An Analysis of British Columbia’s New Pricing Policy

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On November 19, 2014 the Government of British Columbia announced a new pricing model for liquor that is to become effective on April 1, 2015. The Government’s claim is that the new policy will provide “greater consumer choice and convenience, support small- and medium-sized breweries to grow and expand, and ensure fair and equitable wholesale pricing for the retail industry.” (BC Government News Release 2014JAG0319-001743). Based on the information that has been provided to the public, neither the first nor second of these bolded claims is supportable. Additionally, the new policy appears set to have a dramatic negative impact on many small businesses in the province. The implication is that both consumers and the majority of the wine industry will be better off under the old rules.

The Model as we Know it Now

This analysis will focus only on the wine industry and not on the policy changes to the beer or spirits industry.

The biggest challenge in analyzing the impacts of the new proposed policy is a lack of transparency and information. The BC Government claims in its press release cited above:

“Government’s updates on the grocery model and wholesale pricing are centred on addressing the calls of consumers, enabling a competitive marketplace and providing industry with certainty and time to prepare for the changes.”

Contrary to this claim, the industry has no certainty because the government has not provided the actual language of the policies (not even in draft) and has not provided very many specific details about its new policies beyond the following (and keep in mind even these details are only being released five months before the proposed changes):

New Pricing Model: The existing pricing model of various license types receiving a reverse discount from the LDB “retail” price will be replaced with a model where all licensees and each BCLDB store will pay the same “wholesale” price. As such, the current mixed markup of 117%/51% (117% on the first $10.25 of wholesale and 51% on the remainder) will effectively be replaced with a mixed markup of 89%/67% (89% on the first $11.75 of wholesale and 67% on the remainder). For example, an independent wine store (“IWS”) used to receive a 30% discount from LDB “retail” and a Liquor Retail Store (“LRS”) used to receive 16% discount from LDB “retail” but now both will pay the single “wholesale” price and therefore receive the same effective discount. To extend the example, under the current model a wine that used to have an LDB “retail” price of $100 would cost an IWS $60.87 and a LRS $73.05. Each could then mark up the wine based on that wholesale price. Under the new model, that same wine will cost both the IWS and LRS $91.91. It is obvious that in order to maintain equivalent margins to the current model, under the new model, both the IWS and LRS will have to charge considerably more for the same wine, meaning that the formerly $100 wine will under the new model cost anywhere between $125-$150.

Mark Hicken has provided the best in-depth analysis of this new markup scheme on his website.

The new graduated markup system will ensure only that wines that are $15 or less will remain the same price, but anything that is $20 or more will increase and those increases will become more dramatic the more expensive the wine becomes.

Grocery Stores: Will be permitted to purchase existing licenses to host a “store within a store”. The 5km relocation rule will be changed to allow greater ease in relocating licenses.

LDB Stores: Apparently each store will buy wines at the same wholesale price as licensees. The LDB retail stores will be hived off from distribution and run independently. LDB retail stores will be open on Sundays and have refrigeration.

What We Do Not Know: What remains unclear is the precise legal language of any of these policy changes. We also do not know just how the BCLDB stores will be restructured, how their budgets will be allocated, and what will happen to LDB stores that operate in the red (of which there will assuredly be quite a few). We also do not know the impact of the new policy on VQA stores and the sale and distribution of British Columbia wine.

Fair and Equitable Wholesale Pricing for the Retail Industry

The BC Government’s press release claims:

“The new wholesale price is designed to collect approximately the same amount of revenue from each product category as exists today.”

“The new system will see any liquor retailer, including BC Liquor Stores, buy product at the same price from the BCLDB.”

“It is our expectation that, starting April 2015, these changes will create a more competitive market for retailers. The changes we’re making to the wholesale price today will enable more competition between retailers to attract British Columbians into their stores and should not force any change in shelf prices.

