WineLaw.ca

The 6th annual BC Wine & Liquor Law Conference is set for February 23rd in Vancouver, BC. This is an exciting year for the conference because a raft of significant changes to BC\’s wine and liquor policies are scheduled to come into effect shortly. We will provide an update on these changes including detailed discussion of upcoming reforms to BC\’s retail environment, wholesale pricing structure and distribution system, all of which are planned for April 1st. We\’ll also discuss developments in the branding and marketing sector as well as issues related to succession planning for wineries. New for this year, we have also included a panel on issues related to raising capital. Full schedule and registration information for the conference is here: BC Wine & Liquor Law Conference 2015.

Please note that those employed in the wine and liquor industry are eligible for a significant discount in the conference fee – a reduction from $645 USD to $300 USD. The conference always sells out so please register early!

The BC Government issued a press release today indicating that its model for the sale of BC wine on regular supermarket shelves will apply to any wine made from 100% BC grapes, rather than be limited to VQA products. This model is scheduled for introduction on April 1st, 2015. The release indicates that existing VQA stores and independent wine stores may relocate to supermarkets, although there are likely to be no takers on the latter offer since a condition is that they limit sales to BC wines (IWS can currently sell all types of wine). Apparently, a \”limited number\” of new licenses will also be issued for supermarket sales.

The press release does not mention how the above model complies with Canada\’s international trade obligations. It is my view that this model is not compliant with NAFTA, GATT or the EU-Canada Agreement on wine sales.

(UPDATE: I am hearing that the following pricing model may be adjusted … however, there has been no confirmation of that yet.) Here is a short summary of the proposed changes to wholesale pricing for BC set for April 1, 2015 with some new examples. Some information has been circulating that the price projections presented here earlier (Liquor Law Changes 2015) were \”speculative\” and that \”end consumer prices would not change\”. I respond to those claims below.

On the first point, the price projections are estimates but they are not speculative in the sense that they are mere guesses. They were based on the pricing formula that has been publicly released and confirmed by the LDB. Any end consumer price projection that is based on wholesale pricing needs to assume a retail profit margin. These estimates were made assuming profit margins equivalent to the current 16% margin for LRS stores and the 30% margin for independent wine stores. The 16% margin is actually a very low assumed profit margin given that the declared operating costs for LDB retail stores are 17-18% and that Costco, probably the lowest margin retailer, works on 14%. As a result, please note that the low end price projections, in my view, are an absolute best case scenario. The price increases will likely be in the higher end of the range because most retailers would use a margin of greater than 16% (e.g. BC LDB stores would lose money at 16% because their operating costs exceed the margin).  

In respect of the latter issue, it is my view that it is not possible for end consumer prices to stay the same for medium to high priced wine using the new pricing formula (nearly all retailers that I have spoken to agreed with this conclusion).  The wholesale markup (liquor taxes) on medium to high priced wines will increase substantially for all wine above a wholesale cost of $8.81 per 750 ml bottle. Indeed, for some higher priced wines such as those listed below, the new BC wholesale price will actually exceed the current pre-tax retail price! It is not possible to increase wholesale prices substantially without having an effect on retail pricing.

The following examples provide cost comparisons for some relatively well-known high end wine products, showing a range of projected prices between the 16% and 30% retail margins:

And this table provide some cost comparisons for relatively well-known medium priced wines, again showing a range of projected prices between the 16% and 30% retail margins:

In the chart above, note the substantial increases in wholesale prices for BC retailers, the fact that those wholesale prices are far higher than Alberta wholesale prices, and the substantial increase in end consumer pricing. As a result, there will likely be price increases at the high end of at least 25-30%, probably much more. I\’ll add some medium priced wine examples shortly.

(UPDATE: I am hearing that the following pricing model may be adjusted … however, there has been no confirmation of that yet.) The BC Government announced a new wholesale pricing model for wine today, which will become effective April 1, 2015. On the same day, BC will start limited supermarket liquor sales as well as introducing changes that are intended to \”level the playing field\” between government retail stores and private liquor retailers: press release on liquor changes is here.

The new wholesale pricing model will mean that all retailers (government and private) will pay the same wholesale price when they purchase liquor from the wholesale arm of the LDB. At the present time, private retailers pay different prices depending upon their license type. Government stores don\’t pay wholesale prices at all because their revenue is simply blended between their retail and wholesale divisions. Under the old model, the LDB applied a 117%/51% markup on wine to generate a fixed retail price which was used as a reference point for all retail sales. Under the new system, the LDB will apply an 89%/67% markup on wine to generate a wholesale price – retailers will then be free to set their own end retail prices once they add their own markups.  

See my Liquor Changes (2015) Chart for a first attempt at creating comparison pricing between the old system and new system.

The full text of the Canada-EU Trade Deal (usually known as CETA) has now been released. As reported earlier (CETA Not Likely to Affect BC Wine Industry), it appears that the deal will have little consequence for the BC wine industry. Generally, existing distribution and pricing practices for BC wine are continued under the deal. Earlier leaked text indicated that BC would be allowed to operate up to 60 private retail wine stores that provided preferential treatment for BC wine (these are the current VQA stores and tourist wine stores). The leaked text was accurate and the final text provides the same thing. The limit does not apply to the vast majority of BC\’s private liquor stores which sell a range of products from various countries. The limit of 60 is, in fact, greater than the number of such stores that are currently operating (which is about 20). As such, CETA preserves the existing exclusive distribution channels for domestic wine in these private retail stores and it also preserves the ability of wineries to sell from their own tasting rooms (direct delivery). The agreement does contain an agreed objective of eliminating the \”differentiation of provincial mark-ups applied on domestic wines and wines bottled in Canada in private wine outlets\” … however, this objective was contained in earlier agreements with the EU and contains no concrete implementation targets other than a review in 5 years time.

