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Report On Business Retailers divided about allowing Ontario grocers to carry beer

A beer fridge in a grocery store in Montreal, April 22, 2015.

Christinne Muschi/The Globe and Mail

Ontario's decision to allow grocers to carry beer in their stores has left retailers divided about the potential new source of business and uncertain about its effects.

While retailers say they welcome the province's first steps to bring beer to supermarkets, some big chains are struggling with restrictions that will limit beer sales in each store to about $1-million a year and keep package sizes to six-packs.

Smaller grocers fear they will lose out to larger rivals in the granting of just 450 beer licences, creating an unlevel playing field. And big chains wish the rules would be the same as in Quebec and Alberta where liquor regulations are more liberal.

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"It would be nice to sell beer and wine like we do in Quebec and Alberta," said Pietro Nenci, vice-president of food at Costco Canada.

Regarding the Ontario beer plan, "we are evaluating if it fits our business model," Mr. Nenci said. "It's not ideal in a club [store] environment."

Costco's strategy generally is to sell bulk goods at low prices. In Quebec and Alberta it carries beer in 60-pack cases. At one time about six years ago, Costco even considered selling beer in a 72-pack size, Mr. Nenci noted, but ultimately rejected the larger size because it was too heavy for both employees and customers to carry.

Ontario will approve 450 beer licences for grocers, and just 150 by May, 2017, which means most of the 1,500-plus food stores in the province will be left out. The beer rules are expected to be outlined in the Ontario budget on Thursday.

"It should be open to everyone," said Anthony Longo, chief executive officer of Longo Brothers Fruit Markets Inc., which runs 27 stores in Ontario. "It definitely has the opportunity to create winners and losers."

Steve Tennant, general manager of Hasty Markets, which has 220 grocery and convenience stores in Ontario, said he would have preferred that all retailers be allowed to carry beer.

Hasty Markets may be a test case for the beer licence auction. It's a convenience-store chain, which is a retail category the Ontario government has excluded from being allowed to carry beer or any liquor. But 20 of Hasty's stores are full grocers with fresh and prepared foods. The chain will be vying for beer licences for them, Mr. Tennant said.

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"We don't fully understand the rules," he added. "We have questions of how it's going to be administered" and how the province will choose which stores will get the licences.

Still, retailers are generally supportive of the move to allow beer in supermarkets, an industry group says. "The opportunity to provide these products through grocery retailers to shoppers is one that is welcome – I don't think there is any division on that," said David Wilkes, senior vice-president at the Retail Council of Canada, which represents the large retailers.

But, he said, "there are a lot of questions that remain to be answered in respect to the precision around the operation."

Large grocers that count on collecting fees from suppliers for everything from prominent shelf space to flyer promotions will feel the pinch because Ontario will prohibit such practices from beer vendors. Grocers pick up $3-billion-plus a year in these fees from food manufacturers, according to one analyst's estimate. The province will require the retailers to purchase beer from the publicly owned Liquor Control Board of Ontario rather than directly from suppliers.

The prospect of a retailer not being able to carry beer at all of its stores creates confusion for shoppers and added marketing costs for grocers, said Michael Pugliese, chief executive officer of Michael-Angelo's.

"When you're marketing for a two-store operator, it's expensive," Mr. Pugliese said. "It makes sense to have both stores with similar products and similar services. … And shoppers start to think: 'Why are you treating your Markham or your Mississauga customer differently?'"

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Mr. Tennant questioned how the government can put a limit of $1-million on sales per store. What happens when October rolls around and a store hits its $1-million annual limit in just nine months, he asked. "What do you tell your customers for the next three months?"

LCBO generates an average of $1.1-million of beer sales a store, with its most productive outlet bringing in $4.4-million of beer sales and the next in ranking, $3.3-million, LCBO spokeswoman Genevieve Tomney said. The agency's total retail beer sales (excluding wholesale revenues) came to $718-million last year, while the Beer Store had $2.7-billion of sales (less than 20 per cent of which was wholesale business to bars and restaurants.)

Under the changes, Ontario grocers will be allowed to sell beer only in separated areas that keep the same hours as the Beer Store. The foreign-owned Beer Store will keep its monopoly on selling cases of 24 beers. Under a new agreement with the province, however, it will have to give small brewers 20 per cent of shelf space in the stores, up from 7 per cent now.

Ottawa-based Quickie Convenience Stores, with 50 stores, has fared well with beer and wine in its 11 stores in Quebec, said general manager Chris Wilcox.

"In Quebec, if you don't have a beer and wine licence, you might as well close the door."

But now that his Ontario stores will have to take on other grocers with beer licences, "I'm quite afraid we're going to see traffic start to bleed away once this comes into full effect. I don't think this is fair at all."

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