Assuming the information now available on the new pricing model is accurate, the last sentence of the final quote is patently incorrect. It is simply not possible for retailers to maintain current prices for wines above $20 if the new model is put into effect as they will lose massive amounts of revenue. The government will claim that it is the retailer that sets the final shelf prices, which is true, but this is not a logical response to what a retailer will do when faced with significantly increased costs imposed by government policy. Obviously it is the government policy and not the retailer that is responsible for the increased prices and to suggest otherwise is disingenuous.

While it is true that there was inequity in the former pricing model between license types, the proposed solution does not merely balance that inequity between retailers, but instead benefits very low cost wines at the expense of medium to high priced wines. This policy contradicts the health rationale of minimum pricing and the following statement also included in the BC Government Press Release:

““Liquor in grocery stores and wholesale pricing are a few of many changes to support a level playing field and a more competitive marketplace, while balancing the priorities of consumers, industry and health and safety advocates. We heard from many stakeholders during the Liquor Policy Review that the current, varying mark-up and discount rates were confusing to different retailers – and government is acting to address the calls for simplicity and a level playing field.”

During the policy review, health and safety advocates focused almost exclusively on ensuring minimum prices because their research showed that very cheap alcohol correlated with higher levels of alcoholism. However, the new pricing model, while maintaining minimum pricing, is designed to decrease or maintain the price of wine that is at or below $15 a bottle while increasing prices on wine above $20 a bottle.

This contradicts the health policy concerns and does not promote the consumption of high quality wine for aesthetic enjoyment and with dinner but instead incentivizes the consumption of commodity wine with little aesthetic and cultural value that is designed as an alcohol delivery mechanism – a sad reality in a Province which has a tax structure so high that in order for wines to be priced at retail under $15 they have to be amongst the cheapest wines produced in the world – in other words, commodity wines often farmed and produced using environmentally unfriendly methods and using considerable additives.

Greater Consumer Choice and Convenience and the Impact on Small Business

The BC Government press release states:

“We’ve focused on making changes that benefit consumers, promote local products and support equal opportunities for business development across the board – this is a promise made, promise kept.”

As we have seen above, the new pricing policy will not benefit consumers of medium to high end wines because they will have to pay a lot more for the same wines. The policy will also have marginal to zero benefit for consumers of cheap wines as most stores will likely just keep prices the same and take greater margins.

Consumer choice will decrease because it will be increasingly difficult for retailers to sell the same selection of wines at more than $20 as they currently do under the existing system due to the fact that prices will increase. In most cases, good wine, made sustainably costs more to produce. These are the sort of wines that make people passionate, that pair with food, that carry history, culture and aesthetic appreciation along with them. Yet, they will become too expensive for stores to justify holding stock. Consumers will not be willing to walk into a store on April 1, 2015 and pay $36 for a wine they paid $30 for the day before. This leads to the impact on small business that no one in government appears to have considered.

The lifeblood of wine culture in any market is the availability of wines that matter and wines of distinction. The people who locate and import these wines are the bedrock of the system. Under the new pricing model, import agents in British Columbia that focus on the most interesting, important wines will find it extremely difficult to continue operations because these wines are almost exclusively over $25 a bottle under the current system, meaning prices will have to increase.

Consumers who paid $30 yesterday for a wine that today is priced $36 will most likely not buy that wine. Collectors will assuredly purchase wine in other jurisdictions instead. This will decrease demand for the interesting wines. Restaurants that carry interesting wines will have to stop carrying them because they pay retail and their input costs will increase, meaning they will have to increase wine list prices (which are already very high in BC).

As a result, it is quite plausible that import agents will see a massive decline in demand for medium to high end wines. This will force these agents to either cease operations or reform to import wines that will fit within the new pricing model. But the world’s best wines are not going to get cheaper just because the BC government introduces a new pricing policy. This means these wines will likely disappear from market or at least greatly decline in availability. This will have a dramatic negative impact on wine culture in British Columbia.

