BC takes first tentative step in liquor privatisation

On Tuesday February 21, BC Finance Minister Kevin Falcon surprised wine industry stakeholders and consumers by announcing the privatization of warehousing and distribution of liquor in British Columbia.

Billed as a cost-saving measure in a belt-tightening budget, government will sell the assets (warehouses in Kamloops and Vancouver), and the associated distribution services to the private sector. In a separate message to industry, the BC Liquor Distribution Branch emphasised that it is not getting out of the retail business, and that the BC Government and Employees Union will be invited to provide input into the Request for Proposals that the government will issue (this is required under successorship legislation. None of this will happen quickly: the government has committed to divesting itself of the warehouses and distribution by 2015.

While the move is sure to be welcomed by many wine industry participants and enthusiasts, the initial scale of the change is limited, slow, and the devil will be in the details. How might a privatized BC warehouse and distribution system work? A look south and east offers some clues. In November 2011 Washington state voters passed a ballot initiative to end the public liquor monopoly, from warehouse to retail, taking effect June 1, 2012 – a much more rapid transition. Among other elements, the initiative specified that the central warehouse be closed, suggesting an owner-managed, decentralised storage and distribution system. As part of the more sweeping retail change, non-uniform pricing of wine and spirits is to be permitted, as are volume discounts on wine and spirits (the separate beer distribution system was not part of the initiative).

While BC wine consumers (and some retailers) can only dream about the latter two changes, privatising warehousing and distribution could have profound consequences for the selection and retail prices for wines in this province. A look east to Alberta, where the entire liquor industry has operated on a private basis since 1994, can shed more light on how BC’s more limited privatization efforts might look. In contracting with Connect Logistics on renewable five-year terms to operate the central warehouse in St. Albert, the Alberta Gaming and Liquor Commission is single-sourcing its supplier, but the model of supply chain management and inventory (consignment to the warehouse) puts the ownership of the product, decision-making power over inventory and distribution, and all-important pricing, back in the hands of suppliers and/or their agents. If BC follows this model, government-operated LDB stores would compete on a much more level playing field with private sector operators in terms of access to products and consumer-friendly pricing.

However, far too few details are available at present to predict that this model will be implemented in BC. It will be important to watch how the province and LDB implement supply chain management and inventory control systems. For the moment, it seems likely that these first tentative steps will leave the purchasing and perhaps inventory management firmly in the hands of the LDB, continuing an assured pipeline of uniform products and pricing to LDB stores, to the continued structural disadvantage of private retailers who compete with LDB stores while having to purchase product from the LDB as wholesaler (which conducted over 425,000 wholesale transactions in 2010/11). On-premise operations must also be wondering how this will impact their purchasing and supply chains, not to mention the spec listing program.

As Finance Minister Kevin Falcon made the announcement and in subsequent interviews he has strenuously emphasised that government and the eventual private sector supplier will work with the BCGEU to protect all 400 warehouse jobs in Kamloops and Vancouver, at their present levels of salaries and benefits. Clearly the Minister had two principal considerations in leaving retailing out of his announced restructuring: the fact that the public coffers were enriched by your and my liquor purchases to the tune of $218 million in fiscal 2010/11 (second only to BC Lottery Corp) on LDB net income of $890 million; and the BCGEU can make for a powerful enemy, as the Liberal government under Gordon Campbell learned in 2002/03 when it mooted the idea of privatising the province’s entire liquor business. It is worth observing however, that in post-budget interviews the Finance Minister could not bring himself to completely rule out eventual privatisation of the retail side of the liquor business.

Will this partial privatization of the liquor system benefit the consumer? Perhaps as to selection, but only if the LDB relinquishes some of its control over which products enter the newly-privatised warehouse. It seems highly unlikely that wine lovers will see the retail or restaurant price of their favourite bottle decline without substantial shifts in government tax policy or LDB markups. And agents and suppliers will still bear costs for storage and shipping.

For the present, the best that the trade can hope for is welcome efficiencies in this part of the system. Hopeful consumers should cross their fingers that this small step forward is the thin edge of the wedge to a more selection- and price-friendly wine buying environment, albeit one that likely won’t materialise for a few more years.