Why We Need to Reform the BCLDB and Privatize Liquor in British Columbia

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The recent open letter written by Jake Skakun for Scout, and the subsequent debate in the comments, has convinced me it is time to write this post in outright support of reform of the British Columbia Liquor Distribution Branch (the “BCLDB”) and privatization of the liquor distribution system in the province.

In this article I will argue that privatization will produce higher tax revenues, a superior liquor distribution system, better selection, better prices, better service and a better wine culture in British Columbia.

I have no affiliations with anyone in the liquor industry and am a completely independent voice in this debate.

The BCLDB is an Affront to Basic Legal Principles

As a lawyer who has a degree of experience dealing with government agencies, I must say that the BC Liquor Distribution Branch may be the most obfuscated body in the entire BC government. It routinely violates principles of administrative law that include open access to information, transparency and fair hearings and decisions. Its markup system underhandedly violates principles of tax law by effectively taxing liquor 123% without requiring a vote in the legislature (i.e. taxation without representation).

Consensus in the legal community across Canada is that the BCLDB (and all provincial liquor monopolies) violate the Canadian Constitution by restricting interprovincial shipments of alcohol. Nearly identical restrictions in U.S. states have been deemed unconstitutional in the US by the United States Supreme Court. The clause in the U.S. constitution that restricts these practices is similar to the clause at issue in the Canadian constitution.

Reforming the BCLDB will Increase Tax Revenues

Internal audits of the retail operations of the BCLDB have revealed (1) that retail operations cost the government $300 million and (2) that sales of liquor at the BCLDB are declining whereas sales at private liquor stores are increasing.

Eliminating the retail operations of the BCLDB would produce the following results:

1. Save the government $300 million a year in operations costs. This would cost unionized workers their jobs, but it is not the government’s duty to pay shelf stockers $20+/hour. Do you think your tax dollars should pay union staff without any knowledge or respect for the products they sell? What value add is that?

2. Increase tax revenues. Not only would the government save $300 million a year in operating costs, it would still receive tax revenue from all the products sold in the province. Given that private retail sales are increasing, this will result in increased revenues. I will examine why private retail sales are increasing and BCLDB sales decreasing in a future section. In hard economic times it is better to increase revenue rather than lose revenue in order to prop up an antiquated union.

3. Level the playing field. Right now the BCLDB is the wholesaler, regulator and main retailer in the province. In other words, it governs its competitors and controls the flow of products to its competitors. This has resulted in anti-competetive practices. For example, the BCLDB regularly takes shipments of wine intended for private stores and puts them in their own stores. The BCLDB regularly short ships product and takes no responsibility for it. The BCLDB has exempted itself from liquor safety inspectors while the private sector is not exempt. By getting out of the retail game, the BCLDB will not have the incentive to distort the market to its advantage.

Better Distribution

It is not just the BCLDB’s retail operations that are problematic. The wholesale operations produce huge problems. The system is setup to make it difficult to obtain products that are not “listed” items – i.e. items the BCLDB has chosen to carry at its stores. Most of the interesting wines in the province are “spec” or “special order” items, which require a case purchase.

Further, wholesalers are afraid to bring product into the province that is not “listed” but is only “spec” or “special order” because it is harder to sell this product due to the regulatory restrictions governing it. This means less selection, a topic I address below. It also means a distorted distribution system controlled by the BCLDB buyers.

One retail operation’s buyers are therefore impacting and restricting the entire wholesale system for all retail operations in the province.

Additionally, all product must go through a government bonded warehouse. This process can take months. If an agent wants product for Christmas season, they have to order it months ahead of time and have inventory sitting around in the government warehouse in hopes it will be purchased. They cannot take as many risks with this business model because of the sheer amount of inventory they are required to carry.

Agents (importers) are also not allowed to access their own product. Only the retailers can access the agent’s product once they decide to purchase it. So wholesalers are effectively cut off from their own inventory.

Further, storage conditions are not guaranteed at this warehouse, which for any specialist merchant is a nightmare of breaking the chain of provenance. Top retailers in the U.S. and Europe would never accept this practice.

Lastly, restaurants cannot order directly from importers/agents, but must order at retail prices through the BCLDB retail stores. They can then apply for a minimal tax benefit after the fact.

Privatization of the wholesale side of liquor would:

1. Create a more efficient distribution system. Agent/Importers would be able to create more nimble business operations and operate on greater margins, increasing revenue, increasing jobs and increasing taxes paid.

2. Allow retailers and restaurants to obtain the product they want when they want. This means both retailers and restaurants could decrease their on hand inventory, creating better business models and increasing the likelihood of a successful business. Small business, employees and tax collectors all win in this situation.

3. Protect the Provenance of Artisanal Products. Provenance is key to ensuring that artisanal products do not spoil. If importers could ensure the quality of the warehouse in which they store their products, this will decrease the amount of damage to the wine and other liquor – such as dried out corks and heat damage. Again, this is a fundamental aspect to any fine liquor operation anywhere in the world.

I would add the caveat that any private wholesale system would have to be set up to avoid the problems encountered in the U.S. where a small number of wholesalers dominate the market. Of course, it is telling that even with this problem the U.S. has better selection, better prices, and better service.

