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.
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Canada Threatens Tariffs on U.S. Wine
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.
VICTORIA, BC. March 20, 2015 5 pm.
The “S.S. Liquor Policy Review” ran aground on a small island in Georgia Straight late Friday afternoon en route from Victoria to the mainland. Tragically, the ship took on water quickly and sank before rescuers arrived. The island is a known marine hazard and is clearly marked on charts of the area as “The Isle of Lack of Consultation”. Early indications are that the ship hit the island due to conflicting navigational information from its two onboard guidance systems, colloquially known as LDB Wholesale and LDB Retail. It appears that a software update known as “Flat Tax” had not been installed, which would have prevented the errors.
The ship went down with all souls aboard, including prominent socialites “BC Food & Wine Culture” and “BC Hospitality Industry”. Also lost was considerable cargo including 12 independent wine stores, the workable profit margins from hundreds of other retail stores and the business models from restaurants throughout the province. The captain of the ship was not aboard, having travelled from Victoria earlier in the day by a private sector helicopter.
Vessels from BC Ferries and Translink were in the vicinity but, unfortunately, were using the same faulty communications systems as the stricken ship and did not receive the distress call. Despite the enormous popularity of the route in its first year of operation, recent sailings had been plagued with mechanical difficulties causing a loss in confidence. Government appeared unprepared for the disaster and, thus far, has indicated that the route will not be replaced. A spokesperson stated: \”we have no backup plan … for the moment, consumers should make the trip from Victoria via Washington state or Alberta\”.
The BC Government has announced its initial rules regarding the sale of wine and liquor in supermarkets in this policy directive, Phased-In Implementation of Liquor in Grocery Stores, and this press release, Lottery Announced for Liquor Store Relocation. The rules and process are fairly complicated … and the ability of a supermarket to sell various types of liquor or wine, and the way that they sell them, will depend upon the license type that they are able to obtain via relocation. A lottery process is being established for relocation applications since the relocation of LRS and GLS stores will be subject to the 1 km rule (newly extended to GLS stores). The relocation of VQA or IWS stores will not be subject to the 1 km rule and do not need to be part of the lottery. The current documents do not refer to the issuance of new licenses for supermarket sales which has been referred to previously by government.
As has been widely reported in the mainstream media, the BC Government has revised its previously announced wholesale pricing formula (which would have significantly increased the prices for all wine over about $15 – see previous story) and replaced it with a new formula which is intended to \”align\” end consumer retail prices with what they are today (see press release: Minister\’s Statement on Wholesale Wine Prices for Industry). The announced change was a reduction in the second tier \”liquor board markup\” from 67% under the old formula to 27% under the new one … a significant change of 40 percentage points.
I have now analyzed the formulas and provide both wholesale and retail price comparisons in the following PDFs for wine at various price points under both the old and new systems: Price Comparisons $7-$12; Price Comparisons $15-$25 and Price Comparisons $30-$70. There are some interesting issues that arise from the comparisons.
Wholesale Prices for LRS Stores. If wholesale prices for wine are compared for LRS private retail stores under the old and new systems, it is apparent that wholesale prices will go down for all wine that currently retails for less than about $15 (see the PDFs for examples). In contrast, wholesale prices will go up slightly for wine that currently retails for $20 or more.
Wholesale Prices for IWS Stores and Government Stores. Wholesale prices will go up significantly for all independent wine stores as they will now be paying the same wholesale prices as LRS stores (i.e. effectively losing the additional wholesale pricing discount that they previously had). Government liquor stores previously did not pay wholesale prices at all. Under the new system, they will purchase at the same wholesale prices as both LRS and IWS private stores.
