The OCSA vs. The Beer Store 9

 in Accounting for Taste / The Beer Store  tagged Beer in Ontario / Privatization / The Beer Store / The OCSA by

One of the interesting things that happened in Ontario’s beer scene this year is that the market is becoming increasingly contentious. The increased interest in beer is making it so that the status quo is becoming somewhat untenable. There are 155 craft breweries open or in planning as of this writing. That means a very large number of brands for which the LCBO does not have shelf space and a number of craft breweries which are not large enough to afford The Beer Store’s listing fees.

When you add to this the increased interest in the craft and import segments, you get players in the market who are more serious about effecting change than they used to be. Take the Ontario Convenience Store Association, for instance. They hired economist Anindya Sen from the University of Waterloo to produce a two part study that makes the case for privatization of beer sales.

The first part of the study is about the difference in pricing between two-fours in Ontario and Quebec. You can download it here.

I do not have a Ph.D. in Economics, but I’m going to try and walk you through the basic arguments here.

The methodology here was to choose five brands sold over a 22 week period and record data based on pre-tax beer prices. The period in question was Dec 2012-May 2013. The brands in question were Molson Canadian, Molson Dry, Coors Light, Budweiser, and Bud Light. The format in question was 24 341ml bottles. In Ontario, data was culled from The Beer Store’s website. In Quebec, it was culled from online pricing for Metro and IGA supermarket chains.

Dr. Sen’s findings were (for those of you who don’t want to wade through the PDF)

Quebec IGA Quebec Metro The Beer Store % difference IGA % difference metro
$26.08 $25.95 $35.56 27% 27%

 

Essentially, in Ontario we pay 27% more for a 24 of beer than people do in Quebec. That is essentially the primary conclusion of the study and then there are subsequent conclusions based upon that data.

Can you spot the problem with this study? The Beer Store could. They released a comment paper on the study on November 18th through the Earnscliffe Strategy Group. It is available for download here.

To their credit (and lord knows I’m a fairly vocal critic of The Beer Store) The Beer Store only lists one format of pricing on their website or in store. It’s the total amount that you’re going to pay for a thing. It includes both tax and bottle deposit.

The claim here is that the IGA and Metro prices that are listed don’t include bottle deposit or sales tax (GST and QST in Quebec.) If you remove from the average price of $35.56 the bottle deposit and applicable sales taxes (GST and HST in Ontario) the price difference is not $9.50. It’s $3.33.

The Beer Store’s study goes on to mention commodity taxes. In Quebec, these total about 50 cents a litre while in Ontario they total 91.62 cents a litre. As it turns out, this is the main reason for the difference in beer prices between Quebec and Ontario. The provincial commodity tax we’re charged is about 1.8 times higher.

 

 

Table 3:

Re–Stated Net Price Removing All Relevant Taxes & Deposits
  QC Average Price ON Average Price
Price after Adjusting for HST

and refundable Deposit

  

$26.02

  

$29.35
Adjustment for Provincial

Commodity Taxes

  

-$ 4.09

  

-$ 7.43
QC and ON prices on Equal

Basis

  

$21.93

  

$21.92
Adjustment for Federal

Commodity Taxes

  

-$ 2.56

  

-$ 2.56
Net Price after removing all

Consumer Taxes and deposits

  

$19.37

  

$19.36

 

Of course, this means that the data collected for the OCSA study was at best improperly fact checked and that any conclusions drawn from subsequent steps of the study are bunkum. This is dumb. It does not matter if you employ an economist to release a study if the basic and easily verified facts are incorrect. You cannot use an appeal to authority to point to an expert opinion if that authority demonstrably does not understand the problem.

And you know what? The OCSA’s study was released in August. No one questioned the thing. It claimed that The Beer Store was making 700 million dollars in additional revenue based on faulty data. It may have been wrong, but it sure got a lot of re-tweets.

This is the problem with the debate about Ontario and The Beer Store. Every time the subject of The Beer Store comes up just about any self respecting beer drinker is going to have an opinion about it. The problem is that aside from The Beer Store, no one actually knows how much money The Beer Store makes on an annual basis. The information is not disclosed to the public. The ability of interested parties like the OCSA to release a study claiming a 700 million dollar windfall is enhanced by this. It renders substantive debate on the issue ludicrous.

