The curious climbdown on BC’s wine markup

The curious climbdown on BC’s wine markup

As part of the BC government’s ongoing wine and liquor reforms resulting from its Liquor Policy Review, a new wine wholesale price structure was announced in December 2014.

The changes rested on two premises: that the price structure would “level the playing field” among various categories of retailer (licenced retail stores – LRS, private wine shops, and government liquor stores – GLS) in terms of their profit margin range; and that the end price to consumers would not change. Neither appears to have been achieved. But it’s what happened after this that’s curious…

The new wholesale pricing system is better aligned with what we understand in the normal world of retailing as a cost-plus model. (The old wholesale pricing system was a counter-intuitive “work backward” system that discounted wholesale prices from retail prices.) In November 2014, key players in the wine industry were informed by government that the new wine wholesale pricing system effective April 1, 2015 would consist of an 89% markup on the first $11.75 of the supplier price, and a 67% markup on any amount above that. When retailers, agents, importers and BC wineries ran the numbers, it became clear that consumer prices would rise substantially for higher priced wines, acting like a progressive tax. (See Mark Hicken’s post here ) that explains the full effect of the new pricing model on the various retail channels). Consumers would clearly pay more: when wholesale prices rise, retail prices are bound to follow.   And because the various retail trade channels started from an un-level playing field, they would experience differing effects from the pricing model change.

On a Friday in late January – the same day the independent report on the Mount Polley mine tailings pond breach was released, the Attorney General released a statement reducing the second-tier markup by 40 points, from 67% to 27%.

What happened between November and January to cause government to climb down by that magnitude?

The models used to develop the new (67%) system were clearly favourable to revenue to help re-fill provincial coffers. The many retailers, importers, and BC producers of fine wines were clearly vocally opposed to the proposed new structure, and they registered their concerns. And so the markup was reduced to a level that “people could live with”.

If the original, higher tax rate was an error, it was a dramatic one that shouldn’t have resulted in alarmed headlines, a hit to BC wine consumers, or a large share of the wine industry publicly challenging a business- friendly (and wine industry-friendly) government.

Was it a red herring? This wouldn’t be the first example of such a tactic: float a markup / tax / regulatory standard that clearly makes life much harder for the businesses it is imposed on (not to mention the end consumer), and then reduce it before implementation to a level that makes people feel much less concerned about. We may never know.

But playing with the tax/markup structure on wine – without taking sufficient account of effects on the broader wine import, wholesale, distribution and retail system – does not add to the lustre of British Columbia’s reputation as an efficient, reliable or cost-effective place to do business in the wine world. Changes to one element will affect every other area of the system. A more coherent strategy for wine and liquor reform is needed – one that demonstrates an awareness and understanding of all the moving parts of how wine is imported or made, warehoused, distributed and sold through the various channels that make up BC’s wine and liquor system.