(ed. note: This is longer than usual. It is hard to have a discussion about nuanced topics in short form. If that’s what you’d like, Buzzfeed is looking for 12 Readers Who Can’t Believe What Happened Next.)
You may have noticed that when they announced the changes to Ontario’s beer retailing system back in April, I didn’t actually write much of anything about it. You may additionally have noticed that the frequency of Ontario beer writing in general dropped off a cliff at about the same time as the announcement. A victory against The Beer Store, however small, was more or less the end of a narrative arc. I think everyone who had been covering it was more or less exhausted on the topic.
I’m brought back to thinking about the problem by last week’s announcement that the pilot project for 12 packs in LCBO’s had started.
Now, I agree with the skeptics on that one. The LCBO has limited shelf space and 12 packs don’t make a lot of sense in that context. The problem is that the LCBO has to perform the pilot project due to the optics of the situation. The lynchpin of reform was their not terribly secret agreement to allow The Beer Store to handle 12 and 24 packs exclusively. Somehow that made the public very angry and allowed for other concessions to be made.
I don’t care about whether I can buy a 12 pack at the LCBO (you could already buy two sixes), but some people in more rural areas might view it as a win. I do like the idea that this might open up the possibility of beer advent calendars getting stocked in the Christmas lineup further down the line, but I think you’ll agree that’s a minor point. The success or failure of the pilot project is immaterial; all it does is fulfill an obligation to be seen to invalidate the agreement with The Beer Store.
That said, I think that the sale of beer in grocery stores is going to prove to be a really significant victory and I’d like to tell you why.
First off, it’s really important to remember the chronological scale that we’re working on. When you consider that The Beer Store’s roots come from Brewer’s Warehousing in 1927 and a co-operative distribution system with individually owned stores, it’s easy to forget that there were eleven years of prohibition before that. That means that with a projected date of about Christmas, it has literally been a hundred years since anyone was allowed to handle beer outside a monopolistic system.
I can already hear your argument: “Because of the fact that they still have to use the LCBO as their supplier, this is still a monopoly.”
You’ve been paying more attention than usual, fictive strawman reader.
Yes. You’re absolutely right: this is more or less an extension of the existing system. The condition that people seem to overlook is that it’s a necessary extension because of the way the shape of the market has changed.
Secondly, there’s the caveat that change is coming slowly. There are projected to be 450 grocery stores selling beer eventually, but something like 150 by May 1, 2017. I’ve seen otherwise rational people complain that nothing had yet happened something like 70 days after the announcement. Even with permission to start immediately, it would have taken that long to renovate the retail space. It has taken decades of arguing and lobbying just to get to the point where beer in grocery stores was on the table. In this situation, any change is good change because it is likely to lead to more change later.
Thirdly, and this is the one I find pretty baffling, there’s the argument that “this is only going to help the big guys.”
This kind of crab bucketing mentality is one of the reasons I haven’t written about this yet. It’s massively depressing because beer nerds are most often the ones making this argument. They argue, despite having seen grocery stores in the USA, that the international conglomerates will buy all of the shelf space. That’s not the case there and it won’t be here. They also argue that the only companies that will benefit are “big craft” like Steam Whistle and Mill Street.
Neither of those are big breweries. 100,000HL is chump change in perspective. Sam Adams does 35 times that annually. I think that somewhere along the way we’ve lost sight of the actual economic scope of things. I’ll break down Ontario’s production over the last six years in order to help you understand what I’m talking about. These numbers are from Beer Canada’s 2015 statistical report. They are derived, as I understand it, from Revenue Canada.
In the case of this table, which I’ve borrowed from the report, we’re talking only about beer that’s produced in Ontario over the last six years. This doesn’t take imports into account, but it gives us a pretty real idea of the size and shape of the industry up to the end of 2014. What these numbers display fairly clearly is that the international conglomerates Molson Coors and AB InBev are bleeding incredibly badly. Between 2009 and 2014, they have lost 2,346,000 HL of production in Ontario. They are producing 26% less beer than they were in 2009. You may feel like laughing at them, but remember that the entire industry lost 19.3% even taking small brewers into account.