Better Selection

The province is plagued with poor selection compared to our neighbours to the south who have a privatized retail and wholesale system. By way of comparison I looked at the selection of Rhone and Alsace wines at the entire BCLDB chain compared to a top retail store in San Francisco (K&L) and a top retail store in Manhattan (Astor). K&L has 223 wines from the Rhone in stock and 40 from Alsace. Astor has 87 wines from the Rhone currently in stock and 34 from Alsace. The BCLDB is 119 wines from the Rhone and 28 from Alsace in stock across 200 stores. Astor has 1 store and K&L has 3. If you compare the number of Rhone or Alsace wines available in just one major city in the US like SF or NYC, it will far surpass the BCLDB. Even single stores best the entire provincial liquor system for selection.

Go onto the K&L website, or for a broader perspective try wine searcher, and look at the 2000+ wines available from California at various price points. Most of those don’t make it into BC. Let’s consider top CA producers that are not at any BCLDB outlets: Alban, Sine Qua Non, Pax, Saxum, Turley, Harlan, Colgin, Kapscandy, Corrison, Beckmen, Ojai, Line Collado, Philip Togni, Spottswoode, Sean Thackrey etc. etc. If you can find these wines in BC they are at private stores. In California you can either get on a mailing list, go to a auction service like Vinfolio, or simply go to a store like K&L on the release date. There are 0 California wines at the BCLDB that you can’t get in California. The top California wines the BCLDB carries – Ridge, Shafer, Dominus, etc. – are all available easily in San Francisco at grocery stores or an average retail shop. That’s not good selection.

Manhattan and San Francisco have dozens of wine stores selling great wines across the city and have developed wine stores suited to appeal to different niches of consumers (e.g. Terroir SF, Chambers Street Wine NYC). Right now, because of BCLDB retail operations and restrictions on private licenses, there are very few niche private stores in BC. It is impossible for new niche stores to develop because the distribution system severely restricts the kinds of products they can stock.

Only one store in BC (Marquis Wine Cellars) has the ability to source its own wines on its own wine buying trips to Europe. In San Francisco or New York, this is the norm. Some of the world’s best importers operate out of retail operations in the US. For example, Kermit Lynch, North Berkeley Wine in Berkeley, and Chambers Street Wine in Manhattan.

Better Prices

Given that the BCLDB retail operation costs $300 million, and given that private stores are selling more wine per capita over time, if we privatized we could reduce the level of taxation and increase tax revenue at the same time. This would result in better prices, which would increase sales and offer better quality wines for the average individual who doesn’t want to spend over $20 a bottle.

By way of example, at the recent premium spirits release at the BCLDB, Ridgemont Reserve Bourbon was sold for $75. It is $33 at Astor and K&L. When I lived down in Berkeley I regularly bought California wines for 50% of what they cost in BC. To continue my example from the selection argument, Pax is $45 a bottle in CA, it is $150 here (recently discounted to $90 because it cannot sell). I could get Ridge zins for $25 at a grocery store in Berkeley. They are $50 a bottle here and only available at one of the 3 signature stores.

I could also go to my favourite beer store and choose from 600 different beers, sample them in store, and pay about $6 for a 22oz bottle of amazing beer that is (1) unavailable in BC and (2) if it were available would cost $12. Another example is the Deschuttes Jubel ale that just came into the province at $30 retail. I can buy it for $10-$12 in the US at multiple retail outlets.

Better Service

I can best illustrate the problems in service at the BCLDB with an example.

I am not in the industry, but I have personally seen small restaurant and store buyers turned away in the BCLDB stores to keep stock in for the ‘real customers’. This appears to be some sort of pretend solidarity with the proletariat everyday worker. There are many arguments against this practice. However, I have a simple contrast to highlight the hypocracy. When a large steak house in downtown Vancouver went out of business, it returned all its wine stock to the BCLDB. The staff at the then Thurlow and Alberni store were supposed to price discount this wine at 30% and put it on the floor for ‘everyday customers’ to buy – since all of us ultimately own the system it makes sense to let a wide array of customers buy this sort of stock. These were all high end American wines.

However, the staff was ‘too busy’ to put the stock on the floor for a couple days and when the large Italian Kitchen conglomerate came in with an offer to buy all the wine at discount in one swoop, the BCLDB workers thought ‘hey that’s easier than tagging all these wines and putting them on the floor’. The result? Lost revenue for the BCLDB for selling all the wines at a huge discount to a restaurant that would sell the wines to customers for the regular price. Do I blame Italian Kitchen? No – they had a rare opportunity to actually buy wines at a discount and make margins. But the BCLDB employees’ lazyness won out over their supposed principles this time out. And the BCLDB failed in its role to manage the product of a bankrupt licensee and find the best bidder for the liquidated assets. Pretty much no one wins in that situation.

Let us not forget that the average BCLDB employee has close to no knowledge about the products they are selling and the supermarket style shopping experience at most BCLDB outlets. To see how privatization would create better service overall in the city, all one has to do is go into a great wine store in any city in the US to see how it should be done or one of the better private stores here in Vancouver like Marquis or Kits wine.

Service isn’t just about good floor staff, it is also about a good events and promotions program.

The BCLDB has no way of informing customers of new product arriving in the store other than brief website updates with give random new wines listed, even though they get in 100’s of new products regularly. They run tastings with plastic glasses. At the premium spirits release the BCLDB was pouring $200 bourbons and scotches into 1-inch diameter plastic cups. This is mandated by regulation. That neither respects the spirit or the customer.

