October 28, 2013

Hon. John Yap
Parliamentary Secretary for Liquor Policy Reform
Province of British Columbia,
East Annex, Parliament Buildings
Victoria, BC  V7V 1X4

Via email to http://engage.gov.bc.ca/liquorpolicyreview/

Dear Mr. Yap:

Re:  Comments to British Columbia’s Liquor Policy Review

The initiative taken by the Province to review BC’s antiquated liquor laws is welcome – for consumers, the wine industry (domestic and import) and for the establishments that serve beverage alcohol.  The parameters of the review include improving the consumer experience and growing the provincial economy, while not compromising public health and safety. To date, many thoughtful submissions have been made by a range of interests and stakeholders in BC’s liquor supply, importation, warehousing and distribution, retail, dining and consumption system.

The beverage alcohol industry in BC, like most of the western world, has always had – and probably always will have – a public policy component.  Public health and safety considerations should continue to be priorities, and be responsibly and reasonably managed by government.  From this starting point, market improvements to the distribution, sale, purchase and consumption will always be overlaid by the regulatory hand of government:  a fully free market is unattainable, and likely undesirable.

However, the legacy web of paternalistic and archaic rules governing the provision, production, and sale of beverage alcohol in this province needs to be swept away.  Not just in the name of expanding or enhancing the consumer experience or growing the provincial economy, but also from the perspective that a reasonably free market will convey most of the right pricing signals that in normal settings get transmitted from importer (or domestic producer) to the retailer and on to the consumer.

As it stands now, the complex maze of discounts, markups, taxes, quotas and wholesale purchaser categories – all overseen by the BC Liquor Distribution Branch (LDB) – so confuses and undermines the market that the consumer has no reasonable basis on which to make her wine purchasing decision. This confusion is derived from a system where the final price is not “built” from the producer level to the retailer, but discounted back from an arbitrary LDB retail price. This comes especially into focus when the same wine appears on restaurant wine lists for up to three times the price in an LDB Government Liquor Store (GLS), and is even more mystifying when comparison shopping for international brands that are also sold in other jurisdictions.

With this as background, my comments below are in three general categories. Reform in each of these areas will contribute to a fairer, more market-based system which will encourage products and retail and licensee establishments to compete on a closer-to-level playing field. In turn, a more clearly transmitted price signal will help consumers have more of a hand in setting the demand for wines in the general marketplace.

  1. Introduce a wholesale discount for licensees (restaurants/food primary), which currently purchase inventory for their wine lists at full (GLS) retail prices, unlike other wholesale customers of the LDB, including Licensed Retail Stores (LRS) [1].  Also, licensees are required to order all of their wine from the LDB regardless of their location in the province or their type of food-primary establishment.  This restricts their ordering practices, funnels more revenue through the GLS retail system than would otherwise happen (inflating their apparent revenue generation performance) [2], and may compromise the viability of nearby private retail stores.

Therefore, a second recommendation in this category is to remove the restriction on licensee ordering, and permit restaurants/food primary establishments to order their stock from private retail stores.  The immediate benefit to restaurants should be self-evident:  more conveniently available product at lower cost and with fewer administrative steps. Incidentally, government is still made “whole”: if designed properly, taxation revenue to the Crown will not be compromised.  The benefits to consumers should include, over time, less prohibitive wine costs in restaurants, and possibly better selection. However, this latter point depends always on the decisions of the wine director or sommelier, and is contingent on reform in a second area: the overhaul of the distribution and retail system.

  1. Level the playing field in distribution and retailing. The failed attempt by government early this year to privatise the liquor distribution system should not be abandoned, but any renewed effort should acknowledge the many elements that were left unconsidered.  The liquor supply chain in this province involves the interconnected steps of wine importing and warehousing, domestic (BC) production, distribution from warehouse to retail stores (GLS and private – including cross-docking and spec ordering) and ultimately sales to consumers. The relationships between these steps – and the presently uneven playing field between imports and domestic products – need to be understood and clearly addressed.  Reform of BC’s liquor distribution and retailing systems will take considerable time, but the ultimate goal should be a fair, transparent system where government exerts regulatory oversight and collects taxes, but exits the retail system.  Features of a reformed system should include:
  2. Initially, a common baseline retail format between GLS and LRS (and other private) outlets. Subsequently the termination of the contradictory practice of the LDB being both wholesale importer and advantaged retailer.  Ultimately, government exits the retail environment.
  3. A fair taxation regime that contributes to the Treasury; collection point at either retail (preferable) or distribution points.  Shift to a true wholesale pricing model, however maintain social reference pricing for certain categories of beverage alcohol.
  4. A level playing field for distribution/direct delivery. Presently, the direct delivery regime for domestic wineries constitutes favourable treatment under the rules of Canada’s major international trade agreements.  All wines should be delivered directly at no charge, or none should be; and all wines should be distributed through wholesaling warehouses (may be operated by agencies or private sector contractors), or none should be.
  5. Last but not least, the product selected for store shelves should depend on demand by customers (wholesale and consumer), and ordering decisions should be in the hands of agency representatives or producers directly, not the LDB. The risk should be borne by producers and their agents that the product will sell to customers – at undistorted market prices.
  6. Remove unnecessary impediments to the BC winery and sales experience. BC has led by example in introducing regulatory guidelines that meet the spirit and intent of federal Bill C-311 which decriminalised the interprovincial shipment of Canadian wines for personal consumption.   However, more can be done to reduce barriers to the visitor experience in BC’s wine country.  At a time when BC Vintners Quality Alliance (VQA) wine sales are flattening in the domestic market [3], wine tourism is a bright light for the industry, bringing thousands of visitors, and contributing revenue and employment to the wine regions of the province [4].  Enhancing the visitor experience through allowing BC wineries to have food primary licenses as part of their winery licence; and allowing consumers to purchase wine at wine tastings, farmers markets and satellite (off-site) tasting rooms, will contribute further to the resilience and growth of BC’s wine industry.

Taking steps in these areas to reform the province’s liquor system will improve the consumer experience, advance the BC wine industry, and allow those (often small) businesses who participate in the beverage alcohol industry – whether as restaurants, pubs, lounges, retailers or importers – to serve their customers and compete in the marketplace in a fair way.

Yours truly,

Karen Graham

 

[1] Wholesale discounts for various categories of private stores range from 16% to 30%.
[2] However, the LDB’s Quarterly Market Review breaks out licensee sales as a percentage of total sales, by volume and value.
[3] See recent BCLDB Quarterly Market Reviews, available at http://www.bcldb.com/publications/quarterly-market-review.
[4] A Frank, Rimerman + Co. LLP, 2013. The Economic Impact of the Wine and Grape Industry in Canada 2011. Available at http://www.winebc.org/news/view/68.

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