Looking Westward for a Wine, Beer & Spirits Revolution: What Ontario Could Learn from B.C.

Looking Westward for a Wine, Beer & Spirits Revolution: What Ontario Could Learn from B.C.

There's a revolution happening in Ontario. It's a loud one, but not in the old school sense of coup d'etats or even the modern sense of technology. Don't mistake it's quietness by traditional measures for a lack of importance either.

In fact, this revolution has the potential to affect at least 3/4 of Ontarians over 19 (likely nearly 100% of you reading Spotlight) and indirectly affect every person who lives in this province. I'm talking about a change in how we purchase our wine, beer and sprits in this province.

Earlier in May the Economic Club of Canada invited Ian Baillie, executive director of the Alliance of Beverage Licensees (a B.C.-based industry group that advocaes on behalf of bars and private alcohol retailers) to give a speech outlining B.C.'s alcoholic beverage retail model. The audience was a who's who of alcoholic beverages in Ontario. There were winery owners, representatives from the province's biggest brewers, wine writers (who were invited by the Wine Council of Ontario), LCBO representatives and of course the Economic Club of Canada's mix of sharp-minded business and academic professionals.

The crux of Baillie's speech is that the current alcoholic beverage retail system serves some producers and consumers very well, but it could be better. You can hear Baillie's the entire speech below, but its also important to highlight what this is so important.

The current mix of 630 LCBO stores and 440 Beer Stores leaves Ontario consumers underserved. With just a third of the population of Ontario, B.C. has a mix of 1400 stores (including 195 provincially-run liquor stores and 672 private liquor stores who are members of Baillie's organisation). That underscores the point Wine Council of Ontario president Hillary Dawson made during the introduction of Mywineshop.ca when she mentioned that on this continent only residents of Utah (where all alcoholic beverages over 4.0% AVB must be sold in state-run stores) and Pennsylvania (where all liquor stores are state-run) are more underserved than Ontarians.

For Baillie the ultimate consequence of being underserved is that local small-medium-sized wineries, and craft brewers and distilleries aren't performing as well as they could. For those on the consuming side of the glass that means Ontarians aren't getting the selection they could and should be getting.

One of the biggest reasons for this gap is the critical flaws in the current system, explained Baillie. Simply put there isn't enough shelf space at the LCBO for all the great local alcoholic beverages being made. If you look at the LCBO's 2010-11 annual report (the latest on its website) it stocked 900 VQA wines from over 80 Ontario wineries—not bad. But even if that doubled it would still leave 40% of the wine made by the 135 Ontario VQA wineries without a spot on LCBO shelves. That also ignores creating more space for Ontario craft beer (which led all other all other categories at the LCBO in 2011) and upcoming local craft distillers. Bluntly put if more local wines, beer and spirits are to make it on LCBO shelves it will will come at the expense of the current globally-diverse mix products stocked. That could lead to upset customers. In a worst case scenario it might lead to legal challenges under free trade rules by producers who saw their shelf space eliminated and even retaliatory sanctions against Canadian exports.

The other critical flaw is even more difficult that physical shelf space. Sticking with the wine example, the reality is that many small wineries simply don't make enough of their high-quality small lot wines to supply every LCBO with even a single bottle. That leads to an inherent bias where wide-distribution and prime shelf space are dominated by larger producers who can meet the necessary volumes to consistently supply a large number of stores. It's a problem that's not unique to alcohol. Rather it affects all major retailers who have multiple locations across the province and require large minimum volumes of whatever they sell.

