There are areas where governments have no business being involved because they do such a poor job of managing them.
They’re often wasteful, with little impetus to get more efficient because there are rarely detrimental consequences, such as a company going bankrupt or a house being foreclosed on.
The best example is the retail sale of liquor in Canada, which should be left to small and medium-sized business owners (like you).
As with other provinces, all retail liquor sales in British Columbia must be purchased through the government’s Liquor Distribution Branch (LDB), which acts as the worldwide buyer and distributor for virtually all liquor sold.
The branch is the third largest “buying group” of alcohol in the world, behind Ontario’s LCBO and Québec’s Societe d’Alcools du Quebec.
They are monopolies.
Unlike some other provinces, where alcohol is only sold through government liquor stores, British Columbia has almost 700 “private” liquor stores, which are mostly small and medium-sized businesses licensed to sell liquor at retail. This system was introduced in B.C. about 10 years ago, and it allows private liquor to compete with the province’s 200 or so government outlets.
Close to 40 per cent of all retail liquor sales in B.C. are now generated at private liquor stores. (In Ontario, although there are private winery, brewery and distillery retail stores, they are deemed to be “government stores” and they are labelled as such under provincial legislation.)
How do these small private stores compete with the B.C. government liquor stores? Despite the fact they have restrictions that the government stores don’t (private stores are prohibited from moving inventory from store to store, and they have to finance the cost of their inventory), the private stores survive, in large part, because they do what all businesses do to stay alive: they become more efficient with their overhead, especially their labour costs.
While the government liquor stores pay their unionized shelf stockers and cashiers as much as $21 an hour – plus pensions and benefits – the private stores are more market driven and pay $11.50 to $12.50 an hour for, in essence, a job that involves stocking shelves and operating cash tills.
I’m all for paying people what they’re worth, but stocking shelves with liquor and operating cash registers is not worth $21 an hour.
But here’s where the public sector really blows it. I said earlier that the provincial liquor distribution branches in Canada are the largest buying groups in the world. What’s the point of being in a buying group? Well, the chief benefit is that it can use its market clout to get better prices for products and, in turn, retain those profits for itself or offer price savings to customers.
Getting a cheaper “per unit” price for product because you're part of a large buying group is one reason people want to be part of larger chains, such as franchises. It’s partly why Wal-Mart products are so inexpensive. Wal-Mart acts like a big buying group and it purchases so much, it has phenomenal economic clout in the market. Its sells for the lowest price because it buys for the lowest price.
B.C.'s liquor licensing regime has been described as “Byzantine” and the cost to buy alcohol is outrageous compared with countries like the United States. A bottle of Yellow Tail Shiraz retails at B.C.'s government liquor stores for $12.99. You can buy the same bottle of wine for $10.40 or less in Alberta and $6.50 in California.
Why the excessive price difference in B.C.? Unlike Wal-Mart, B.C.’s LDB and other provincial liquor bodies in Canada don’t negotiate price based on the volume of alcohol they purchase. They don’t negotiate volume rebates at all. The LDB actually tells suppliers of certain alcoholic products to charge more, not less, because of something called social reference pricing.
The theory is, if the price for alcohol is high, people will drink more responsibly and they will buy less. So if the price of a new Finish vodka is being offered to the LDB for lower than the usual inventory carried by B.C. liquor stores, the LDB will ask the supplier to increase the price the board pays for the product, and it can’t be sold for less.
If social reference pricing worked, California would be awash with stupefying levels of alcoholism, and B.C and Ontario, with some of the highest pricing in the world, would be provinces of teetotallers.
But that isn't the case. People still buy alcohol, despite the pricing.
I’ve also been advised by private store owners in B.C. that they are not permitted to accept money from suppliers to advertise liquor products, yet those same suppliers are allegedly encouraged to spend advertising dollars in the LDB’s glossy Taste magazine to get preferential product placement on B.C. government store shelves.
Toronto liquor lawyer Arnold Schwisberg points to a similar situation in Ontario with the LCBO’s Food And Drink magazine and its high advertising tariffs.
Do governments really believe in social reference pricing when their glossy magazines and websites feature premium priced wines and cocktail recipes meant to increase consumption, not decrease it?
So if the LDB and other provincial branches are a big buying groups, why don’t they act that way? If you’re negotiating for two-million cases of vodka, why not be like Wal-Mart and negotiate the best possible price?
And if there's any merit to social reference pricing, and you don’t think the savings should be passed on to consumers, then use the millions of dollars in volume rebates and discounts to fund schools, hospitals or other social programs.
“On most products they sell,” says Mark Hicken, a lawyer and marketing consultant who provides services to the wine industry, “the B.C. LDB and other provincial liquor boards set prices by ‘working backward’ from the retail price using a fixed formula that then generates the wholesale price they pay to the producer.
“On lower-priced products, which are subject to social reference pricing, the formula often produces a wholesale price, which is often much higher than the price the manufacturer would have sold the product for, creating a windfall for the supplier.”
Mr. Schwisberg remarks that “frequently, the regulators don’t want volume discounts at all: they strive to maintain basement wholesale prices.”
As a result, the LDB and other provincial liquor boards overpay millions of dollars at wholesale because they want to sell at an artificially high retail price to discourage overconsumption. Mr. Hicken says producers love this system: “I’ve heard some of them say that provincial government control boards are their favourite customers because there is no price competition.
“’They actually tell us to charge them more for what we sell.’ Now what kind of customer does that?”
In 2008-09, the LDB purchased more than $1.4 billion worth of alcohol at wholesale. One would think it might have been able to obtain some volume discounts, proving my point that this is an area of business they either should run as a business or exit.
With growing demand to fund social programs, it may only be a matter of time before governments figure this out, and start using their market clout to negotiate better pricing.
Or maybe they’ll realize that they’re better at doing other things than retail liquor sales, and get out of it altogether, leaving the field open to small and medium-sized businesses, while policing them with an iron fist to ensure they aren’t serving minors.
Tony Wilson is a franchise and intellectual property lawyer at Boughton in Vancouver, and he is an adjunct professor at Simon Fraser University. His newest book, Manage Your Online Reputation, was published in November.