Has pressure on the British Columbia government finally passed a tipping point to force true liquor policy and regulatory reform?

 

The British Columbia government finds itself in a real bind on liquor policy. Pressure on it has been mounting, among industry stakeholders and within some of Canada’s most weighty institutions. The admirably blunt January 17, 2019 Competition Bureau letter adds to three other significant recently-applied pressure points on B.C. to properly reform the province’s liquor wholesaling, distribution and retail system.

These pressure points are:

  1. The USMCA (or “NAFTA 2.0”) Side Letter (October 1, 2018) commits Canada (meaning British Columbia) to rectify its preferential treatment concerning wine-in-grocery by November 1, 2019.
  2. The B.C. Liquor Distribution Branch (LDB) Manager of Wholesale Operations issues an extraordinary “mea culpa” Release to wholesale customers (August 2018) with unsubstantiated explanations about inexcusable product delivery delays.

The opening of the LDB’s new Delta warehouse appears to have worsened the problem, not improved it (amid heightened levels of frustration reported by restaurants and some retailers). Delays extended through the busy December season. According to the Business Technical Advisory Panel Report (discussed below), order fill rates for “Non Stocked Products” or “spec” products dropped from 91% to 88% between fiscal 2017 and 2018, with some products taking approximately two weeks to ship.

  1. The B.C. government is in receipt of (April 30, 2018) and subsequently publicly releases the Report of the Business Technical Advisory Panel, which was established by Attorney General David Eby and chaired by Mark Hicken. The Panel was expressly tasked to present advice and recommendations to improve efficiency, fairness and outcomes in B.C.’s liquor system. (I was pleased to both provide a submission and present in person to the Panel in spring 2018.)

The Report presents several very practical recommendations that – if implemented together – will go a reasonable distance to addressing the systemic issues that have plagued the wine and liquor industry in B.C. for decades.*

And most recently, the bombshell:

  1. Canada’s Interim Competition Commissioner writes an impressively frank letter to B.C. Attorney General Eby (January 17, 2019) to urge him to incorporate competition principles into B.C.’s liquor supply and distribution, and to complete the work of properly reforming B.C.’s liquor system.

Competition Bureau letters (especially public ones) are typically the culmination of painstaking confidential investigations, often taking months. It is highly likely that B.C.’s unbalanced liquor distribution and retailing system has been on the Bureau’s radar for the better part of a year.

 

This latest development could be a Christmas-in-January present to those whose business viability depends on significant reform to the way wine and other liquor products are imported, warehoused, distributed and sold to wholesale and retail customers in this province.

The BC government has a problem on liquor policy. Is the Interim Competition Commissioner’s letter a tipping point? And if so, what changes could it signal?

 

Wholesale Problem, Wholesale (aka Comprehensive) Solutions

It is helpful that the Competition Bureau references and endorses the spirit of the Business Technical Advisory Panel recommendations: it lends additional credibility to an already very sound Report; and it nudges the Attorney General to take a close look at implementing those recommendations (over politically motivated objections from traditionally supportive stakeholders) to alleviate pressure on both the LDB Warehouse debacle, and bringing B.C. into line with accepted principles of fair competition and appropriate access for consumers to wine, beer and spirits (including bringing B.C. into compliance with Canada’s World Trade Organisation obligations).

In other words, the A-G has a near-perfect storm to deal with on the liquor file (notwithstanding the distractions of the launch of recreational cannabis) which demand attention in the very near future. He therefore has the perfect opportunity to address the above challenges comprehensively, rather than piecemeal, as governments have done in the past. The Advisory Panel Report describes the regulatory setting of the overall liquor supply system as a “lifeline” between public policy and the proper and healthy functioning of private operators in various parts of the system. When it is out of balance, then the industry as a whole is adversely affected. My view has always been that the liquor supply system in BC is akin to a ball of yarn, and that if one part is picked at without addressing the effects on the rest, then the whole ball is bound to unravel – not least because of the disproportionate power held by the government monopoly in the form of the BCLDB. Previous examples bear this out: the aborted reform of the distribution system in 2011-12 under then Minister Rich Coleman, and more recently the incomplete introduction of the wholesale division under Premier Christy Clark and then Minister Suzanne Anton. Rather than fix a perceived problem, these narrow measures in fact introduced new inequities and imbalances into the overall liquor supply system.

 

What are the right policy changes?

The best steps A-G Eby can take in the coming months to properly implement a fully-reformed BC liquor supply system (mainly drawn from the Panel Report and my submission) are:

Governance. The structural conflict of interest between the LDB Wholesale and Retail divisions must stop. It does not measure up to the standards of sophisticated regimes in other jurisdictions, and gives rise to game-playing and predatory inventory strategies described in the Panel Report. These in turn give rise to concerns raised in both the Competition Bureau letter and by private wholesale customers like restaurants and retailers. Completing the separation between Wholesale and Retail divisions is essential, with transparent business practices demonstrating that private operators are not disadvantaged by government operated B.C. Liquor Stores. A good litmus test would be if, in future, the Manager of Wholesale Operations has to reassure private retailers that they are not “second in line” behind government Liquor Stores in order fulfilment (as he did in August 2018), more private customers would actually believe it.

Wholesale Discount for Restaurants and Bars. This was a significant and (unsurprisingly) unanimous recommendation by the Panel. So many facets of the industry have called for this since the 2015 introduction of wholesale (which excluded restaurants and bars) that it is essentially a no-brainer. Two alternative models are discussed in the Panel Report: either a flat wholesale price applicable to hospitality (restaurants/bars) and retail, or a “cost plus” approach with the price set by reference to the retailer wholesale price.

Hospitality Customers Permitted to Order from Private Retail. (Closely related to above Recommendation) The requirement for hospitality wholesale customers to order through the LDB is directly attributable to the inflation of sales by LDB Wholesale and individual B.C. Liquor Stores. Such restrictions are anti-competitive in two ways (and thus attracted the attention of the Competition Bureau): forbidding an entire customer segment from accessing private retailers for their purchases, and limiting consumer choice at reasonable price at hospitality establishments.

Fixing Wine in Grocery. While the complexity of this issue could take up an entire post on its own (and has, among much other commentary by thoughtful observers), the fix is actually very simple. Before November 1, 2019, the Attorney General will be required to rectify the preferential treatment of B.C.-only wine on grocery shelves in one of two ways: either by permitting wines from all wine-producing regions on open store shelves; or by shifting to a “store-within-store” model where wines from all wine-producing regions are grouped together for purchase at a separate till from the main supermarket tills.**

 

None of this is impossible, and by my read of the Business Technical Advisory Panel’s Report, the changes recommended here should not require legislative amendments. The operational failures within the B.C. liquor wholesale, distribution and retail system on full display in 2018 and the resulting critiques levelled by federal government authorities and by long-suffering industry participants (not to mention unwitting over-charged and under-served consumers) leave the B.C. government with little choice but to make significant alterations to the system.

The pressure is there. The roadmap is there, in the form of the Panel Report. What is government waiting for?

 

 

*These issues persist despite the previous government’s Liquor Policy Review, which enacted a majority of its 73 recommendations but which did not sufficiently grapple with the systemic issues of wholesale, warehousing, distribution and retail in the province.

**Important considerations would include a phased adjustment period for affected B.C. wineries selling into grocery stores, as well as market-boosting investments that remain trade compliant.

 

 

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