Andrew Stodart is president of The Brands Group.
This spring, former bank CEO Ed Clark and his team delivered a first set of advisory recommendations to the Ontario government on reforming beverage alcohol sales and marketing to maximize returns for the provincial government.
They're now working on the second stage of this exercise. Their focus appears to be on the retail side of the business – a vastly complicated endeavour of competing stakeholder interests, large revenue producers and international trade agreements.
As someone who has marketed a variety of beverage alcohol brands in more than 100 jurisdictions around the world, I believe there is a way to deliver at least $300-million by focusing efforts on the non-retail side of the business.
It is important to recognize that the publicly owned Liquor Control Board of Ontario delivered more than $1.8-billion to the province in the form of a dividend this past fiscal year. The LCBO has increased this dividend annually for the past 20 years, and note that this dividend does not include the HST contributions and excise taxes it pays to the federal government.
Bluntly put, any tampering with the existing system puts some of this dividend at risk. Equally, any move to privatize more of wine and spirit sales will result in an opening of the private retail market to U.S. and European wines at least, to the detriment of both Ontario wine sellers and the LCBO's dividend. This is because of the North American Free Trade Agreement, but the new trade deal being finalized with the European Union will probably require allowing privatized sales of wines from these countries as well.
Finally, there is a lack of understanding, particularly among Ontario wineries, about what will transpire under a more privatized system. It is unlikely they will get the same type of preferential treatment from a private retailer that they are now getting from the LCBO in terms of shelf placement, allocation and rebates based on sales. In fact, I believe we may well see a decrease in Ontario wine sales as a result of expanded privatization.
There is an alternative, though, that can add an estimated $300-million to the Ontario government's coffers without detracting from the current retail system. This has been done successfully in a number of other jurisdictions, either in whole or in part. It's a two-step process that can be executed almost immediately.
The first step, which will have the biggest impact, is to move to what the United States calls a bailment or consignment sales system. Under this system, the LCBO would not take title to the goods it sells until they are sold on to the final customer, be that a retail consumer or a restaurant or a bar. While the LCBO does not break out its beverage alcohol inventory, based on their cost of goods, it is estimated that inventories in their warehouses and retail stores amount to at least $250-million. Moving to a bailment system simply means they would sell the inventory back to the supplier at cost and the supplier would be made responsible for this inventory and its associated costs.
As the LCBO tracks retail and restaurant/bar sales through its electronic point-of-sale system, it knows exactly what has been sold and what remains in inventory, both at the warehouse and the store level. In the case of consignment or bailment, they would simply pay for the goods when they are sold based on the reports they generate. This system is currently in use in a number of U.S. markets – indeed, the LCBO currently uses a consignment system for private orders and some restaurant/bar sales.
The second step is to do what Alberta has already done: Privatize the wholesale and logistics operation. The LCBO currently operates four warehouses – the main one in Durham, along with others in Ottawa, London and Thunder Bay. In addition, the agency operates depots for deliveries to restaurants and bars, which could be privatized as well.
Like Alberta's, this warehouse operation would have standard fees for various activities built into the pricing and could include a fixed delivery fee to ensure the same delivered price anywhere in the province. Estimates of the value of this business, including existing land and buildings, is at least $50-million.
Alternatively you could have multiple private wholesalers and distributors while retaining the LCBO as the sole retail outlet. This has been done for a number of years in Sweden, where the former warehouse operation has been privatized, along with a number of other licensed distributors. In this case, the supplier quotes a delivered price to all the monopoly outlets and then can use whatever distributor they want. These have included grocery distributors, soft-drink companies and beer companies, all of whom deliver to the Swedish monopoly stores at a fixed delivery price.
These two steps could be taken immediately. They could deliver more than $300-million to Ontario's government this year.