There's never been a better time to be a local craft beer lover in Ontario. It's a statement that has rung truer every year since the decade began and a trend that looks to continue.
I'm so bullish on the local craft beer scene that if it continues developing at its current pace, folks will be saying we have entered the golden age of Ontario craft beer by decade's end. But there's still one thing that could prevent that promising future from unfolding as it should—the retail system that governs the way Ontario craft breweries can sell their beer to us.
On the surface everything looks pretty good for local craft beer. Under the current system the LCBO has seen high triple digit growth in sales over the past eight years. In the past dozen, local craft brewers have tripled their market share to a value nearing a quarter of billion annually. The number of new players in the local craft market has more than doubled since the decade began and they account for almost a third of industry jobs in the province. The soft metrics are just as impressive too. Top Toronto restaurants are starting to offer craft beer pairings with the same care and thought as they do wine. There's the beginning of a high-quality home-grown and educated work force with brewmaster and beer sommelier courses. Not to mention the number of local craft beer events and festivals now rivals local wine.
In short Ontario craft beer has flourished by any measure, so what's this talk about needing to change to the retail sales system? It's about setting-up the correct foundation for long-term success, while the industry is thriving. If we don't explore retail sales change now the Ontario craft beer scene won't realise its full potential of a golden age and the progress of the past two decades could be lost.
Any potential changes to beer retail come down to two issues and the most important one for local craft breweries is market access. There are three ways an Ontario craft brewery can sell directly to you and I: the government-owned LCBO, the privately-owned Beer Store and the on-site retail store it's permitted to have as a manufacturer. We'll focus on the first two because they're most convenient, common and statistically significant places we Ontarians buy our beer.
The LCBO buys its beer in two ways. One is through tenders (publicly available on its trade website). Staff consider trends, previous sales, a mandate to generate profit for the province and sales objectives during the process. Like any major multi-outlet retailer with seasonal products this is how most buying is done and it requires months of lead time which unfortunately isn't the most friendly for an industry with many start-ups. Luckily, the LCBO also has a process to buy on an ad-hoc basis. Together they should allow an influx of trendy and seasonal products throughout the year, a longer-term place for proven sales successes and some new or exciting local craft beers that LCBO staff believe are just plain good. The province's Auditor General's critical report and follow-up have shown that the process isn't as clear and documented as it could be and things don't always happen as they ought to, but it has served both brewers and the LCBO quite well until now.
Last month the LCBO buying process began to show some potentially serious structural issues. Barrie's Flying Monkey's and Toronto's Kensington released beers through the Beer Store after they couldn't get them into the LCBO. Based on Flying Monkeys founder Peter Chiodo's press release and Kensington founder Brock Shepherd's past comments to The Agenda, both prefer to sell through the LCBO and have serious issues with the Beer Store. But with their preferred retail partner not having room and wanting to give customers the retail access to these beers that they asked for, they really felt they had to go through the Beer Store. With the doubling of local craft brewers in the past few years and more entering the market, this could become an increasingly common problem with no easy solution.
That's because the local craft brewers have some business and philosophical concerns with the Beer Store. To get at the root of both it helps to know a bit of history. Like the LCBO, the Beer Store is a legacy of a compromise with the Temperance movement that resulted in the end of the prohibition era. Knowing the free-for-all of pre-prohibition was over prudent Ontario brewers seized an opportunity to shape their own destiny with a self-run beer-only retail store network. The government was happy to oblige because it was more concerned with the harder stuff and busy setting-up the LCBO. So while it owes its existence to a government-granted beer retail monopoly, the Beer Store is actually a privately-owned and operated not-for profit cooperative of Ontario brewers. But thanks to consolation and multinationalism it is now in the hands of three foreign brewing giants: Molson-Coors, Anheuser-Busch InBev (via Labatt) and Sapporo (via Sleeman).
Given that we're still a nation of beer drinkers it shouldn't be a surprise that this beer retail monopoly is pretty darn successful with a network of about 450 stores responsible for 80% of total beer sales in the province. About a fifth of its listings are local craft breweries and like the LCBO, it's the Beer Store's fastest growing sales category. Local craft breweries are enticed by a relatively streamlined and unrestricted listing process compared to the LCBO. There's no limit on the number of beers a brewery can have on shelves and there's no tender or sales criteria to meet. So long as your beer passed its safety requirements and you're willing to pay the listing fees the Beer Store will have it in whichever of its stores you want and list it at whatever price you'd like (subject to legal minimums). So what's the catch which makes it the second choice for many Ontario craft brewers?
For one, those listing fees. To get a beer into a quarter of the Beer Store's outlets a local craft brewery will need to write a $27,500 cheque. There's also an additional fee of about $0.16 per standard bottle sold to cover retail expenses. It's a significant cost to get retail access and for many brewers tips the balance towards the side of unviable.
