The Beer Store Debate & Ontario’s Policy Quagmire April 25 2014

By Charles Benoit

Seems like everyone who’s paying attention gets that Ontario is uniquely screwed up when it comes to beer retail. And thanks to the efforts of the OCSA, more and more people are paying attention, which is great. But how precisely do we fix that? And what about the Wine Rack? And of course, what about the LCBO?

To answer these questions, it helps to consider precisely how booze physically gets from point A to point B, and who’s doing that leg work. In this post I give an overview of beverage alcohol distribution (Part 1), the peculiar way it’s developed in Ontario (Part 2), and finally my own suggestions as to how to proceed from where we’re at (Part 3). Nobody’s paying me to write this, just trying to make a contribution to the debate.

Part 1: Won’t somebody please think about the children distribution?

There are three necessary components in the beverage alcohol game: (1) producers, (2) distributors, and (3) retailers. What does each of these look like?

  1. “Producers” should just be understood as brand/label-owners. The label owner may do their own production (e.g., they’re a winery/brewery/distillery), or they may source their wine, beer, or spirit from others.
  2. Distributors: the most overlooked yet crucial player in these debates. In every market, you need trucks and warehouses to get your bottles on to shelves. More accurately: you need licensed trucks and warehouses. In North America, every province and state may as well be its own country with regard to booze. There’s no national distribution network in either Canada or the United States. Producers may choose to self-distribute in their home market (if they’re allowed), or if they’ve become uber-established in a given market, but generally speaking producers rely on distributors to take their product off their hands, and certainly to expand their geographic reach. Distributors buy from producers by the pallet, break up those pallets in their own warehouses, and sell bottles one by one to retail accounts in their jurisdiction. This is an extensive ground game requiring lots of trucks and people. In a jurisdiction where government operates the sole distribution operation, as is the case for spirits in Ontario, an ‘agent’ can take on the responsibility to ensure that retail accounts are being wooed to place orders with the government-controlled warehouse and help facilitate the process.
  3. Retailers: Governments license bars, restaurants, caterers, etc. as On-Premise Retail. Off-Premise Retail licenses are for ‘to-go’ retail, e.g. liquor stores, grocery stores, convenience stores, or just some small-business owner who wants to open a specialty store.

In public debates, people focus intently on who will be doing the off-premise retail, but retailers can only retail what’s available to them – and booze doesn’t cross borders easy. So it’s equally important to figure out who’ll be there to distribute to the retailers. Many privatized states have allowed uncompetitive practices to result in a tight distribution cartel that keeps a stranglehold on what's available in the market, severely limiting retailers’ options. Retailers can only purchase from licensed distributors in their province or state. So a competitive retail space is nothing without a dynamic, responsive distribution network. And small producers absolutely depend on a fluid, dynamic distribution system.

Part 2: So how does it work in Ontario? How badly have we dropped the ball?

Badly. Post-prohibition, we passed the Liquor Control Act. Like all the provinces and a good chunk of the U.S., we created our own government-run distribution and off-premise retail network, the LCBO. That’s all well & good. But incredibly bizarrely, the province’s brewers were told they could create their own distribution and off-premise retail tier, so long as they did it as an opaque cartel. The Liquor Control Act specifically directed the Board of the LCBO to issue an off-premise retail license to Brewers Retail Inc. – this was and remains terrible, horrible policy. You know that Beer Store ad with the convenience store owner selling booze to the kids? That’s actually exactly how I pictured that meeting going down some 87 years ago, with the credulous c-store owner representing Queen’s Park and the kids representing the brewers.

So reflect on this for a minute: The Beer Store is actually an amalgamation of all three tiers: production, distribution, and retail. Except, while all brewers must strive to exist within that distribution and retail network, only the few biggest are in the driver’s seat. The province didn’t do much in the way of oversight for the one and only private distribution + retail beer license it issued. My guess is that ownership / voting rights in the Beer Store is a function of previous year’s sales volume, so inherently stacked. And note that I said one and only license, the LCBO isn’t a licensed private interest, it’s the peoples’ business.

What about the Wine Rack? This is a slightly different kind of screw up. Ontario, like other provinces and states, lets its wineries, breweries, and distilleries (real producers, not just any brand owner) have their own store where they can sell only their own offerings. This is a limited off-premise retail license. It's not part of any distribution network, the license is tied to the actual, physical production site. But at some point in the province’s history, Queen’s Park told Ontario’s most prominent wine producer, Vincor, that it could open many more off-premise retail stores all over the province. Other countries got upset enough to threaten trade litigation, and so Ontario promised it’d stop issuing off-premise retail licenses for stand alone stores. So I think the 160 Wine Racks we’ve got are the hard cap. I’ll just mention here: Vincor was bought by Constellation Brands (huge megacorp) back in 2006, so the Wine Rack is also foreign owned, and can only sell its own offerings. But I don’t like the foreign megacorp bashing; we as Ontarians are solely responsible for our cockamamie schemes, and pointing the finger at foreign companies means we’ve learned nothing. The Wine Council of Ontario has its own campaign called "My Wine Shop" to correct this absurdity.

Part 3: Where do we go from here?

I’m assuming that if you’re reading this, you’re well aware of the particular hardships the Beer Store imposes to stifle new entrants (I would sooner shutter my distillery than pay a four-figure listing fee just to get a case into some locker). But it wouldn’t matter if the Beer Store changed things at the margins. Bestowing economic power on select private actors to the exclusion of any competitive opportunity is a breach of our basic due process rights to equal protection under the law. This is about more than convenience, it’s about justice. Same goes for the Wine Rack – we just can’t have the economic landscape so tilted.