It is impossible to buy tickets to BCLDB events online and there are very few events run at all. Compare this to the LCBO (Ontario’s liquor monopoly) events and seminars where people are actually taught something about wine or Marquis Wine’s wine maker dinners and you realize that the BCLDB is not interested in educating consumers or building wine culture. They don’t even have a regular tasting tower in their biggest stores (compare this to the LCBO Summerhill store in downtown Toronto where I got my first tastes of great wine for $1 a glass at their regular tasting tower and $4 a glass at their special weekend premium wine tastings.)

Conclusion

All of this (added to the inane regulatory system – which you can read about on Mark Hicken’s winelaw.ca website) amount to an industry where ideas come to die. Imagine any other industry where ideas and creativity are stifled to support a broken system that doesn’t make anyone happy except for the overpaid shelf stockers. Other examples of Canadian lack of competition like this include the telecommunications industry (how long did it take to get a cell phone competitor in Canada? – prices are still 2x the US) and the dairy industry (go to seattle and revel in their vast selection of French, Spanish and Italian cheese that our milk board prevents from entering canada for fear of competing with the big canadian dairies), etc.

How do we make this happen? The liquor industry needs to step up and give us all a platform on which to sign on. But what we can do as consumers is to talk about the issue with our friends, spread knowledge and information and whenever possible complain to the BCLDB and to our MLA. Big movements usually begin with small steps.

Are we, as Canadians, content with a few large corporations benefiting and small businesses suffering? Are we content with compromised tax revenues, poor prices and selection and mind numbingly bad service?

We will forever remain the nanny state if we prop up this sort of mentality. I, for one, prefer innovation and entrepreneurialism over sameness and bureaucracy. Let us make our province a destination for innovators and investors in wine and liquor. Let us privatize.

My Credentials

NB: I’ve moved this section to the end to highlight that I am not listing my credentials as an argument in thesmelves, but as noted, merely by way of background and for context.

By way of background, I am a lawyer here in Vancouver, British Columbia, with a Juris Doctor from the University of British Columbia. I have also previously worked as a law clerk for the British Columbia Court of Appeal, spent half a year as a visiting scholar at UC Berkeley’s Boalt law school, hold a Master’s degree, and have published several articles on social theory, property law and environmental law. I have written this blog for three years and have developed a robust knowledge of the liquor distribution system in British Columbia and the United States during that time. I have also got to meet a large number of members in the liquor industry in BC, Washington and California and heard their stories. As per my legal training, I have also verified all the facts upon which this argument is based and I have done my own legal research to understand how the system works.

I have no affiliations with anyone in the liquor industry and am a completely independent voice in this debate.

Comments

  1. Jake
    November 13, 2010

    Excellent Shea! The $300 million in operating costs alone should be enough to convince anyone in the government to at least consider the prospect

  2. Weston
    November 13, 2010

    Its disgusting when we really think of what “Freedom” we do have. like my dad says every once in a while time for me to write my “Canada is a Third World Country” tho its more of a Governemnt knows all Socialism. and we the people are stupid and dumb and know nothing. Sad isn’t it

  3. Jake
    November 13, 2010

    Great insight towards a system I left behind 16 years ago (Do they still make Canterbury beer?). Feel duped being dictated to the LCBO out here, but your story made me feel better by comparison.
    Maybe your mom and my mom should go bowling?

  4. Winesagasu
    November 14, 2010

    I may even move back to Canada if BC privatized!!! The wine world out there was so sad I had to move to London 🙁

  5. Wilf krutzmann
    November 14, 2010

    Maybe we do need a revolution as suggested by Winecouver in his comment on Scout Magazine. I had my own fight with the system back in the nineties. It cost me $35,000 in legal and consulting fees and 3 1/2 years time to finally beat the monster.

  6. Shea
    November 14, 2010

    Thanks for the comments so far. A few more stats for some doubting comments I have received:

    BCLDB vs. Private stores: The reason private stores in BC charge more than the BCLDB is because private stores in BC are only given a 16% discount off of retail prices by the regulator. BCLDB stores are the only ones that pay wholesale prices for product. So the BCLDB pays $8 for a $25 bottle of vodka. Private stores pay about $21 and charge $28. However, the government makes more taxes off of the private store on that sale because they do not have to pay overhead. Regardless, the private store has a far lower markup. The BCLDB could lower the tax, resulting in lower prices, and still collect the same amount of revneue. Private stores cannot play on an even playing field.

    Comparison to other provinces: Prices in BC are a bit higher than ALberta, but private companies in Alberta make a lot more money, can pay staff better and have better selection. In Alberta tax rates are significantly lower, but revenue is higher since the alberta government left the retail game. In Ontario, the LCBO tax rate is about 90% and revenue is higher than BC. It is 123% in BC. Selection is also better at the SAQ in quebec where the regulations on importations are less strict.

    Why compare BC to the U.S.: The reason to compare BC to the U.S. is because the U.S. has a privatized system. No other Canadian province is fully privatized. The Alberta gov still has wholesale monopoly control.

    This is not just Rhetoric: I am not making an ‘I am a lawyer trust me’ argument. I only state my credentials so readers know who I am. I expect readers to read the arguments and make up their own minds.

    Anecdotes: I use anecdotes because they are effective microcosms for the situations that everyone in the BC liquor industry deals with on a daily basis.

  7. Adrian
    November 14, 2010

    I have no doubt that there is much truth in this polemic, but its credibility is seriously compromised by its being such a one-sided diatribe that is imbued with “free enterprise” philosophy.