The volume produced by small brewers grew by a factor of 2.7 over the six year period. They now account for something like 12.4% of the beer produced in Ontario. I suspect that if you include Brick, which is over 100,000 HL, it’s actually more like 15%. When you think about what this means in terms of the percentage of brewers represented in The Beer Store, they were actually doing a worse job than you thought of being inclusive. It also means that the three brewers that own the beer store somehow managed to lose production to the tune of a quarter of their business while holding a defacto retail monopoly. That deserves a sarcastic slow clap.
Beer Canada’s statistical report says that there were 140 breweries in Ontario at the end of 2014. It is actually significantly higher than that now, and growing fairly rapidly to the chagrin of chroniclers. Almost no one can keep up. Numerically, the growth has been most prodigious in categories less than 5000 HL. Those breweries increased 75,000 HL in production between 2013-2014. That’s impressive as it goes, but that entire increase is still smaller than Steam Whistle. On the other end of the small brewing spectrum, between 15,000 and 100,000 HL, you’ve got an increase of 431,000 HL in six years. That segment tripled. In 2015, we’ll pass 1,000,000 HL in production fairly easily.
It’s hard to argue that really large breweries will benefit very much from Grocery Store sales. At the moment Molson Coors and AB InBev are floundering about trying to sell you apple flavoured Lager. I know that you think they will, despite the fact I just showed you they lost a quarter of their production with a monopoly. They’re already at more or less peak advertising. They’re actually going to have to spend more promotional budget on Grocery Store sales. I suspect it will be significantly worse for them than the current system. Remember: the limit on package size is going to be a six pack and the large brewers thrive on volume. Their entire model in Ontario has been predicated on selling 24’s of beer. Here are 450 new locations where they can’t do that and where everyone else can grow their overall volume selling 473ml cans.
There’s also the grocery store shopping experience to be taken into account. People are acting as though we’re going to get a purely No Frills experience. I wonder where people are shopping when I see some of the online arguments about this. You’re going to get huge chains attempting to replicate the relatively pleasant experience of the LCBO in their largest locations because they’re competing against it for traffic. They’re not just going to stock the ten most popular products because this isn’t a loss leader. This is a guarantor of foot traffic through their grocery store. I predict a significant bump in impulse bought gourmet snack foods.
Yes, this is going to take time. I don’t know that we have an end date on the 450 store model that has been suggested. I don’t believe that the changes will end there. I think that any change is going to lead to more change. My colleague Josh Rubin pointed out to me the other week that the arbitrariness of licensing based on square footage will probably lead to significant lawsuits from a competition standpoint. I rather suspect that the Convenience Stores have not given up either.
No, the system we’re getting is not ideal. It looks to me, based on the statistical evidence, as though it is intended to be economically protectionist of Ontario producers and to steward further growth in a calm and measured way. It favours increasing excise tax rather than focusing on consumer convenience.
The important thing is to remember that nothing was ever going to happen overnight. This is better than things have been in a hundred years. The complexity of the market has increased dramatically due to the number of players involved in retailing. While past performance doesn’t necessarily indicate future growth, the production of small brewers has been growing at an average factor of 1.3 annually. That was in an unfavourable environment with distribution controlled by very large competitors. We just added 450 stores over the next half decade in retail environments that will likely be tonally similar to the LCBO, but specializing in beer. Even without those additional stores, small brewers were managing production growth at 30% a year. It’s fairly likely based on the statistical evidence that they’ll make up something like 30% of the volume of beer produced in Ontario by 2020.
Grocery store sales are going to function as a tool that allows small brewers in Ontario to increase their market share to the point where they have an increased ability to influence legislation. I think that’s a good thing, but it does call into question what happens after that. Will the largest players ever legislate against themselves? Probably not. We may never get a free market in Ontario, but the best way to get anywhere near such a thing is to reduce the power of MolsonCoors and AB InBev in the sector. This will help do that. Any other outcome is unknowable.