But what's even more troubling for many Ontario craft breweries is how the Beer Store operates. Its claims of offering all Ontario brewers equal and open access isn't hyperbole. The issue for craft breweries is the philosophical approach of how that access is administered because despite common misconception equal and fair aren't synonyms. Besides the high cost for a start-up, the per-SKU listing fee practice slants incentives towards a limited range of a few core, consistent products that recoupe the fee over time. Most Ontario craft breweries produce a core product or two but they also tend to release rotating seasonal, speciality and one-off beers because their business model is less about high volume efficiencies like the macro brewers who own the Beer Store and more about the flexibility and freedom of small batch experimentation. A list fee that would allow you to swap out a barley wine for a bock in spring, then a hopped hefeweizen come summer before moving to a pumpkin beer in autumn and imperial stout before Christmas all for a single fee would be more enticing for a local craft brewer.
Even something as innocuous to the consumer as the Beer Store's layout is an issue for many craft brewers. The long-over-due rebranding at the turn of the millennium brought on a system where you selected your beer off a wall-mounted list of beers, placed an order with an employee who waited for it to be rolled out to you from back by another unseen employee before cashing out. This de-emphasised packaging and discouraged browsing-based impulse buys, tipping the floor for well-advertised brands and repeat buys like the popular macro beers made by the Beer Store owners. A later tweak introduced a self-serve cooler section featuring the top ten brands based on store sales. While this opportunity was open to every brewery, in practice the cooler was always filled with macro brands made by the Beer Store owners. To its credit the Beer Store has listened to this criticisms is in the midst of another rebranding moving back towards a self-serve format of the 1990s where all brands on the floor to browse. Some store now even feature new arrivals in special displays.
The second major issue with our retail system is selection. It's the tails to access's heads as it's really just the inverse, but with selection more directly affecting consumers. To understand the access-selection relationship you have to go back a decade-and-half. Back then a West Coast IPA, mainstream Ontario craft staple today, was rare and exotic. Both retailers and local craft brewers only had our reaction to lagers and mild pale ales as solid reference points. But as those early craft brewers have seen support and their customers develop and grow they've started to take chances with some bolder styles. Fast forward today and you find Ontario craft brewers thriving selling boozy barrel-aged imperial stouts and funky saisons alongside lagers and pale ales. That's what happens when a local beer culture with cosmopolitan tastes begins to develop. As consumers gain experience and education the bottles on shelves become more diverse and interesting. This is beginning to happen, but how is our retail selection on the whole compare to our southern neighbours?
The Beer Store boasts about its selection of over 400 beers from more than 100 breweries around the world as the largest in the province. In recent years the LCBO improved its craft beer experience significantly with brewery features, seasonal themed releases and staff education. That has seen its share of the beer market rise (a 14% increase in domestic sales over the past handful of years). But above all the craft beer group the LCBO has really embraced is local and single or double serving format. It now stocks over 100 different beers, making it the go-to place for a range of local craft beer. In isolation these numbers seem pretty good, but head to Premier Gourmet in Buffalo and you'll get context. It offers 1,500 top-quality craft beers (local and imports)—a bigger and better selection than you would see through LCBO and Beer Store combined and all in a single store located in a city with one tenth of Toronto's population. That wouldn't be as difficult for Ontario beer lovers to take if we had a retail system that emphasised quality over quantity. When you comb over craft beer enthusiast crowd-source lists for the world's best beers, we've maybe seen less than a handful on our retail shelves in the past year. We also aren't doing an exceedingly great job stocking local craft beer at retail. The Ontario Craft Brewers Associations estimates put us at 86 craft brewers last year and growing. If each produced an average of five beers a year (one core and four seasonal) to sell at retail and the LCBO committed to stock them all it would need to find space for 430 beers. It might be able to do that but would likely have to come at the cost domestic macro beers, craft beer form other provinces and around the globe. When you put these three often conflicting selection aspects (size, quality and local) together the Ontario retail selection is actually pretty impressive on the whole.
That's not to say that adjustments can't be made to improve, the quantity, quality and local selection of craft beer at retail in Ontario. These have all improved dramatically over the past decade and if they're made a priority they can improve even more. Looking at ways to improve cost, time and effort it takes for a craft brewer to list their product in the LCBO would be a great start. But it would need to be followed-up by continuing upon their current improvement path, investing in a larger management and buying team (the beer team is much smaller than spirits or wine) and then finding more shelf space. The problem any of those is that they likely come at the cost of compromising another area of the LCBO. As much as I love craft beer I'm not sure that's necessarily justified.
One of the Auditor General's most interesting findings was that beer was 20% of sales at the LCBO but only contributed 15% of gross revenue. When your mandate is to provide the best return to Ontario taxpayers allocaing more funds to an area that will give you a smaller return isn't a justifiable business decision. At the same time when you're only one of two beer retailers for a population of 13.5 million you also owe it to your customers to continually improve selection and push bounders so that sales will continue to improve.
Therein lies the major dilemma with the LCBO. It has conflicting mandates so each and every decision it makes is open to justified criticism. That's the single biggest reason to advocate for some significant change to our beer retail system. But just what kind of change is best and what are the potential consequences? That will need to wait for next week and part two.