    I haven’t the time for a detailed discussion of the piece by this fellow who is so proud of his legal credentials, but here are a couple that jump off the page:

    The impact of the oft-repeated condemnation that LDBD retail operations cost $300 million is hard to judge without having at least some notion of what a private retail operation of the same size would cost to run. Presumably less, because the private operators would not have to pay those nasty “unionized shelf stockers $20+/hour”, but how much less?

    Conveniently ignored in the comparisons of prices here and in American jurisdictions is the fact that our vastly superior social support system necessarily results in heavier tax burdens for booze sales and all other sectors of the Canadian economy. We can’t have what we have without paying for it.

    A more moderate argument would have more impact.

  8. Brian
    November 14, 2010

    Hi, thanks for the article! I am a clerk at a private liquor store and have always advocated for the BCLDB to get out of the retail game. This information, along with some of the links you provided will really help me explain to some of our more bewildered customers why their wine and liquor cost so much. I would love to get some more examples from you in terms of seeing the actual price of a product as it goes through the chain. Feel free to email me and we can chat.

  9. Shea
    November 15, 2010

    Adrian, thanks for the comment.

    The point of listing the $300 million operating costs is not to compare it to the costs of running a private company. The point is that the government does not need to incur these costs at all. The other point of this article is that reforming the BCLDB does not need to result in lost income for the government, and therefore does not need to result in cuts to social services. I’m sorry you feel this is an ideological free enterprise argument. However, I feel that in this case open competition is better for the consumer than a state controlled monopoly.

    Thanks,
    Shea

  10. Rick
    November 15, 2010

    Adrian,

    If you are going to make strong accusations about the intent of the author, then you better make time for a detailed discussion. Otherwise, you won’t be taken seriously.

  11. Wayne
    November 15, 2010

    Oh C’mon Rick, you’re unfairly a little harsh with Adrian. His comments were concise but very much to the point. I don’t normally start off discussions by dragging out the fact I too have 3 degrees including one in law. Implicit in this flashing of degrees is that we ooze credibility? Adrian was right, it was a diatribe, it was flawed on its face but yes as Adrian admitted there were some good points. What more do you expect for Pete’s sake?

  12. Shea
    November 15, 2010

    Thanks for the comments all. As I mentioned earlier in these comments, I see nothing wrong with identifying credentials so people know who an author is. This is standard practice in academics, law, journalism, etc. I am sorry if you feel I was listing credentials as an argument for credibility. I assure you I was not. I am happy for my argument to stand or fall on its merits. I am happy for criticism of the merits of the argument and discussion about the merits. I have responded to all points made about the merits of the argument and I am not set in my position that my argument is infallible. Good argument does not stand still but progresses with input. However, I see no need for some weird anti-credentials, anti-lawyer, or anti-education diatribe (or whatever that is all about) that does not relate to the merits of the argument.

    Thanks,
    Shea

  13. Liz
    November 16, 2010

    Interesting article. Thinking it through and have a couple of questions.

    First is regarding your example that the BCLDB buys a bottle of vodka for $8 and then sells it for $25, while a private store buys for $21 from the BCLDB and sells for $28.

    So the BCLDB makes a gross profit per bottle of $17 ($25-$8) in this example when it sells through a retail outlet and a gross profit of $13 when it sells to a private store. So the province takes in less revenue per bottle for sales through private stores?

    Any idea whether the loss of margin would be offset by the reduced operating costs if BCLDB stores are eliminated?

    Is $300 million the cost of just the BCLDB retail operations or does it also include the warehousing side, head office, inspectors, etc?

  14. Shea
    November 16, 2010

    Liz,

    1. The province technically takes in less revenue with the private sale, but if you eliminate the costs of overhead per bottle, it actually makes more because it is not paying lease or salary. Based on the data I received from the internal audit and from various private retailers (whose names shall remain anonymous), the BCLDB would make much more revenue if it did not have to pay operating costs. Let me put it another way: The province collects about $700 million in profit from the BCLDB per year. This is 2.4% of its total revenues. It employs 3500 people and holds millions in real estate to collect 2.4% of its revenues – a very inefficient tax collection system.

    2. The warehouse is run by a private company called Containerworld as a government bonded warehouse. It has government supported monopoly control. Inspector costs come out of a different budget as far as I know (but I would need to verify this). Thus the operating costs are entirely those of the retail employees (including high level retail employees) and real estate empire (which would be worth a lot if sold). Of course you would not need a retail head office without a retail operation, you would only need a small body of regulators. So you are probably right that the government wouldn’t save the entire $300 million, but it would very likely save a very large majority of those costs.

  15. Mark
    November 18, 2010

    I confess to reading only the first several paragraphs. It was all I could spare to so shallow a prospect. The notion that eliminating the distribution would save money to the public coffers only holds should the product wholesale margin remain the same as it is currently. The government would immediately fall under increased pressure to lower or even elimnate it’s wholesale end in the interest of reducing cost. (goodbye cash cow) Also, the premise that eliminating more union jobs is a net benefit to the economy ignores the lessons of the rise of the middle class in western economies and it’s influence on the overall standard of living post WW2. To suggest that decreasing gov’t revenue while increasing the overall wage gap would prove a net benefit to society is pure fantasy. Before we siphon any more good paying jobs out of our neighbourhoods we should take a serious look at the repercussions to our society as a whole.