This isn't to say that the LCBO is failing the Ontario wine and craft beer and spirits industries. Over the past five years the LCBO has made a concerted effort to increase support for VQA wines and Ontario craft beer. That support has delivered great dividends with local beer and wine being amongst the board's high-growth categories (continually delivering double-digit growth). The LCBO has even tried to correct some of the inherent shortfalls in its system. For example the Ontario Wines Direct Delivery Program allows smaller wineries an opportunity to be on LCBO Vintages' shelves. The program lets smaller wineries apply to a be listed in a cluster of carefully selected stores with a good history or potential to support local wine and work closely with staff to build the community relationship for future success. Although the program has been successful and seen small wines and small lot labels that wouldn't otherwise make it to LCBO shelves, it still doesn't fully address all of the critical flaws for the Wine Council and its members.

So for Baille and the Wine Council the answer to the critical shortcomings is a network of private stores to work alongside the existing provincially-run liquor stores just like in B.C. “We chose the best of both worlds and we've created many new opportunities on the way,” he said in his speech referring to the path B.C. chose a dozen years ago after watching neighbouring Alberta privatise government liquor stores in 1993.

Under this public-private hybrid system the importation is handled by the existing provincial liquor board, which has the infrastructure to collect taxes, do quality assurance and warehouse enough alcohol for the entire province. Consumers could then go to government or private liquor stores to buy their wine beer or spirits. The belief is that additional private stores would create competition and allow for a broader overall selection, more flexible hours and stocking procedures, as well as potentially more expertise about niche products. If this model sounds familiar it's essentially just like MyWineShop.ca which Wine Council presented earlier this year and has seen great public support.

One of the most surprising and bold statements from Baille's speech is that Ontario is under-performing when it comes to revenue from alcohol sales. Baille's assertion is that under the B.C. public-private hybrid model Ontario could be returning $2.7 billion to government coffers rather than the $1.6 Billion the LCBO returned in 2012. There's was a dispute of that figure by some attendees with the argument made that narrowing the gap between B.C.'s tax rate on alcohol would make-up the difference and then some. But the point is that all Ontarians should be concerned if underperformance in revenue from alcohol sales is brought-up as those dollars have the potential to help fund transit, social services, education or health care.

But if Ontario is to follow the B.C. model the big question is how did it turn out? Baille cited statistics that it worked on all the different levels that are brought up in opposition to the idea. The B.C. government has seen revenue from alcohol sales increase year-over-year. The number of local wines stocked in government liquor stores and retail stores overall has increased. Most importantly it seems to have helped local industry grow (B.C. has seen its craft breweries, distilleries and wineries at least triple in numbers over the past dozen years).

One interesting caveat of B.C.'s system is that private liquor stores purchase alcohol from the provincial liquor distribution board at a wholesale rate of 16% lower than consumers. A discounted rate was also something argued for in MyWineShop.ca so it seems critical to the success of a public-private hybrid system. Whether the LCBO would be willing to do this remains to seen. The argument by Baille and MyWineSop.ca is they would come out ahead despite the discount because they wouldn't be paying to stock the shelves, store bottles and all the other costs associated with retail. While any discount is a lot of guaranteed money for the government to potentially leave on the table, no discount and slim margins aren't exactly the best way to entice savvy entrepreneurs.

The other interesting factor is things might not be utopia in B.C. either. Last year the government announced it planned to sell the provincial liquor distribution branch and warehouses by 2015—a quick way to reduce expenses and generate money when you face a budget deficit. This had wine, spirit and beer lovers cheering and dreaming of lower prices and more choice. However the government reversed those plans when it was able to reach a deal with the B.C. Government and Service Employees’ Union. So it's business as usual. Even more interestingly, is that B.C. has a moratorium on applications for new liquor stores until 2022 and it was put in place not long after it initially began taking applications for private stores in 2001. The result is that despite a larger population compared to neighbouring Alberta, where all liquor stores are private, B.C. is significantly underserved. So it seems there could be tweaks in B.C. as well.

There's also been some alternatives proposed in addition to the B.C. public-private model. The first is to tweak the exisiting system, which is what the LCBO is planning to do with its 10 Express outlets in grocery stores set to open-up over the next year and quarter. These small store won't do much for selection, but they do address convenience. To address the issue of access for local wineries the LCBO plans to test a handful of VQA store-within-a-store boutiques at some of its larger stores. While both add-up to a step forward it's hard to believe how this incremental change will do much to address the critical shortfalls for many.

