I have been quite neglectful at updating this website over the past month. I have good reason, however. In December, 2017, the Supreme Court of Canada heard argument in R. v. Comeau, a case of fundamental importance to all Canadian industry, including the wine industry. I appeared at the court to present argument on behalf of small British Columbia wineries. If 2017 was an eventful year for the liquor and hospitality industry, it was but a foreshadowing of the fundamental importance of 2018. Get ready for a whirlwind year.
1. Legalization of Marihuana
There is no doubt that the number one issue for the liquor industry in 2018 is the legalization of marihuana. Who will be granted licenses? How will they be regulated? More importantly, how will sale of marihuana impact liquor sales? In states like Colorado, sales of marihuana have resulted in significant declines in revenues derived from liquor sales. In states with privatized systems, that is of little public policy concern. However, in Canada, where we have mostly government-run monopolies for liquor, a shift from very high margin/high markup liquor to lower-margin marihuana could have a negative impact on provincial coffers. That could prompt additional changes to liquor policy and regulation. Right now, uncertainty is high, but what is certain is that legalization of bud will fundamentally change the liquor industry forever.
2. R. v. Comeau
While Comeau was argued in 2017, the decision will be released in 2018. The Court’s decision will have profound impacts on the industry, whichever way it is decided.
If the Court allows the appeal and affirms the 1920’s Gold Seal interpretation of the law (that s. 121 of the constitution protects against tariffs alone), it will resolve decades of uncertainty in favour of the provinces. The Court will be giving a green light to extremely protectionist provincial policies. As a result you can expect that the provincial governments and liquor boards will become particularly aggressive in targeting cross-border shipments of all liquor.
As many know, it is not only wineries that ship across provincial borders illegally, but many retailers, particularly those in Alberta, do so as well. It is likely that provincial authorities armed with a favourable Comeau decision will act aggressively against these black and grey markets, including by imposing regulatory reporting requirements on carriers backed by fines. This would likely result in much of this grey/black market being imperiled.
A shut down in these markets means increased profits for local retailers but it will also fan the flames of the need for legal auction markets within each province.
If the Court decides to liberalize free-trade in Canada and either dismiss the appeal or create a favourable interpretation of s. 121 of the constitution, this would mark an epochal shift for the Canadian domestic liquor industry in that it is likely direct to consumer shipping would become legal across most of Canada. This kind of decision will fundamentally change the financial parameters for operating a winery and other domestic liquor producers in Canada, increasing the value of these businesses and opening them up for further acquisitions by larger interests. It would extend the viability of such acquisitions to a much broader swathe of the industry.
Such a decision would likely also spell certain death for discriminatory provincial policies that would face court challenges from consumers and wineries. Over time, provinces may be forced to re-examine the very structure of their liquor distribution laws as consumers adapt to the new reality. Additionally, provinces will be required to set up new regulatory regimes to govern direct to consumer shipping.
3. Canada Free Trade Agreement Beverage Alcohol Working Group
Representatives from each province are currently meeting under the auspices of the Canada Free Trade Agreement to discuss drafting and implementation of free trade rules that govern alcohol. Comeau will undoubtedly have a significant impact on these deliberations. Without a decision in Comeau that favours inter-provincial trade, it is likely the provinces will implement a less than satisfactory system. On the other hand, the profile created by the Comeau case along with the dominant tide of public opinion mean that the status quo will not be politically popular. In my view, it is thus likely that even with an unfavourable ruling in Comeau the provinces will create some sort of system for interprovincial liquor distribution – even if unsatisfactory.
4. British Columbia Liquor Policy Review
The British Columbia government has, since 2013, been engaged in what seems to be an endless round of liquor policy reviews. First, the Liberal Government proposed privatizing the wholesale division of the LDB. Political scandals scuttled that effort. Next, the Liberal government conducted a “liquor policy review” that won it few friends in the small and medium business sector of the industry. That liquor policy review favoured the granting of licenses to grocery store operators – the infamous BC Wine in Grocery policy. Other reforms resulted in pricing increases, separation of taxes from shelf price (only to be added back at POS), alleged separation of LDB retail and wholesale, a levelling of discount levels across the liquor retail license classes (to the detriment of the Independent Wine Stores), among other changes. Many, many issues resulted from these reforms.
Now that the Liberal party is no longer in power, the NDP have elected to conduct their own liquor policy review. The NDP has appointed long-time wine lawyer Mark Hicken as liquor policy advisor to conduct the review. The review has the potential to remedy many of the issues created in the last-go-around. It also has the potential to do very little. Avid and thoughtful participation by various industry groups will be essential to success here, as will be the willingness of the NDP to expend at least some political capital to push forward some much needed reforms.
Whatever happens, 2018 is the year that sees deeper industry participation in liquor policy reform and the NDP’s first crack at putting its own mark on the portfolio. With Attorney General and former liquor critic David Eby at the helm of liquor policy in the province, it will see a high profile. Will he live up to his promise to fix liquor pricing?
5. International Trade Challenges to Canadian Preferential Treatment for Liquor
Not to be forgotten is the always-looking-over-our-shoulder WTO trade challenges launched by the United States, Europe, Chile, Argentina, Australia and New Zealand against preferential treatment of Canadian-made liquor. These challenges were driven explicitly by BC’s wine in grocery store policy, which restricted sale to B.C. only wines, obviously discriminating against foreign products.
However, BC Wine in Grocery was merely the catalyst for what is now a much broader challenge, including challenge to the essential BC preferences of direct to consumer shipping and markup exemption.
This trade challenge is wrapped together with ongoing issues between the US and Canada and so it is reasonable to expect some horse trading will occur. However, if this matter heads to a WTO panel, the majority of experts tend to agree that Canada is almost certain to lose. If that happens, major shifts will be needed to restructure domestic liquor law to ensure the local industry can continue to survive.
6. New Acquisitions of B.C. Wineries
2017 saw several very high profile acquisitions such as Tinhorn Creek and Laughing Stock. All reports are that this is merely the beginning of a trend toward acquisition and consolidation in the industry. Expect to see several more major announcements along these lines in 2018.
Rarely is a single industry subject to such a tsunami of major changes in its business and regulatory environment. All operators in hospitality and liquor should be paying very keen attention to the above issues and engaging in some thoughtful contingency planning. With so many issues at the fore, in my view, 2018 will usher in the modern era of liquor for Canada.
Have I missed anything? Any thoughts? Please comment below.