Most importantly, the new pricing policy is not equitable to many import agents who have invested considerable time and money into building businesses in British Columbia. These businesses will either fail or be forced to reform, to modify their passion in order to suit the government’s new pricing model. It is difficult to understand how this is equitable.

By way of example, the agencies That’s Life, Trialto/Liquid Art and Sedimentary import a significant number of blue chip wines into BC and do not focus on commodity wines. A mere smattering of blue-chip, essential wines these agents import include:

Gravner
Cappellano
Roagna
Pattes Loup
Nikolaihof
Ramonet
Roulot
Arlaud
Egly-Ouriet
Larmandier-Bernier
Billiot
Jamet
Zind-Humbrecht
Leoville-Barton
Jean Grivot
JL Chave

I conjecture many of these wines will be priced out of the market in the new pricing model that will see their retail shelf prices increase between 25-50%.

Existing Policies that Should be Changed, Are Not Being Changed, and May be Illegal

The current policy changes are being made under the guise of “levelling the playing field”. However, they do not level the playing field but rather shift the burden to consumers of medium to high priced wines. This appears purely political as most people will have little sympathy for consumers of medium to high end wines.

The statement also contradicts existing policies that discriminate against private retailers to the benefit of the LDB retail stores. Let’s look at a couple more claims from the BC Government’s press release:

“Government is also working to separate BC Liquor Stores’ retail operations from the Liquor Distribution Branch’s wholesale operations to remove any perception of an unfair advantage that government liquor stores have in the marketplace.

“Underpinning many of our liquor changes – including our models for liquor in grocery stores and wholesale pricing – is the concept that government needs to get out of the way and leave more to market forces.

Two policies contradict these statements.

  1. Restaurants are prohibited from purchasing product from private retailers and must purchase (without a discount) from LDB stores; and
  2. IWS’s will not be permitted to sell beer and spirits under the new policy.

The first policy does not appear to be supported anywhere in the two statutes that govern liquor distribution and licensing in BC. Furthermore, it is on its face an inequitable policy that gives government stores a significant competitive advantage. Restaurants also do not benefit because the variety of wines available to them for purchase is greatly reduced since private stores carry many products not carried by LDB stores. It seems clear that in order to truly “remove any perception of unfair advantage” the government must permit restaurants to purchase wines from private stores.

The second policy also does not appear to be supportable in the two relevant statutes. It makes little sense under the new model because IWS’s will not have the greater discount that they possess under the current system. In other words, the IWS will be made equivalent to the LRS in every way except for the fact the IWS’s will not be permitted to sell beer and liquor while LRS’s will. This is clearly not equitable and contradicts the claims in the BC Government’s press release.

Conclusion

Liquor law and pricing reform is essential. However, the current proposal for changes to the pricing model, based on what we know now, is inequitable on its face. It is difficult to understand how any of the goals of the policy reform will be achieved: better selection, a levelled playing field, the removal of unfair advantage, improved and equal opportunity for business development, no increase in shelf prices, and ensuring and promoting health and safety.

This policy appears as bungled as the proposal to privatize the LDB wholesale operations that was kiboshed a mere 6 weeks before launch. If this new pricing policy is enacted, I fear for the viability of a robust, passionate, diverse, culture-enhancing wine industry in the Province. The policy is a backwards step that will promote commodity wine consumption and make it even more expensive and difficult to appreciate good wine in a jurisdiction already known to have amongst the highest wine prices in the world.

The substance of the policy change that we know contradicts the claims about the policy’s purpose made by government. The stated effects cannot be realized. It is not an overstatement to say the entire industry is up in arms and completely flabbergasted.

Additionally, the government has consistently ignored (at least publicly) the only real price policy change that makes sense and that has been recommended by policy reform commissions and economists across the world: a flat-tax coupled with a government exit from private retailing. There are political reasons for this, but the government should confront those reasons publicly and honestly and explain to the public why this sort of reform is not possible.

Sadly, it appears the only hope is for the government to rethink its policy with a semblance of rationality, a quality that thus far has been consistently lacking in the liquor portfolio.