Another alternative is allowing convenience or grocery stores to sell alcohol. Baille doesn't think that's prudent. He has issues with what it could mean in terms of sheer numbers and for social responsibility. Social responsibility usually touches on ensuring minors doesn't get into trouble and that there are adequate support programs and protections for addicts. Based on secret shopper studies convenience stores are fairly vigilant about ensuring minors can't purchase tobacco. There's no reason to believe that they can't continue at that pace which sees them ahead of the LCBO and Beer Store in some studies. Support and protection for addicts is another story. There are over 10,000 convenience stores in Ontario and while the chances that all of them would want to sell alcohol are slim, even if 10 percent did it would almost double access to alcohol. This boom in access won't result in social ruin but it's also naïve to think there won't be some social consequences. So the major question on social responsibility front is how do balance the luxury of convenience for many while being sensitive to the minority that struggle with addiction?

Leaving social responsibility aside, convenience stores don't necessary mean better selection for consumers or better access for small wineries, breweries and distilleries, which is a major point of changing the status quo for Baille or the Wine Council of Ontario. The nature of a convenience store is to have on hand what people in the neighbour need when they want it. Given their limited shelf space most owners bet on wide range of products from popular national brands. So if they were given the chance add beer or wine to their product mix, it's hard to see why they would choose line-up featuring small wineries and craft brewers. You might get some savvy owners who use a carefully curated beer or wine selection to differentiate themselves, but they're likely to be the exception not the norm. But the most interesting argument against allowing grocery stores and convenience stores to sell alcohol is that even in Alberta, which privatise its system 20 years ago, that option wasn't a direction they felt was a prudent and it's not something they've expressed a desire to revisit.

It's a desire to revisit things which is exactly what prompted Baille's speech and the MyWineShop.ca before it. Ask any craft brewer, distiller or VQA winery the desire for a change to the way alcohol is sold to consumers and will be near unanimous. Based on angry response by consumers and restauranteurs as well as the resulting chaos when the union employees at the LCBO threaten to strike prior to the Victoria Day long weekend, many in the public would like to see a change as well. It even seems that the current minority government situation has the notoriously resistant to change politicians musing about change.

So the question is what's stopping the call for change from becoming reality? Probably not a lot other than people's natural wariness of change. That said a change should be coming sooner rather than later because knowledge about wine, beer and spirits is growing and will reach a critical point.

If you look at the latest International Wine and Spirit Research study you'll find wine consumption in Canada has increased since 2007 and should continue on a torrid pace that is three times the international growth average for the next three years. LCBO statistics which have and continue to see great growth in premium whisky, VQA wine and Ontario craft beer for the past few years support that larger picture. But more importantly when connect the dots to what you're seeing in terms of restaurant wine lists, cocktail bar openings and craft beer focused events you begin to see a larger picture that shows that many Ontarians care about what they are drink, where it comes from and how it fits in with their a broader epicurean lifestyle. In short, there's a growing food and alcoholic beverages culture. Along with that growth has come a movement to open-up choice by abolishing provincial trade barriers for Canada wine. With that budding food and drink culture there also comes a growing demand for a wider range of products from around the globe and if they can't be provided under current system the call for options to purchase them promised become even louder.

Whatever direction Ontario takes, expect there to be some significant changes in the sale of alcoholic beverages in the next few years. It has been an exciting decade for VQA wineries, Ontario craft brewers and distillers as well as Ontarians who love their products. That said revolutionary change doesn't happen without advocating for what you want. So now is the best time to contact your MPP and voice your preferred direction for retail alcohol sales in Ontario. Things aren't too bad right now and they could get even better, but only if we want it bad enough to speak-up.