With that as a guiding principle, there are just two options: (1) have the LCBO subsume the Beer Store and the Wine Rack; or, (2) begin issuing more off-premise retail licenses. We can dismiss the first option right away – the province would have hell to pay and, as a kicker, the Liquor Control Act says the LCBO Board “shall” issue a license to sell beer to the Beer Store. Good news for option two though: current Ontario law grants all the authority needed for the Board of the LCBO and the Registrar of the Alcohol & Gaming Commission of Ontario (AGCO) to promulgate new license types, including off-premise retail. We don’t need new legislation!

The only equitable solution to the Beer Store / Wine Rack situation is to open up off-premise licenses for wine & beer sales more broadly to retailers. Some, like Ben Johnson, think the province should let craft brewers open their own version of The Beer Store. Now, Ben is a hero: perhaps the leading proponent of craft brewers in the province, a tireless advocate of encouraging Ontarians to try something new and explore everything that this province’s growing community of brewers has to offer. On this one issue of a Craft Beer Store though, I disagree with him. A Craft Beer store modeled after The Beer Store would have all the same problems. How would it be managed? One brewery, one vote? That’s anarchy. Based on contributions to the business? That just means a few (relative) giants will call all the shots. These things are serious problems when the business also controls distribution.

As to who’s eligible for off-premise retail licenses? Well that’s for Ontarians to decide. Grocery Stores? Why not! Convenience Stores? Make it a Dép! Pharmacies? I… I guess so? Most importantly though, I look forward to seeing new entrepreneurs opening up specialty wine and beer retail stores throughout Ontario: owner-operators passionate about what they sell and evangelizing to their patrons. Food for thought though: it’s normal and not a bad thing to put a limit to the number of liquor licenses on a city block, they have a habit of crowding out every other business with their margins. So to keep our barbers and hardware shops viable, a license stipulation often requires that there be no other off-premise license within 400 feet or some such distance. If this is to be the case, then for the love of the trillium give the preference for the independent specialty store. Small independent retailers can be much more responsive to consumer demand, and are more eager to differentiate themselves as opposed to offering a homogeneous consistent experience.

Part 4: Back to the Future with the LCBO

Given the preceding paragraph, you could be forgiven for thinking I was an advocate for abolishing the LCBO, but I’m not, for a bunch of reasons. For one, I think like many Ontarians, I’m just tired of seeing us dismantle our public infrastructure. We know us, we’d just end up trading it for a sack of trinkets, and somehow find out we owe billions to some foreign pension plan. Let’s look at the long game here: all those warehouses of provincial booze are going to come in mighty handy when our creditors start asking us for collateral to back up our IOUs with something beyond good intentions.

Kidding aside, for new producers, I think there’s something of a benefit to starting in a controlled jurisdiction. A government retailer with a fixed markup isn’t going to twist your arm or engage in tough negotiations, whereas a private distributor is going to have a definite view about what your retail price should be and what percentage of that price should go to them. So when you’re just starting out, the government retail operation isn’t going to bust your balls. Later on when you’re ready to move to a non-control state, you’re in a better position when you negotiate that first contract with your private distributor. The flip side, of course, is that you’re on your own in the control state, whereas the private distributor is a partner in building a brand. But from my perspective, at the outset you’re already basically on your own all the time anyway, so you’re used to that, but a tough negotiation with long-term effects isn’t  something I’d relish early on.

One other pro-LCBO point to consider: we have an insanely high 140% markup on spirits in Ontario. I can’t stand it both as a consumer and producer. BUT, with each and every bottle representing a not insignificant amount of government revenue, there’s a case to be made for keeping it close. The LCBO is pretty crucial when it comes to revenue collection, the Ministry of Finance’s markup policy has flaws, but thanks to the LCBO they can actually execute it and collect on it. If we didn’t have the LCBO, but maintained our liquor taxes, we’d have to militarize the AGCO, who’d in turn have a never ending series of joints that needed busting.

LCBO branded scotch whisky

There is, however, one big change I’d like to see at the LCBO. Speaking as a consumer, a producer, and a taxpayer, I’d like them to get back into the business of bottling their own branded spirits. As I noted at the beginning, many “producers” don’t own or operate actual production facilities, but simply source their spirits from distilleries that supply spirits in bulk for private labels. There’s tremendous whisky and other spirits being made at many of these distilleries. In fact, there’s exceptional Canadian Whisky out there that’s not even marked as Canadian! As a consumer, I’d love to see the LCBO use its buying power to travel the world securing the best barrels to bring home to Ontario while cutting out the marketing middlemen. I’d also love raw transparency regarding grains and mash bills. Ontarians would become the most knowledgeable whisky drinkers anywhere. And hell, if the LCBO can pull this off right, it might find demand outside the province, and now we’ve got a real Crown-Corp money maker. Costco sells its own branded spirits where it can, including Canadian whisky, and even CVS Pharmacy in the U.S. has its own private label Canadian Whisky! My producer point-of-view: as the co-founder of a true on-site production distillery, and just generally with what we’re trying to do at Toronto Distillery Co., I think the more that consumers ask questions about the origins of their whisky, the better the landscape for us. I think LCBO-labeled spirits have the potential to educate consumers while bringing great offerings to market with maximum public benefit.

If you enjoyed this post or at least found it informative, then may I suggest heading down to one of these LCBOs and picking up a bottle of Batch #2 of our Organic Ontario Wheat, thanks!