  16. Shea
    November 18, 2010

    Mark, your contention that government revenue would decrease is based on an unsubstantiated assumption that the government would receive pressure and cave into demands to lower its wholesale markup beyond the level it could lower it without impacting revenues given its decreased overhead. It also assumes sales would not increase. It also ignores the lesson of Alberta, where privatization did not result in decreased government revenues.

    As for losing union jobs. I contend it is simply not efficient to employ 3500 people to collect taxes amounting to 2.4% of net revenue for the government. Nowhere do I claim that low wages would result or should result. In fact, there is no reason why privatization could not result in an increased number of jobs and more mobility in the marketplace. Job mobility is, these days, essential to a healthy economy. I am unclear how propping up unskilled labour is somehow beneficial in the 21st century to BC’s economic future. SHouldn’t we be investing in training, education, health, investment, trade, etc.? Not paying shelf stockers $20/hour and giving them no incentive to be efficient or increase their and their organization’s value to the economy?

    Also, before criticisizing arguments I contend it is good practice to read them in their entirety.

    Thanks,
    Shea

  17. Paul Rickett
    November 18, 2010

    Interesting discussion. I run a private liquor store (LRS) and have direct experience of the often baneful impact of BCLDB and its arcane methods.

    However, I feel the need to point out a few things that are conveniently omitted from the overall privatisation argument.

    All figures from or based on BCLDB 2009/10 Annual Report

    1. Disposing of the LDB retail operations (while keeping the wholesale monopoly) and turning it all over to the private sector would save only $196M not $300M in operating costs. Shea uses the total overhead of BCLDB (and rounds up) of $276M. The balance of their overhead is the wholesale centre cost. Assuming no changes to private sector discounts mix/rate disclosed in the Report then Government revenue would be INCREASED by $61M p.a. On the face of it this alone might be a compelling argument to dispose of the stores.

    2. However, there would be consequences not necessarily palatable to the public at large.
    a. Prices to the public who previously shopped at LDB stores could rise by up to 20%. A 16% discount is not an economical business model to be able to retain existing LDB shelf prices. Even Wal-Mart makes 25% gross profit.
    b. If all private sectors (private wine stores, LRS and Licensees) were put on an discount equal footing of 16% then total Government revenues would fall by c. $185M. If the discount was harmonised to 30% then the drop in Government revenue would be in the range of $660M.
    c. If the current system of discriminatory pricing (and product) between different private sectors was maintained then about 12 businesses (i.e. the private wine store owners) would be the major beneficiaries. These companies are already super-profitable as they receive 30% discount already. Note that the average margin in these stores on ‘wholesale’ products is almost twice that of the LRS channel at it’s marked up prices. If the current ,model was maintained and BCLDB stores eliminated then from the perspective of the LRS channel we could be even worse off as a viable business as the mega private stores that emerged (and within a concentrated ownership) could practice very predatory pricing to squeeze the channel that delivers 40% of today’s consumer purchases.
    d. Pay scales in private stores are substantially less than BCLDB – they have to be given our margins. If the margin remains the same then eliminating LDB retail would have a negative impact on a lot of people in BC.

    I do not mean that there is no need for reform and I, for one, would be very happy to see the back of a Government monopoly but not so happy if it was replaced with a small private oligarchy.
    A lot more thought has to go into any reform and it cannot be done in only one area. Most the arguments for eliminating the LDB remain too simplistic and are based on significant biases of those proposing them.

  18. Shea
    November 18, 2010

    Paul,

    I don’t really have a bias proposing this so I am open to your comments. However, I am confused about how you calculate that the $270+ million savings in overhead would only translate to $60 million increase in revenue if the current pricing structure is maintained. If you could explain the step by step calculations more clearly that would be helpful.

    I’m still not convinced that unskilled labourers should be paid $23/hour. I don’t understand how that adds value to the economy or provides incentive for increased efficiency.

    I am curious about what you say, but you just need to explain your math a little more clearly. Thanks.

  19. Paul Rickett
    November 18, 2010

    Very sensibly Shea asked me to recheck and add clarity on the numbers. Well some of my estimates were off – this post corrects the numbers in 2(b) above – rest stands.
    (Col1)
    LDB 2010
    (Col2)
    No retail/16% all Licensees
    (Col3)
    No retail/30% all Licensees
    Sales ($000s)
    LDB Retail $1,160 $0 $0
    LDB W’sale $1,694 $2854 $2854
    Total revenue $2,854 $2854 $2854
    Discounts $198 $457 $856
    Cost of Goods $1,514 $1514 $1514
    Retail Op Costs $196 $0 $0
    W’sale Op Costs $73 $73 $73
    Net return to BC Govt $877 $810 $411
    Change from current -$67M -$466M

    So net result if all licensees receive 16% discount is reduction of revenue to BC Govt of $67M and at 30% of $466M.

  20. Paul Rickett
    November 18, 2010

    To add to above

    With a 30% discount consumers would likely see prices at all stores roughly equivalent to LDB shelf price. However since private wine stores today continue to mark up wholesale products above the ‘official’ LDB price anyway consumers may not see any reduction in these items unless they are willing to reduce their existing margins. Prices on wholesale products at LRS stores might drop by 20% if savings are passed through – probably a big IF. Market forces might work however and there is scope for more competition.

    Big winner would be restaurants rather than the retailers, so prices there could decline quite sharply.

