Canadian Wine Buffeted by WTO Trade Winds
The imminent end of preferential treatment of some Canadian wine producing provinces helps level the playing field. Opening Canada’s internal markets can help limit the economic pain.
Canada’s wine producers have had a tough 2020 - and it’s only late July. The COVID-19 pandemic has wreaked havoc with the on-premise (restaurant, lounge, hospitality) trade channel, with scheduled wine country events, and with direct sales to spring and summer tasting room visitors.
In British Columbia’s Okanagan Valley, the visitors are certainly back, and anecdotal reports from tasting rooms up and down the Valley - many of whom have implemented appointments, fees and curated tastings - indicate their sales are skyrocketing (both value and volume) based on year-over-year comparisons. The tasting bar “crush” may be a thing of the past, and the new approach represents a step forward for a maturing wine industry.
What price IS that bottle of wine?
Aside from strong on-site sales reports, the business planning and general resilience of BC and Canadian wineries are about to be tested in the near future. In just the past few weeks, seemingly every piece of news would cause an operator to tear up her or his pricing strategy for the year and start over. Specific to BC, the well-publicised and welcome news from the Attorney General that effective July 20, 2020 the on-premise trade channel may (finally) purchase wine at a wholesale price (see my previous post) meant a lifeline to some restaurants and food-service places around the province.
Understandably, not everyone in the BC industry welcomed the news since it could make a material difference to a winery’s previously-planned bottom line. However, it seems short-sighted that BC wineries would strenuously object to selling wines at wholesale prices to their champions and ambassadors in the restaurant industry. After all, many BC restaurants over the years - decades - have supported BC wines on their lists, introducing them to many visitors and locals alike. Yes, direct delivery makes it easy to order, but also, typically higher prices (at full retail for restaurant buyers) entails a real commitment by a restaurant to choose BC over value priced wines from many other countries. Are they willing to share some of the pain now, so that the restaurant trade channel continues to exist as a viable means to sell BC wine?
And yet, we learned late last week that the BC Wine Institute had “requested” the BC Liquor Distribution Branch to exempt all BC-produced, direct-delivered wines from the wholesale price catalogue for the August sales period - meaning prices would remain at full retail for struggling restaurants. Why just a one month exemption? Clearly, that is not a sufficient duration to assist wineries - one concludes that this negotiated exemption is to buy time for a more “permanent” carve-out which would permit BC wineries to continue to sell at or near full retail prices to restaurants. (“Permanent” in quotes because the wholesale pricing policy is effective only until March 31, 2021, and will be reviewed by government for potential continuation, tweaking or scrapping altogether.)
This head-scratcher news could well have negative implications for those BC wineries who had already increased their hospitality price in anticipation of wholesale - and for the next month may have to sell their wine at even higher prices to any restaurant still willing to purchase their product. Not a positive signal for the relationships forged between winery and restaurant over the years.
It is about to get more costly to sell - and for consumers to buy - Canadian wine
Just as one begins to digest the above, today’s bombshell news was that Canada has agreed, in response to a World Trade Organisation (WTO) challenge by Australia, to adjust some very significant taxation and markup practices federally and in at least two of Canada’s wine producing provinces. Over the next two years, Canadian-produced table wine will have excise tax levied on the volume produced (presently, imported wines face a duty of $0.66 per litre). This helps level the playing field with international producer countries.
In addition, wineries in Ontario and Nova Scotia will see the phased end to preferential markup schemes which were intended to boost the (once young) domestic wine industry. The final WTO panel report is due in mid-August, and there will almost certainly be another shoe to drop. British Columbia and Québec were included in Australia’s challenge but not in today’s announcement The betting is that preferential delivery rules, markup schemes and retail channel access will be curtailed or ended.
Consequences
A quick projection of the probable effects of these changes are:
Across the board, Canadian wine prices go up in net terms (+federal excise tax, -provincial markup exemptions), and likely also relative to international wines.
Depending on what is decided on direct delivery, BC wineries that are marginal operators (unprofitable or barely profitable) will have a really tough go over the next two years as the new policies are phased in.
International wines may enjoy comparatively better market/trade channel access as well, depending on what distribution/delivery and retail remedies are agreed to by Canada in respect of BC and Québec.
Karen’s Opinion
Unfortunately, this is the tough-love part of the post. Canada’s wine producing provinces have - for many years - successfully executed preferential policies to boost their domestic wine industries. These policies were almost certainly well-intended, and justifiable as wine regions around the country were just getting off the ground and needed help to turn consumers on, and to begin to compete with strong import brands.
However, the very obvious (some might say blatant) provincial policies around preferential access and favourable markup structures are the very opposite of the hallmarks of a maturing, respected wine industry. It is hard to reconcile the assertions of resilience by many operators in the Canadian industry with the continued strenuous lobbying for preferential treatment to protect the very same operators in their home markets.
Today’s announcement and the coming policy changes will put an end to these confusing and unhelpful signals about the maturity of Canada’s wine industry. Are we up to the challenge of competing on the world stage - and inter-provincially, to the extent that’s possible - or are we not?
Discouragingly, one can look in the rear view mirror, knowing what we now know about the coming WTO compliance measures, and interpret some recent unhelpful moves designed to protect domestic producers: Ontario’s last-minute Canada Day decision not to open its borders to direct-to-consumer sales from other provinces; and perhaps even the BC Liquor Distribution Branch’s acquiescence to the BC Wine Institute’s request to exempt BC wine from wholesale pricing.
The federal government’s willingness to clear the slate via the WTO Panel decision should be accompanied by a strong statement by the Government of Canada mandating the provinces to implement the full and unfettered access by Canadians to ALL Canadian wine. This would send a much needed strong signal about the maturation of the wine industry in this country, and remove the incentive for the parochial game-playing that persists to this day in provincial liquor policymaking. Eliminating Canada’s internal trade barriers would help limit the economic pain undergone by wineries in recent months, and take the sting out of the coming transition to a full and fair tax and markup platform.
Such changes should be welcomed by the industry’s leaders and Canada’s political leaders alike. Either way, they will be implemented over the next two years. It’s time for a growing-up moment in Canadian wine.
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