Big brewers’ Ontario monopoly threatened

Share

The big breweries that own Ontario's Beer Store are facing an unprecedented threat to their private monopoly. Legal challenges are piling up, the government is promising reforms and everyone from craft brewers to restaurateurs is pushing for the end of this lucrative cartel arrangement.

What's more, a Globe and Mail analysis shows the Beer Store owners' iron grip on the province's beer market gives them nearly $400-million more a year than they would receive if Ontario had a more open system. It's an important figure for the province to consider as it searches for ways to divert more benefit from alcohol sales to the public purse.

One of the most unusual beer retailing models in the world, The Beer Store consists of a consortium of foreign-owned companies protected from competition by the government. Other brewers who sell in the system must pay the owners a fee. Most stores use a warehouse-like setup, with the beer kept behind a wall and fetched for customers by employees.

Founded in 1927 to appease temperance-minded voters by keeping tight control on beer sales, the company began as a co-operative of all the province's breweries.

Over time, through mergers and acquisitions, it fell into the hands of three multinationals – Anheuser-Busch InBev SA, Molson Coors Brewing Co. and Sapporo Breweries Ltd.

The Beer Store owners say that, because the retail system just covers its own costs, it is effectively a non-profit entity. But this ignores the money made by the owners themselves – who benefit from significant cost savings and higher market share by controlling the entire retail and distribution system.

"The Beer Store isn't consumer-focused. It's a distribution network," said Jordan St. John, co-author of Ontario Beer. "The large brewers are able to sell directly through stores that they own, creating a predictable model which operates exclusively for their benefit."

Beer Store data peg retail and distribution costs for the brewers at $5.34 per case of 24 – or $65.25 per hectolitre of beer, and about nine per cent lower for craft brewers. The Beer Store estimates comparable figures are $9.06 in Quebec, $9.56 in British Columbia and $10.23 in Alberta, all three provinces with more open beer retail systems. These savings yield about $246-million annually in Ontario for The Beer Store's owners compared with what they would shell out if they had the same unit costs as in Quebec.

Factoring in the owners' market share – 80 per cent of Beer Store sales compared with what they would have if they had to sell under a system such as the one at the government-owned LCBO, in which their market share is 74 per cent – their total extra take from the system comes to $396-million.

"There is a conflict of interest," University of Waterloo economist Anindya Sen said. "If you have three major breweries who are controlling retail access, what incentive is there to grow the brands of their competitors?"

But The Beer Store argues average prices are lower in Ontario than in Quebec, B.C. or Alberta – which means the system's cost savings are mostly passed on to customers.

Its data also shows the province collects $10.63 in tax per case – about $591-million annually – a rate higher than Quebec, but lower than B.C. and Alberta. This figure includes taxes on Beer Store sales by all brewers, not only the owners, and covers only sales made in retail outlets, but not restaurants and bars. However, the owners point to it as proof the treasury is already collecting a hefty take from the system.

"The efficiency benefit of The Beer Store is realized by everybody," said Jeff Newton, president of the lobby group that represents the three owners. "The efficiency benefit of the system is going to the government with high tax and consumers with low price. And every brewer gets the same benefit."

The Beer Store's price data for Quebec, however, are incomplete: They are based on AC Nielsen figures that look mostly at grocery store chains and exclude more than half the market, including convenience stores. Mr. Sen, who has researched beer prices for the C.D. Howe Institute and the Ontario Convenience Store Association, calculates that prices in Ontario are actually about 6 per cent higher than in Quebec.

Long-simmering opposition to The Beer Store exploded last fall after a government advisory panel led by banker Ed Clark revealed the company was benefiting from a 14-year-old deal with the LCBO that gave the private cartel the exclusive right to sell 12- and 24-packs, and forced restaurateurs to buy the most popular brands exclusively from The Beer Store. Amid the backlash, Premier Kathleen Wynne promised to overhaul the system. An announcement is expected within weeks.

At stake are the livelihoods of craft brewers and restaurateurs, and choice for the province's consumers.

Steve Beauchesne of Beau's brewery in Vankleek Hill, Ont., says he sells more from the store at his small-town brewery than he does in the 336 Beer Store outlets that stock his brew. He blames the Beer Store's wall for discouraging customers from discovering his beer. The fees are tough too, he says: To offer a single beer in six packs, 12-packs and 24s in a large number of outlets would cost nearly $250,000 in the first year.

Mr. Beauchesne also wants the chance to open an off-site outlet.

"When you're selling through your competitor's retail chain, it's a very risky proposition," he said. "I really do hope they allow other breweries to open another store. I've got great relationships with breweries around the world. I'd love the opportunity to bring their beer into my store as well."

David Hughes, owner of The Poacher pub in Burlington, has filed a $1.4-billion class-action lawsuit on behalf of the province's beer drinkers. The Beer Store often charges bars and restaurants more than consumers pay – a case of Molson Canadian, he says, costs The Poacher $45.75; the retail price is $33.95 – and he wants his business to be able to buy any beer from the LCBO.

"I see no logical reason why licensees should be paying such a premium, and it can only happen because of the stranglehold that The Beer Store has on the sale of beer in Ontario," Mr. Hughes wrote in an e-mail.

Restaurants Canada, meanwhile, has complained about the Beer Store-LCBO deal to the federal Competition Bureau.

The Beer Store has responded to the furor by offering ownership stakes to all Ontario-based breweries. But the three current owners would still have 12 of 15 seats on the board of directors, and many craft brewers argue the change is not enough.

Even Greg Sorbara, a former Liberal finance minister, is in favour of fully abolishing The Beer Store's monopoly. He contends the retail system should be handed off to either the LCBO or private companies.

"My first choice would be for the LCBO to take over responsibility for the Beer Stores," he said. "The issue is to end the relationship between three foreign-owned brewers and the retailing of beer."

Mr. Sorbara said he did not pursue Beer Store reform while in office because there was no public outcry. Both public opinion, and the government's attitude, seem to have shifted significantly.

"No government up until now seemed to have the political will or the might. No government seemed to indicate that they'd be looking at any kind of fundamental change – until this government," Mr. Beauchesne said. "I'm really hoping that as all this unfolds, it won't get watered down from what we're hoping can happen. We're at a crucial point."