  21. Shea
    November 18, 2010

    Ok interesting numbers. I was arguing for full privatization, so that would still see a net benefit to consumers. But what of a refined model that would see all profit-losing stores of the BCLDB closed and privatized and all profit-making stores retained? This would both reduce operations costs and increase revenues while making the entire system more efficient. That seems a reasonable approach.

  22. Shea
    November 18, 2010

    Additionally, what of reform to all the incoherent rules. Additionally, I have a big issue with a competitor acting as a regulator. Maybe revenues would decline somewhat to begin with, but if sales continued to improve at the private stores, then wouldn’t government revenues improve as well?

  23. Shea
    November 18, 2010

    Also, let’s do another calculation, based on those numbers revenues to the government would be $1,071,000,000 if there were no private stores. Do the historical numbers support this? If not, we have to assume that private stores are bringing in more revenue per capita than the public stores. I’d like to see those numbers.

  24. Paul Rickett
    November 18, 2010

    Shea

    Look at P19 of the LDB annual report. Their operating efficiency is not wonderful relative to peers. This sustains your argument about costs so eliminating retail gets rid of their least efficient operation – however remember the gain on efficiency is then transferred to private sector who get this by paying their staff less. Business-wise its a good policy, socially one can see some obstacles.

    Also note their warehouse operations are relatively efficient (still room for improvement tho’). Transferring these to private sector might come at an offsetting costs – there is still a collection/monitoring bureaucracy to support – it’s never free.

    I do agree my argument is simplistic and there is need of reform (my bias is that I’m an LRS)that would serve all parties (Govt, consumer and biz)but there is considerable hypocrisy being voiced by entrenched players whose own interests are often best served by vilifying the current system.

  25. Paul Rickett
    November 19, 2010

    Shea

    re #21 & #22. Logical. You’d have to remove current moratorium by LCB of issuing new store licenses. Totally agree on the incoherent rules. Bill 20 may help but I doubt it.

    re #23 comment How do you arrive at $1.071M – not clear to me.

    I would agree that the addition of private stores has expanded the market. However part of $ increase is increased markup (say 20%). Relative to BC private wines stores, LDB retail is quite efficient in inventory management and sales sq/ft

  26. Paul Rickett
    November 19, 2010

    You also need to factor in population growth. Since BC has an increasing pop, private stores may have soaked up demand that otherwise would have gone to LDB

  27. Paul Rickett
    November 19, 2010

    And lastly, all the calculations around our LDB mark up ignore pricing differentials that wineries may give to their own domestic versus export markets. Its entirely possible (I have no evidence either way)that say a US winemaker may sell to distributore in US at a lower price than to the agents in BC (who in turn add their profit margin)

  28. Shea
    November 19, 2010

    That # simply comes from adding back the discount given to private stores into the revenue stream.

    Also, there appears to be a fundamental flaw in the accounting you present, but correct me if I”m wrong. The ‘cost of goods’ line item should reduce to 0 if retail and wholesale were privatized as the government would ONLY be collecting tax revenues and the cost of product would shift entirely to the private sector. When you eliminate that $1.5 billion cost, then the net gain to the government even with a 30% discount across the board is $300 million/year. To keep revenues the same, the government could increase the discount to 45% and still make $800 million in revenues per year.

  29. Paul Rickett
    November 19, 2010

    Shea, I`d stick to lawyering, accounting is not your forté 🙂

    If you zero out COGS by privatising wholesale your revenue line also drops by same amount. It’s not that the revenue goes away it’s transferred to private sector too. Can’t make wine ‘free’ 🙂

  30. Paul Rickett
    November 19, 2010

    Shea

    Re your $1.071M, there is not necessarily any causation between having private stores and that growth. If LDB had maintained a pure monopoly it may have had that all to itself. I’d like to think that the private sector has expanded the market though.

    Private, collectively, has certainly expanded selection and improved convenience for consumers.

  31. Paul Rickett
    November 19, 2010

    Shea

    Noodling a bit further on the numbers.

    By eliminating LDB retail but leaving the discount structure and monopoly w’sale unchanged then Govt revenue would increase by c. $60M. Consumers would not benefit though, just be basically a unofficial tax grab offset by one-time closedown costs of the LDB store system.

    Personally I think the optimum first-step solution is to privatize the wholesale business but leave the LDB stores intact and having to compete on a level playing field with private stores. Then one could see clearly which channel delivers better customer value and that might indeed lead to your selective culling of unprofitable stores.

    There is lots of complexity in this whole topic but I think any Govt we could elect in BC will be reluctant to give up any revenue so a strong case has to be made on this front first. The other thing to consider is the offsetting pressure from health and social policy to restrict drinking.
    The LDB stores actually support social policy by essentially creating a floor price on liquor products.

  32. Shea
    November 19, 2010

    I get your point about reduced revenues, but I think I’ve been confused because that model you present makes no sense to me on a privatized level.

    If things were privatized revenue would be through taxes. So we have to consider what tax rate is necessary to produce $810 million in revenue. Assuming total provincial sales revenue for all liquor remains at 2.8 billion, then the tax would have to be 29%. The question is whether private retailers, etc. can operate with profit margins at that tax rate or whether they would have to raise prices. Of course, with raised prices comes raised revenue and, consequently, reduced tax rate. Say if revenues went up to 3.2 billion. Taxes would only have to be 25% to recover $810 million, then private stores would have net revenues of $2.4 billion to work with. Would that be sufficient for price reductions?