The BC Government has unveiled some of the rules relating to the forthcoming sale of wine in supermarkets in BC, which is slated for a spring 2015 start. As reported earlier, there are currently two sales \”models\” that are proposed. The first model is for \”store within a store\” sales such that an existing private or government retailer would be able to move inside a supermarket\’s floor space so long as the liquor sales were conducted in a segregated area with separate cashiers. The second model is proposed to permit the sale of 100% BC wine on regular supermarket shelves, for sale through designated regular checkouts. The new announcement (BC Takes the Next Step Towards Liquor in Grocery Stores) indicates that eligible stores must be at least 10,000 square feet and must have approximately 75% of their sales coming from food products. These restrictions will mean that liquor sales may take place, for the most part, only in \”traditional supermarkets\”. Convenience stores and smaller food stores will not be eligible for alcohol sales as they will not meet the square foot requirement. In addition, the 75% requirement would exclude Wal-Mart and Costco, both of which hold large chunks of the grocery market, but neither of which would meet the 75% figure (each is about 50-55% for food sales). In addition, and as noted earlier, the 1 km distance separation requirement will remain in place … which will mean that BC supermarkets will only be able to sell liquor if they purchase and move the licenses of any existing liquor stores that are located within 1 km of their stores.

Also, the press release noted that grocery and liquor stores will be permitted to \”co-brand\” (this is currently not permitted), that there will be no minimum requirement for the space allotted to liquor sales within a supermarket, and that further details regarding wholesale pricing reform and the supermarket sales models will be released during winter 2014-15. The final reforms are expected to be implemented in spring 2015, including the launch of supermarket sales, a \”level playing field\” for government and private liquor stores, and a complete re-write of the Liquor Control and Licensing Act.

The BC and Saskatchewan governments have announced that their borders will open for direct to consumer liquor shipments (see: Dill Pickle Vodka for All, BC and SK open liquor borders). BC\’s borders were previously open for wine only. Saskatchewan\’s were closed for all liquor products. Wine DTC shipments between the provinces will be allowed by the end of this year with other liquor being added in 2015. In addition, as reported yesterday, Premier Wynne of Ontario has also indicated that she would like to implement a similar deal in the near future. This is obviously great news for BC wineries as progress is finally being made on the efforts to reduce interprovincial barriers for the wine business. Nevertheless, it remains unclear how these developments will affect FedEx\’s decision earlier this week to halt interprovincial wine shipments.

FedEx notified BC wineries earlier this week that it has stopped accepting interprovincial direct to consumer shipments of wine other than to destinations within BC or Manitoba. It is unclear whether this development is related to earlier reports of FedEx being charged in Newfoundland for shipping wine into that province (see: FedEx Charged in Nfld for Shipping Wine). In addition, media reports today have indicated that a deal may be close that would allow the interprovincial shipment of wine between Ontario and British Columbia: see Wynne, Clark Announce Ontario BC Wine Deal is Near. More details will be posted as they become available.

A wide ranging report from Ontario\’s CD Howe Institute is calling for an end to Ontario\’s monopoly based liquor distribution system. The report indicates that Ontario\’s current system does not serve consumer interests and actually prevents the provincial government from maximizing its liquor revenues. The link to the report is here (PDF): Uncorking a Strange Brew. The report has also garnered substantial media attention including these articles: Liquor monopoly keeping revenue from Ontario and Time to end retail alcohol monopolies. The provincial liquor monopolies are also preventing the free trade of wine and other alcohol between provinces by creating barriers to inter-provincial trade.

Some recent media reports have speculated, based on leaked text, that the trade agreement between Canada and the EU (the Comprehensive Economic & Trade Agreement, more commonly referred to as CETA) may affect or restrict the BC wine industry (see: Canada\’s Wine Industry May Face Restrictions). It is not possible to comment with certainty until such time as the official text of the agreement is made public. However, based on my reading of the leaked text, it is unlikely that CETA will have any significant effect upon the BC wine industry. The media reports focused on the fact that CETA may limit the number of private outlets that sell wine. In respect of BC, the supposed limit is set at 60 of such stores. However, this restriction only applies to stores that sell exclusively Canadian wine (in BC, these are the VQA stores and a smaller number of tourist wine stores). The limit does not apply to the vast majority of BC\’s private liquor stores which sell a range of products from various countries. The limit of 60 is, in fact, considerably greater than the number of such stores that are currently operating (which is about 20). As such, CETA preserves the existing exclusive distribution channels for domestic wine in these private retail stores and it also preserves the ability of wineries to sell from their own tasting rooms (direct delivery). As a result, there appear to be very few effects on the BC wine industry. CETA may, in fact, provide benefits to BC wineries that use European products in their manufacturing processes as any Canadian tariffs on those products will be removed. Some media outlets correctly reported that there will likely be little effect: see Leaked Document of Canada EU Trade Deal. And see this previous article on the trade agreement.