Comments

  1. Bill Tieleman
    December 7, 2014

    Thanks for this excellent – and very depressing – news on the ridiculous new liquor law changes. For those interested, I first wrote about this in my column in 24 Hours Vancouver and The Tyee online on November 25 – you can see that article at my blog above. More people – especially us wine collectors – have to hear about this and start putting pressure on the BC government to back off the single wholesale price as currently constituted – or get used to drinking Yellow Tail indefinitely.

  2. Robert McNair
    December 7, 2014

    Thank you for an excellent anaylsis of the proposed liquor regulation changes.
    To me the solution is very simple, albeit, unlikely to happen!
    The government should get entirely out of the liquor business. No “wholesale”, no retail. Period!
    They should only collect a flat tax. Nothing more.
    Governments should only be involved in essential services, liquor is NOT an essential service.
    They make enough mistakes trying to operate these; a normal free enterprise business doesn’t need them to buggar it up!!
    Go & try to straighten up some essential services like our over priced & incompetently run ferry service & our poor ambulance service. Still on strike after 2 years!!
    Just do it!!

  3. Chris Wallace
    December 8, 2014

    Sean,

    Thank you for your excellent analysis of a terrible situation. I know that I personally will substantially curtail my own purchases of fine wine in BC once this becomes enacted and the prices jump. And while this is a nasty to blow to me personally and to others who enjoy consuming fine wine, it is a terrible blow to those in the industry. I feel very sorry for the distributors and retailers of fine wine and their employees who will face downsizing and other tough decisions as price increases curtail their business.

    I was actually thinking positively about gradual reform of our antiquated liquor laws as BYO is now permitted in restaurants and grocery stores will soon be able to offer some wines for sale. But this is a massive step backwards. It is hard to believe that elected officials are unable to see the harm this “reform” will create.

  4. Leo Hsiao
    December 10, 2014

    I took a look at BCLDB’s financials. The total wine sale was $962 million for 66 million litres of wine sold (or 88 million bottles at 750ml). That means the average price of wine sold in this province is around $13 a bottle after GST/PST. They may not be lying when they say it’s not a tax grab, because for the vast majority of the public, the wine they buy may actually be getting cheaper.

    With that being said, I recall reading that there is a legal minimum price for a bottle of wine, and instead of taking a larger mark-up, the LDB asks the distributor to charge LDB more so the retail price will meet the minimum pricing standard. If that is still the case, then distributors of really cheap plonk are getting richer.

    The government should also look at it from a brain drain point of view. BC already has the highest housing cost and lowest pay. If I have to pay 30% more for my wine, it’s not inconceivable that I’ll just move, and I’m sure I’m not the only one who feels this way.

  5. Shea
    December 10, 2014

    Leo,

    The real question that I have not yet looked at is what percentage of total revenues are derived from wines $30 or more. Average prices are fine, but not helpful when determining the value of each price segment. I’m guessing the data is available in the publicly released documents. I wonder if there has been analysis on the various possible declines in revenue for the over $30 categories. It seems reasonable to assume there will be some decline in sales and therefore revenues of wines over that price. That said, I imagine an increase in sales at the low end will more than compensate, though that requires an increase in consumption, which contradicts the stated health policy objectives of the liquor reform. In any case, these are questions right now and I’d be very curious to see an accountant’s take on the numbers and projections under the new policy given different scenarios.

  6. Gustav
    December 11, 2014

    Shea,

    At this summers Oenology conference in Penticton Stephen Scheidel of the BCLDB spoke on current trends at BC liquor stores. One point he made was that the fastest growing price categories was the $30 or premium category. I’m sure the new pricing will have a negative impact on this growth. Unfortunately I don’t have a copy of the presentation but overall sales were up at all price points with one of the larger jumps being in this “premium category”. It was also interesting which varietals were popular and which weren’t with some surprises. That however is for another time.

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