  33. Paul Rickett
    November 19, 2010

    Shea

    There are loads of scenarios in this. But remember we’re analysing what would have been the case if LDB retail did not exist last year first.

    Lots depends where taxes and/or mark-ups are applied but let’s take it from bottom up.
    Assume 3 givens:
    1) Amount of liquor LDB buys $1514M (COGS) 2) Govt revenue from LDB profit is $877M and is the minimum $ any Govt will accept for privatisation. This excludes HST which is not included in the overall $2.8B number &
    3) COGS is consistent regardless of whether LDB or private

    Regardless of who handles distribution there is cost of running warehouses etc. So you have to add to the COGS some allowance for this. Today that is $73M incurred by LDB. If privately operated then there has to be a profit element added so let’s say 30% mark up or total distribution cost appx $100M. So product COGS before channel markup is $1600M (rounded). Let’s also say that the Govt would not have accepted a penny less than (rounded) $900M in income.

    Scenario 1.
    Govt adds a tax at import (or at least before it leaves wholesale warehouse)to equate to $900M. COGS now = $2.5B. Channels add own markup of whatever they choose but let’s say average 45% (32% GPM). Retail value of product has now moved from $2.8B to $3.6B. This is pretty close to retail value of existing biz as Govt direct sales $1.2B + channel sales $1.6B + channel markup over channel sales ($1.6B *.43) $0.7B = $3.5B. Given this, it’s likely some prices would drop and some go up but the overall value stays the same. Individual stores/chains may change their mark-ups to create competitive advantage. Biz winners in this scenario Restaurants/bars/clubs as they wd buy at wholesale; Losers – private wine stores as their margins could shrink on what are now wholesale products; a wash for LRS.

    Scenario 2
    Govt changes HST rate on booze to recapture lost income. COGS $1.6M (i.e. this becomes price to channels). Channel marks up by average 45% so selling value becomes $2.3B. Now the Govt adds a sales tax of 39% (in addition to the 12%HST) boosting retail value to $3.2B (excluding existing HST in all cases). In this scenario, I could see liquor becoming a little less expensive, I’d guess something like $1 bottle/pack (just a guess).

    Shea, all these are totally simplistic examples and anyone can drive a truck through them (including me) but they serve to illustrate different approaches. I caution that, IMHO, you are not making allowances for the social policy side of this, increased individual consumption is not something that Govts like to encourage (or be seen to at least). We’re dealing with a lot of unknowns. I’d have a hypothesis that the COGS in both these equations is understated. Plus these all ignore the costs of Govt enforcement some of which are carried out by LDB so it’s entirely possible that they’d seek a higher tax rate.

    But thanks for debating this, you’ve got me thinking and that’s a good thing 🙂

  34. Shea
    November 20, 2010

    This is definitely getting into territory outside of my expertise. My question would be on your COGS analysis though because I thought the monopoly Container World cost everyone a fortune not just in costs but also in efficiency. We would have to factor in efficiency gains and gains in more nimble inventory management, etc, the need for less product stored in warehouse (for agents) and stored on site in expensive real estate (for retailers).

    Social policy can be address as part of the debate. IT wouldn’t be hard to mandate a floor price for certain items if that’s what people want and that is proven to reduce drinking related injuries.

    Cheers, and thanks for your input and perspective.

  35. Shea
    November 20, 2010

    For the benefit of readers here, I am going to reproduce the comment of Lee Hsiao from the Scout debate as it directly address these accounting issues:

    “Author: Leo Hsiao
    Comment:
    Just going to offer my opinion on some numbers as a Chartered Accountant. I haven’t really looked at the numbers that closely, so the following is just some generalizations.

    1. Privatizing the LDB is not really going to save the province 275 million. You can’t really look at the operating cost of the stores as losses when you’re examining the system as a whole.

    2. Privatizing the LDB is not going to drop government revenue by 877 million, unless the markup is dropped altogether. Even if that is the case, it’s not gonna be a billion dollar of profit flowing to corporations, because in perfect competition, net income will probably be around 5~10% of revenue.. which means price will drop significantly due to competition and instead of having a government reallocation of wealth through taxation, the people will just have more money to spend elsewhere.

    What privatizing will do, is to eliminate inefficiency in the system.

    First let’s look at whether the LDB stores are efficient.

    Based on the statements, LDB stores made sales of 1.16 billion, which is 40.6% of the total sales. Their portion of the 1.515 billion of total Cost of Merchandise sold is 615 million (actual number is probably higher, because the COMS of the items sold through LDB stores is probably higher than the ones sold to private stores. Reason will be explained below.) The actual profit generated from LDB stores would be around 270 million. Looks pretty healthy, no? But now let’s assume that they get their products at 80% of final sales price like everyone else (translated to a 25% markup). The COMS goes up to 928 million, which means they are really running at a operating loss of around 40 million IF they are on a level playing field.

    Now lets look at the COMS more closely.

    The total sales is 2.854 billion, and the Cost of Merchandise sold is 1.515 billion. Assuming that the markup is 117% across the board, that means 1.315 billion is the actual purchase price, and around 200 million is spent on storage, transportation, warehousing etc. (this number can very well be higher because markup is lower on higher price items) Based on some of the comments, a lot of this money is flowing to parties that are totally incompetent at what they do.