Retail Profit Margins for LRS Stores. Under the old system, the LRS wholesale discount was 16% off government store retail prices. This meant that if an LRS matched government store prices, its profit margin was 16%. However, this is a very thin margin for the retail business and most LRS stores chose to retail for higher than government store prices to create a healthier margin. Under the new system, the margin will be better for LRS stores for wines currently retailing for less than about $15. At the very bottom end of the price spectrum, margins increase to about 21-22% (based on current government store pricing). However, for wines that currently sell for about $20 and above, the retail profit margin is slightly reduced to between 15-16%. As noted this is a very thin margin. Grocery stores usually run on something in the 30% plus range. Most normal retailers run somewhere in the 40% plus range. Costco (likely the most efficient retailer in North America) runs on a 14% margin.
Retail Profit Margins for IWS Stores and Government Stores. IWS Stores previously had a 30% margin if they matched government store prices. Under the new system, their margin will be cut significantly to the numbers noted above for LRS stores. Government stores will also have to run on these same profit margins which would appear difficult as the declared operating costs for government retail stores are 17-18% (i.e. the operating costs of the stores may exceed the profit margin).
Predicted Effects on Retail Prices in LRS Stores. It is possible that the least expensive wine may get cheaper under the new system as wholesale prices go down somewhat for LRS stores at the lower end of the price spectrum. However, for wines above $20, wholesale prices increase slightly … so it may well be that pricing in LRS stores will not change much as stores seek to balance their profit margins across the price spectrum.
Predicted Effects on Retail Prices in IWS Stores and Government Stores. IWS Stores will have to raise their prices as their wholesale prices will go up significantly for every price point. The Government has indicated that end consumer prices in Government Stores will stay the same. However, for this to be achieved, the government stores would have to stick to a margin of 15-16% for wines above about $20. As noted above, this margin is below their declared operating costs and it would mean that the stores would lose money on these sales. It is possible that Government Stores may seek to shift their product mix to lower price points in order to create sustainable margins.
Restaurants/Bars/Hotels. Despite being some of the largest wholesale liquor customers in BC, restaurants/bars/hotels continue to be denied wholesale pricing. These \”hospitality\” customers still have to pay full retail prices and are restricted in terms of whom they can purchase from (government liquor stores and approved BC manufacturers such as wineries). The lack of a wholesale discount puts the hospitality industry at a competitive disadvantage as compared to our neighbours in Alberta and Washington state.
Move to Pre-Tax Pricing. Government stores have announced that they will change their shelf pricing to pre-tax pricing. It remains to be seen whether LRS and IWS stores will follow suit … although it would seem likely since this is the standard form of pricing for other retail sectors and there may be a \”psychological\” advantage to lower pre-tax shelf prices.
Two pieces of news today, both of which are good for DTC winery sales …
Firstly, the Nova Scotia government has sent out a message to stakeholders indicating that it will proceed with its previously announced plans to permit inter-provincial DTC shipment of wine to consumers in that province. The responsible Minister noted that the most frequent comment during a consultation process was that Nova Scotia should \”be a leader by adopting regulations to allow direct to consumer shipping of wine and encouraging other Canadian provinces to reduce interprovincial importation restrictions to help create an open Canadian market\”. The applicable legal changes are expected this year.
Secondly, in British Columbia, the LDB has announced that it will switch on April 1st from \”tax included\” shelf prices to pre-tax shelf pricing in all government liquor stores. Up until now, it had become the standard for all liquor retailers including wineries to also use \”tax included\” pricing. A switch to pre-tax pricing will be beneficial for winery DTC sales because the sales taxes on a DTC sale will vary depending upon the destination … and it was previously confusing for out-of-province customers to see web site pricing that included BC sales taxes.
The Saskatchewan government is in the midst of a consultation process to determine the future of its liquor retail system (which is currently mostly a government retail system with a policy of opening only new private stores). A web site has been set up that asks for citizen input (Liquor Retailing in Saskatchewan) and a number of options have been set out for the future (Future of Liquor Retailing). This PDF sets out the full history, analysis and options: Green Paper- Liquor Retailing. The options section is particularly interesting given the current proposed changes to BC\’s liquor retail system.