changes that accomplish this, they are contained in the Miscellaneous Statutes Amendment Act No. 2 (2012) starting at section 30.

The BC government has issued its RFP (\”request for proposal\”) which relates to the the privatization of the wholesale distribution of liquor within British Columbia: NFRP: Distribution of Liquor Project. Here are a few observations following my review of the RFP (I have not reviewed the appendixes which require a signed indication of intent to bid):

• The RFP is structured such that BC would basically adopt the same wholesale distribution model that is used in Alberta (currently operated by Connect Logistics). Unlike Alberta, our retail model would still include government liquor stores.
• The BCLDB\’s existing \”liquor warehouse program\” (which has a few operators, the largest of which by far is Containerworld) coupled to the LDB distribution warehouse would be replaced with a single consolidated distribution business operated by the winning bidder. See supply chain flow chart on p.21 of the RFP.
• Agents (importers) will not have to get approval from the BCLDB to issue purchase orders. See p. 22 of the RFP.
• The BCLDB will no longer own product that is routed through the supply chain (currently it owns product routed through the LDB distribution warehouse). In the new model, the agents will own all product until it is sold to any customer (either a private licensee or a government liquor store). See p. 22 of the RFP.
• The \”direct delivery\” system for BC wineries will remain. See p. 22 of the RFP.
• The RFP does not deal directly with any potential changes to the wholesale pricing structure and markup system. Reform of the wholesale pricing system (and particularly the creation of a \”level playing field\” of wholesale prices) would probably be the most beneficial change that government could make. The responsible Minister has previously stated that this would occur: see Changes Coming to Liquor Wholesale in BC. Nevertheless, while it would make sense to tackle this issue at the same time, such changes would constitute a marked departure from past practice and it is not clear how this would be accomplished (or if it is even part of the contemplated changes).
• The \”service commencement\” date for the new regime is April 1, 2013 (shortly before the next fixed election date).
• The consolidated warehouse system would likely mean improvements in service for importers and licensees with faster delivery times and a more streamlined ordering process. Consumers may also see a better selection of products in the marketplace. However, it remains to be seen what, if any, effect there will be on retail pricing. In addition, it appears that there will be no competition at the wholesale warehouse level … which means that everything is on the line for those companies that are bidding. Alberta\’s rationale for adopting this type of system (whether you agree or not) is contained here, particularly in the 2009 report: AGLC Industry Reviews & Studies. Washington state rejected this type of system when initiative 1183 passed in the November 2011 elections.

Update (May 8, 2012): Business in Vancouver has a story on this issue today: Logistics giant targets lucrative LDB contract.