    So let’s say the LDB is converted to a tax collection agency, with the goal being to maintain the same level of contribution to the provincial coffers. Assuming that the total consumption is the same. (alcoholic beverage w/ cost of 1.315 billion), it’ll just need to slap on a tax @ 67% of purchase price @ wholesale to maintain the same amount of provincial revenue.

    Assuming that private store owners can run the stores and the distribution much more efficiently, we’ll get the same revenue to the government, but with better prices, better selections, and better services. What’s not to like?

    Lastly, in my opinion, it’s never a good thing when people are overpaid for what they do. I have no problem with liquor store employees making 20+/hour if they are actually knowledgeable and helpful, but at the current level of service they are vastly overpaid.”

  36. Howard
    November 26, 2010

    Most people would agree that BC has a superior social support system to that of the US so let’s look a different comparison – BC to Europe. The social safety net in Europe is as good or better than BC’s yet they somehow find a way of funding this system without sticking it to people that enjoy a glass of wine. A $40 bottle of wine that you buy direct from a producer in Spain can be purchased in a restaurant for around $55. That same bottle of wine will be over $80 in a store in BC and may get close to $200 in a restaurant. Why should I, as a wine drinker, be expected to fund social programs anymore than a person that enjoys skiing or any other type of activity. This notion that wine should be subjected to a sin tax is more than silly….it’s an insult.

  37. Shea
    November 27, 2010

    Howard, I thought of doing a comparison to Europe, but lacked enough data. I am thinking of spending a little time doing that. It is true that France, Spain and Britain all have much lower alcohol prices compared to us but also have strong social services.

  38. Jim Mitchell
    January 23, 2011

    Thank you Shea, I wish more people would have the hutzba to attack this situation. My contention is that Government should NOT compete with private enteprise in any fashion, period.

    The one thing that has not been touched on and has a huge inpact on Government revenue are the Pensions and benifits paid to retired employees.

    If the BCLDB ceased to exist today we would continue to pay retired employees for about the next 30 years.(including spouses) again no contributors, just drain on the taxpayer.

    I personally know of a manager who when retired was able to add his unused sick days to his time and was paid full salary for the days before his pension kicked in. Nice, but never happens in private enterprise.

    In addition, as I understand it, in the case of the death of a pensioner the remaining spouse continues to draw their pension at 100%, not like most private companys that reduce this benifit to 60% for survivors.

    Also it should be noted that the employees of this governmet agency are a net drain on our tax system, and for all intents only return tax dollars to the pool, as their wages come from taxes received by our government.

    A 100% privatized would add tax payers to the tax pool resulting in an increase in revenue to government coffers. If we replaced the 3500+- people (non tax payer) to the same number of actual contributers would this not help things like our failing health care system? Would this not add hundreds of thousand of dollars to B.C. revenues over the next many years?

    Please don’t let this fight end, it is time and it is necessary.

    Jim

  39. Shea
    January 23, 2011

    Thanks for the comment Jim. Pensions are a whole separate tricky issue that thankfully we don’t really need to consider in order to show the benefits of privatizing this particular industry. We wouldn’t want to go into the constitutional waters by proposing any sort of retroactive reform.

  40. Jim Mitchell
    January 25, 2011

    Was only refering to the great crisis both NY City and the state of Il. are haveing regarding the difficulty in paying retired government workers pensions.

  41. Okanagan Bill
    February 25, 2011

    Better prices? One example of “better” prices: Big Peat whisky in the LDB – $115; at a private store – $154.

  42. Shea
    February 25, 2011

    This is because the BCLDB controls the wholesale discount given to the private stores. So, for that $115 whisky, the BCLDB pays around $52 (they mark up 123% from wholesale) – thus marking up $63. The private store buys that at their controlled 16% discount off of retail – thus at $96.60. Their markup is therefore $57.40, that is, LOWER than the BCLDB. This means the private store is actually more efficient in its operations.

  43. Nick
    March 1, 2011

    Yes, we really do need to reform our liquor laws, the real problem here in BC is the Unions have far to much control, and the government who supports them makes far to much money. It won’t change till WE demand it, our government should be in the business of government, not retail. No NCLDB, and no ICBC.

  44. anonymous
    September 25, 2011

    I hope the board dies very soon. Everybody is tired of being price gouged so a few people at the top of the board can make fat pay checks.

  45. Small Guy
    May 25, 2012

    Government should not be in liquor business. Businesses are operated by risk takers, who put a considerable effort and financial resources to make available the best product to the consumers. At present, about 10 distributors out of a total of 400 distributors of foreign spirits supply 90 percent of imported spirits. The remainder can’t even get their foot in the door of LDB and no matter how good their product is, LDB won’t ‘list’ their products. The LDB also has licenced distributors who make lots of money without being listed as “employees” of the LDB and therefore their names and the the amounts they make do not appear in the BCLDB annual reports. On top of that, they are the ones who decide whose products get “listed”. As far as imported spirits is concerned, only a single person decides what the consuming public of BC can drink. The other distributors who have paid a large sum of money to get their distributor’s licence actually find their licences are pretty much useless because since their products can’t be “listed”, as a result, it can’t be sold in the BCLDB stores. Only a handful ( about 10 distributors out of 400 in foreign spirit category) whose products get “listed” are allowed to sell to the Government. To sell to the private stores is almost an impossible task because the step is made extremely difficult by the BCLDB who control every transaction including the markups of a private liquor store. For purposes of selection, variety, quality, and fair play, the Government needs to be out of that business like it has just happened in the State of Washington.

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