Every Six Months… 3

It seems like every six months we get a spate of articles about privatization of liquor, wine and beer sales in Ontario. Currently, it’s in the press again because Tim Hudak is theoretically in favour of selling off the LCBO. Now, personally, I think that privatization of sales is a shiny bauble that gets waved in front of the electorate. There are so many factors that would go into privatization that simply mentioning it is never going to accomplish anything. I don’t believe that it will happen in the short term, and that a number of stars would have to align in order to make it happen in the long term.

The reason that the discussion is frustrating is that the status quo for the organizations that would be involved in the discussion never seem to change sufficiently in a six month period to bring any new information to bear on the situation.

It’s like a campus demonstration on social equality. The actual rate at which change takes place on a societal level is glacial. It’s the result of many small changes over a lengthy period. Sure, having placards and megaphones for an afternoon is cathartic, but it accomplishes relatively little. It also promotes a cognitive dissonance between people who think that change ought to be instantaneous and the reality of the situation. Small vocal groups tend not to represent the majority.

When these articles are written, they tend towards being somewhat exploratory while ignoring the fact that there was a similar article in the recent past. Personally, I hate this because the situation exists on a continuum and not as a single instance of reporting as you would be led to believe.

Rather than looking at it from the perspective of the consumer, you have to look at it from the point of view of the revenue stream for the province. The consumer wants change because they can’t find a certain variety of sherry or port, or because the craft beer selection is not expanding quickly enough. The consumer essentially wants to be satisfied on a basic, short term level. I have some sympathy for this, since “more good beer” is probably not a bad thing.

The problem is that that desire simply doesn’t exist in a vacuum. If you’ve read an article on the subject in the last year or so, you know that the LCBO generated a dividend of about 1.55 billion dollars for the province in the 2010-2011 period and about 1.63 billion in the 2011-2012 period. Keep in mind that the total amount of revenue for the province of Ontario in 2011-2012 is about 109.25 billion dollars.

This means that the LCBO dividend to the province is worth approximately 1% of the total provincial revenue. It will be slightly higher than that in coming years due to the sale of the LCBO headquarters and adjacent properties. Also, the dividend has been ticking steadily up for the last decade, meaning that there is some significant optimization of profitability going on.

The difficulty is that privatization is not an overnight process. It’s fine to spitball the concept that tax revenue might remain the same or even increase were sales of liquor, beer and wine permitted in convenience and grocery stores. The issue is that this is not magic. There are transitions to be made in order to allow for that situation.

Folks point at Alberta as a shining beacon of privatization. Sherbrooke Liquor, with its thousand beer selection gets mentioned a lot as the kind of thing that might appeal. The thing that tends not to get discussed in re Sherbrooke Liquor is that Alberta was privatized in 1993, meaning that it has taken approximately 20 years to get to the point where there are a thousand beers on the shelf.

I think one of two conditions has to be met amongst the players in the market before privatization can be considered anything more than a pipe dream.

In the case of political will, I suspect that it is unlikely that we will see privatization prior to a year in which there is a budget surplus in the province of Ontario. Ontario’s economic recovery plan suggests  that this will not happen until 2017-18 barring any catastrophe. Until such a time, it would be folly to play with the LCBO dividend that results in 1% of the provincial revenue stream. I would like to think that politicians of all stripes recognize that a guaranteed amount of income in a period of financial hardship is a better choice than an unproven alternative. Once there is money to play around with, you might see change.

The other possibility in the situation has to do with market share. There’s the possibility that the large brewers who own The Beer Store might be quite interested in privatized sales. While they currently control a de facto monopoly on 80% of beer sales within the province, the market share for their products is eroding at a relatively slow drip. This is a bad thing for large brewers, and you can see how there might be some resentment of the fact that they are forced to provide logistics and shelf space (however minimal) for their competition.

I mean, they’re not quite as resentful as the small brewers who are forced to pay for listings and shelf space, but they are probably mildly resentful.

The question of privatization may well hinge on whether the large brewers are willing to forego a sales monopoly in order to take advantage of wider distribution through supermarkets and convenience stores. After all, they are in an advantageous position in terms of economy of scale. Small breweries don’t have the ability to leverage deals with large chains. Large breweries do.

The difficulty is the additional outlay required to make this happen. This requires sales and negotiation, distribution, lobbying, additional and possibly alternative packaging for various chains. It requires more labour. It is an expensive proposition, and a strategy which would not see immediate profit due to the capital expenditure required to make it work.

Should large brewers see a series of poor financial quarters, this might begin to look appealing to them. It assumes, however, that the additional convenience provided to the consumer would result in the growth of the market. Given overall trends we’ve seen for sales of large brewers’ products, this is probably more risk than they are willing to sign on for at the moment.

What might well occur is a concatenation of circumstances whereby a provincial budget surplus and a shrinking market share pronounced enough for large brewers to take such a risk exist at the same time. Say, about… 2016-17.

In the meantime, I think Tim Hudak is performing the time tested political trick of “being seen to be looking into,” which probably doesn’t hurt.

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3 thoughts on “Every Six Months…

  • Brian

    I think a more ideal situation would see the LCBO stay pretty much how it is, but also allow for private imports and sales without as much red tape. The OCB for example could open co-op stores basically like the Wine Rack locations you see in stripmalls and such. Ryan Morrow pointed out that not all Ontario craft breweries were OCB and the smaller may be marginalized, and though that is true there would be nothing stopping those smaller breweries from having store fronts too.

    Private bottle shops are an obvious plus for most dedicated beer (or wine or spirit) nerds as well.

    That said, the LCBO will stock what sells, so you could see skids of Blue and Yankee Jim Ice where most of the the OCB section used to be. That would suck for a lot of smaller market customers where OCB stores may not get to for a few years. Living in Toronto and Ottawa respectively, we’d have it pretty good.

    I do agree that the MolCoo and Inbev people would essentially own grocery and convenience stores though, There is no way even Muskoka or Mill Street could afford to be in Quickies/7-11s outside of their immediate location.

  • Pit Boss

    Excellent post. In fact, I will go so far as to say that not only would prioritization (and the supposed benefits that come from it) be a slow and probably painful process, it would be a downright stupid idea. As a taxpayer in Ontario I like getting both the tax revenue AND the profit from almost 100% of the sales in the province. And I say that as someone who both calls and writes to the LCBO every week to complain about their piss-poor selection of rums.

    The answer to the perceived problems of the LCBO is not privatization. What the LCBO really needs to do is drag itself from the retail muck of the 1970s and become a proper modern retailer. Using 21st century retailing tools would let them easily service the needs of specialty customers with literally no extra expense or logistical overhead. Did you know that currently, they dont even track the items that are being searched for via their web site or their mobile apps? That is inexcusable. Period.

    The problem isnt government ownership, it is inertia and a refusal to get on board with the way retail works in this day and age. A single smart person could fix the problems in a month or two. Sadly, the LCBO doesnt seem open to listenning (or hiring) smart people.