The end result of this go around in the Ontario Privatization Hoedown is that The Beer Store has managed to basically discredit any further studies the OCSA might care to produce. They have done this by understanding their own pricing structure. Frankly, it was kind of a gimme, but I have to applaud their restraint in not smacking it down on the second day with a cry of “Boo-Ya.”

What this should do is highlight the fact that the Ontario beer market is large and profitable and that in the next few years, organizations are going to fight over it. It is not being fought over for the benefit of the consumer, no matter how much the consumer might feel that they should have a say in the matter. Frankly, what we want is immaterial.

As a side note, the average price of those five brands at the moment at The Beer Store is $34.55. That may have been an unintended consequence.

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9 thoughts on “The OCSA vs. The Beer Store”

  • Reply ↓
    Ben

    There’s so much about the OCSA’s approach to dislike–not the least of which is the fact that it’s got beer writers like you siding with the fucking Beer Store.

    Mostly though, with their factually creative arguments in their own favour, they’re doing a lot to discredit any viable future alternative. I imagine that every time an implausible candidate for an alternative booze retailer is rejected, the government snuggles up a little closer to their ol’ safe friend The Beer Store.

  • Reply ↓
    Chris

    I absolutely refuse to shop at the Beer Store. I guess you can say I am off the beer consumer grid. Yes, I am a homebrewer and I can’t figure out why everyone doesn’t make their own beer. It would certainly send a message to the Beer Store king pins and the communists who run the LCBO.

  • Reply ↓
    Anindya Sen

    Dear Mr. St. John:

    I have read with your interest your analysis of my recent work on beer price differentials between Ontario and Quebec. Much of your analysis seems to be based on The Beer Store issued critique of my work. Unfortunately that study is flawed on many dimensions.

    In response, I have written a new study that is independent and not commissioned by any group. I have done this in my capacity as a professor in a publicly funded university who feels it important to contribute to policy debate.

    In summary, the results of my findings are robust. I examine price differences between nine major brands of domestic and imported beer. There are significant price differences between Ontario and Quebec, with Ontario prices being higher. This should not be surprising given the strong demand for beer and the fact that The Beer Store has a virtual monopoly.

    As I state in the abstract of my study, employing data on 24 bottle (341 ml) packs collected from major Quebec grocery retailers over many weeks, my results suggest median differences ranging from roughly $3-$6, without accounting for variation in province specific commodity taxes. The need to account for commodity taxes is conditional on whether the beer is manufactured in Ontario. Using the conservative approach of applying a commodity tax correction to all products, I find that median estimates of price differences for a majority of domestic brands, reduces to $1.3-$3.3 However, data from Costco reveals large differences for major imported brands, in comparison to corresponding prices posted by TBS. Specifically, median estimates imply differences ranging from roughly $9-$11, after adjusting for deposit fees, sales taxes, and commodity taxes.

    In fact, a weighted average of price differences between domestic and imported brands suggests a 17% in beer prices between the two provinces. In tandem with the likely existence of significant economies of scale, my results indicate that TBS experiences significant retail profits, which under some assumptions, may be even larger than $700 million. The implications for government revenue are obvious.

    The Beer store study claims that incremental profits are a function of differences in profits. As any person with an understanding of business knows quite well that differences in profits are not only a function of prices, but also of costs. Taking that into account I find significant differences in retail profits in beer between Ontario and Quebec.

    Also, as I’m sure you know, not all beer in Ontario is subject to the Ontario specific beer tax. The tax is relevant to beer manufactured in Ontario and may be applied to beer manufactured in other provinces but destined for Ontario. Imported brands are not subject to the tax and it is upto the discretion of the LCBO to implement mark ups. The point is, one must be cautious in claiming that differences in beer prices between Ontario and Quebec are an exclusive function of differneces in provincial taxes.

    This is the point of my research – what is perplexing is that incremental profits that can be linked to the monopoly status granted to a few private sector firms by the province – are retained exclusively by these firms with very limited benefit to the provincial government, especially during an era of significant public debt.

    Interested readers may download my study titled ‘The Beer Store, Monopoly Profits, and the Potential for Government Revenue’ from https://uwaterloo.ca/economics/sites/ca.economics/files/uploads/files/the_beer_store_monopoly_profits_and_the_potential_for_government_revenue.pdf

    In the interests of transparent debate and policy, I look forward to any further comments you might have on my research.

    Please feel free to contact me if you have any questions.

    Sincerely,

    Anindya Sen