Privatising LDB: happy wholesale customers?
In early December, Business in Vancouver reported the findings of an independent market research survey from 2010 which found high levels of satisfaction with the overall British Columbia Liquor Distribution Branch system by its wholesale customers. According to the Corporate Insights research*, not only were wholesale customers quite happy in 2010, they were happier as a group than they were in the 2008 survey. They expressed higher levels of satisfaction with customer service and the product ordering process, and had fewer complaints. So why, implies the BIV article (without stating so directly), did the government decide to privatise the LDB distribution if its customers were so satisfied with most aspects of the system? There are two general ways to address that question. The first, short, answer is that customer satisfaction (or otherwise) had very little to do with the reasons for the privatisation effort. BIV and many other commentators noted that the government did not come up with a business plan –or any credible rationale for its decision. Among the myriad, poorly communicated reasons given by government were savings from the sale of its real estate, and lower prices for consumers. (Each of these are possible but were backed up by no evidence whatsoever). At no point did government refer to satisfaction levels by wholesale customers – or retail customers for that matter – as a reason for privatisation.
The second way to answer the question requires unbundling just who the Liquor Board’s wholesale customers are. It is a far from homogeneous group, and BIV reports that the Corporate Insights survey respondents were divided into three main groups: 39% Licensee Retail Stores (LRS), 24% restaurants (“on-premise” to use the trade term) and 19% pubs. (Hotels and other small categories make up the remaining share). Diving in more deeply, who are the individual respondents to the survey? This information is typically collected, but was not reported in BIV’s article. It can make a great deal of difference to the results whether the respondent is the general manager of a large restaurant group or a clerk at a small LRS store. Their roles will, by definition, result in a far different relationship with the LDB, and thus a different set of experiences on which to base their responses.
Leaving aside the unknown of who responded, it can still reasonably be asked: How satisfied are they really? How do they know? In a monopoly system, what levels of service and delivery do they have to compare to? Dare they complain, given the powerful role the Liquor Board occupies as supplier, regulator and retail competitor to many of its customers? (In the present context, survey responses are anonymous unless respondents choose to identify themselves).
Two elements in the survey are reported to have received critical feedback: one, that the weakest overall rating is for flexibility toward customer requirements, and two, that restaurants and hotels are the categories least satisfied with the delivery process. Taken together, these findings suggest that the Liquor Board system is better at meeting the needs of “transactional” wholesale customers – those who regularly order similar products that are widely available in substantial quantities (i.e. mainly beer and spirits – not to say that there aren’t very good niche or craft products in each of these categories). In other words, the wine buyers from restaurants and hotels (typically small lots, frequently changing inventories/availability, fluctuating prices) are likely the “least suitable” customers for such a system.
If this last sentence sounds Alice-through-the-looking-glass it is meant to: in the real world, the supply system should serve the customers, not the other way around. This has driven a set of attitudes that has begun to treat on-premise customers as a category to be tolerated at best, not served. Purely anecdotally, I have heard from at least two sources (who represent fine dining restaurants) that they have – in their own hearing – been described dismissively by LDB staff in terms of “Oh, they’re restaurants, not customers.” This when they are standing at the ordering counter with a wine order worth thousands of dollars…
It may not be the easiest thing for an individual staff member to fill such an order while also trying to serve other customers at a busy store. However, even the order-filling system as designed by the LDB is customer-unfriendly, and sets the local government store staff up for frustration. First, on-premise customers (i.e. those with restaurant or “food primary” licenses), are prohibited from ordering their product through the network of private retail stores that have proliferated around the province (we’ll come back to that). Second, if on-premise customers are not of a sufficient size or central location to order through “Store 100” in Vancouver or “Store 231” in Victoria – two virtual stores that are dedicated to serving wholesale customers, now officially called Wholesale Customer Centres, they must order their product through three designated Government Liquor Stores – not even the closest to the establishment – regardless of that store’s size, selection or wholesale service capacity.
Why is this odd, inefficient, requirement in place that on-premise customers must order their stock from Government Liquor Stores? Follow the money… easier said than done. The Liquor Board’s discount/markup system, let alone its taxation system for beverage alcohol, is too complex to review here. In brief, the on-premise category does not receive any wholesale discount for purchasing product for its establishments – unlike all other wholesale categories – so there is no lost revenue if restaurants were to fill their purchase orders through private stores (i.e. the LDB as wholesaler to the wholesalers still receives its revenue share). Similarly, from a tax perspective, this is collected as (import) product lands in the bonded warehouse. So the LDB (and therefore government) is made whole from both revenue and tax perspectives whether or not on-premise customers purchase their stock from Government Liquor Stores. What is left to consider? It is hard to believe that the Liquor Board just wants to see more bodies in its stores. However, if all wholesale sales are driven through the Government Liquor Store system then it helps boost (justify, validate – pick the preferred term) the operational bottom line of the network of 197 government owned and operated stores.
Back to our original question, then. Clearly, the (reported) satisfaction levels of the LDB’s wholesale customers are an argument against privatisation, not for it. It is pretty clear that this information was considered nearly irrelevant for the case made by government for privatisation. It is more enlightening to follow those small clues evident in the data which point to the structure of the system. Once you begin to untangle the web of the profitable (is it really?) but high-cost architecture that forms the core of BC’s liquor control, distribution and retail system, it is difficult to see (as discussed in a previous post) how distribution privatisation wouldn’t have unwound a large part of the pricing model of the whole system, and therefore prompted wider reform, perhaps even more than government could foresee. As with most existing systems which entrench inequalities, change would have meant a reordering of winners and losers among wholesale customers. Who knows whether aggregate satisfaction levels would have gone up or down? Perhaps a better way of assessing the merits of the system as a whole uses a lens that considers its transparent price discovery (i.e. market pricing), its true operational costs, and its efficiency in serving all categories of customer.
*Full disclosure: I was a Customer Relationship Manager for Corporate Insights from 2001 to 2003, and analysed, reported and co-presented the results of the LDB wholesale and retail customer satisfaction surveys during that time. I have no present connection to the company. The article referenced (and hyperlinked) above was by Bob Mackin, “LDB’s pre-privatization survey found most customers happy with system,” Business in Vancouver, November 27-December 3, 2012, p. 8.