You can listen to the Ian Baillie's full talk below;

Written by Mike Di Caro

Michael Di Caro covers all things vinous at Spotlight. His lover affair with Ontario wine began over a decade ago and he’s been in front of tasting bars trying to sweet talk staff into pouring a taste of a library wine or the latest unreleased bottle ever since. Since good wine can’t be made without great grapes, you can also catch him amongst the vines trying to persuade the winemaker into revealing his/her next big thing for you on Spotlight. His epicurean tendencies don’t just stop in the glass either. During the rest of his free time you can find him searching for the perfect bowl of Dan Dan noodles, exploring the city’s best tasting menus or baking cookies and mucking about in the kitchen.

Comments

  1. Ivan Stephen says

    A large proportion of Ontario wine drinkers is STILL (note the emphasis) not aware of the difference between VQA and Cellared in Canada (now renamed somewhat more honestly “International – Canadian blends”). Many of those people are otherwise educated, and would be interested in purchasing real Canadian wine if they could recognize it.

    There are a few problems related to this. First of all, the Cellared in Canada product (which starting in 2014, will be entirely foreign content) is positioned in the Ontario section, when the percentage of Ontario content is in the minority (and not even of high quality). Secondly, signage is lacking in clearly explaining the difference between the two categories.

    The idea that a wine with smaller production volume should be throughout the LCBO system is nonsense. Those wines are purchased by a minority of consumers, perhaps 10 per cent (which is still a significant number). Those wines should be available in specific stores, generally in more upscale neighbourhoods, or stores which have a clientele with higher education or income levels. This easily resolves the supposed “problem” of insufficient product at the LCBO.

    I really do not believe that the LCBO has shown true commitment to helping the industry, particularly smaller wineries. Furthermore, I am not convinced that the answer is a second level of private stores, as the large companies which produce Cellared in Canada wines (and some VQA wine too) will push for the right to have those foreign products in those stores. We should also be careful to not allow VQA rules to be changed to allow a small percentage of foreign content in VQA wines. (Do I sound cynical? Yes, I am.)

    I noted a small typographical error in the above article. It states that Ontario consumers are “underserved”. Elsewhere, it uses the term “undeserved”, which I find quite apt.

    • Mike Di Caro says

      Ivan, thanks for your interest in the article and your well thought out points. I think the CiC debate is an interesting one because you have to balance the interests of growers, small wine producers and larger wineries. It actually reminds me of the crossroads between labrusca and vinifera the industry faced prior to free trade. To me it also ties into where Ontario should be focusing its efforts. Given what needs to be done with crop thinning, the limited physical space where high-quality grapes can be grown, and the cost of labour, premium and ultra-premium wines should be Ontario's focus.

      It's unfortunate that people aren't making the connection that VQA equals 100% Ontario grown grapes and that CiC means mostly foreign juice with Ontario juice as a minority in the blend. At Spotlight we really don't cover CiC wine and our focus is on VQA wines and the occasional non-VQA wine that is high-quality and made from 100% Ontario grapes, but the winery has chosen not to or cannot get VQA certification for it.
      The Wine Council of Ontario is certainly on board with allowing another layer of private wine stores to support the LCBO. It's by no means certain that this will be a game changer for small producers, but you have to think more outlets for their wares in major population centres can only help. The WCO wouldn't be pushing it if it didn't believe it was the best answer for its members.

      I do believe the LCBO has shown an increased commitment to Ontario wineries in recent years and that has shown in increased sales. The LCBO is also in a tricky position because it needs to show a good return lest it be subject to further criticism and it also risks free trade challenges if it limits access to foreign producers by favouring local ones. That said the LCBO just like many other companies could certainly always do a better job.
      Thanks for catching the typo. It's been corrected now with the hep of your sharp eyes. I also wanted to thank you again for reading and taking the time to comment with your thoughtful response. The Spotlight team appreciates your feedback and we hope to see you around.

      Thanks, Michael Di Caro

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