Gracious, it’s been an interesting year. Looking at last year’s analysis, I mentioned that I liked to think about the state of the Ontario Market while trudging around to various breweries. I checked Google Maps to see my trip history for the last year and aside from a trip to Belleville in August to see Signal Brewery and a trip to Gravenhurst to host the Ontario Brewing Awards in October, it’s really a diagram of major streets and as little subway travel as possible. In summer I got to take the St. Clair streetcar a couple of times. Luxury.

That said, it’s just about time to take a look at the state of play in Ontario, as we seem to do every year.

I may well come back and update it based on a couple of data sets that we’re currently waiting for. Beer Canada’s annual industry reporting came out on April 15th last year, which is earlier than some editions. We’re still waiting on the numbers for December, and I’m not optimistic about those. With gray tier lockdown beginning November 23rd (I remember because my last public pint was the day before at The Rhino) and then a stay at home order going into effect on Boxing Day, it’s looking to be down year over year, which will probably drive 2020 negative in terms of domestic volume Canada wide. 

We are also waiting on The Beer Store’s annual financial reporting. They are in the middle of a capital expenditure spiral which sees a long term trend of selling off property year over year in order to cover increasing operating costs. They sell physical assets in order to operate (since they operate on a cost recovery basis) and every year the operating cost increases due to lease expenses. We’re well into diminishing returns on that.

It will be interesting to see the effects on their business of the chain wide POS hack that occurred in March of last year right at the beginning of the initial COVID lockdown. According to their twitter, this happened overnight on March 26th and the majority of the chain was down for something like 19 days, or until April 14th. Ultimately, that should be a blip in terms of annual finances given that business continued more or less normally albeit with inventory being hand counted. 

However, there are packaging concerns that are additionally problematic. Returns were paused on March 18th, 2020 and only slowly began to make a comeback over the course of a couple of months, with 200 stores by April 27th and 300 locations by May 11th. If you’re Molson or Labatt and dependent on the 341ml ISB bottle float to make your bones and no one is returning bottles, you’re in a lot of trouble. Hadn’t happened since February 1985, and that was a Beer Store lockout. Molson’s Q3 reporting suggested they were pushing hard at cans, creating their own facility with a 750 million unit manufacturing potential. 

As I say, we’ll need to revisit the financials when they come out, but the fact that a 452 store POS can be hacked at all tells you much of the story. No budget for pre-emptive IT solutions. Clock’s winding down.

Demography

We start with demography every year. This is because it is important. Depending on where you exist in the beer industry, you’re probably going to think what you personally do is the most important thing. If you’re a brewer, you’re going to think beer quality makes it. If you’re a marketer, you’re going to pat yourself on the back for the streetcar wrap. If you’re the social media guru, you’re going to believe it’s engagement (#likeshareandsubscribe). Nope. Demography is universal. 

As we mentioned last year, we’re in a trough in terms of population and beer. The majority of beer volume is always going to be sold to people aged 18-35. Look at this handy tool. The population pyramid is a good way to envision the age of each cohort in Ontario’s population. Set it to Ontario, Medium Growth, and move the slider to 2020. Follow along at home.

The Boomer generation, aged 56-74 is beginning to yield numeric superiority. Born 1946-1964, these are the people who ensured the high point of alcohol consumption in the 1970’s. Gen X-ers, aged 40-55 are the first generation for whom craft beer was a normal thing. Their numbers are holding surprisingly steady. Millennials are actually aging out of their beer drinking years. Born 1981-1996 and aged 24-39, their cohort actually dwindles over time, with tailing numbers toward 1996.

Gen Z? Born 1997-2015. The people who are able to buy beer for the first time this year were born in 2001. Yes. You should feel old. It’s an inexplicably male dominated cohort of about 160,200 people. Next year it’s 155,440. The year after that it’s 151,765. In fact, with the population as it exists (IE: people who already live here) you’d be in a lot of trouble. 

Go ahead and move that slider right to 2036. That makes this year’s 19 year olds 35 or 36 years old. That cohort is 184,780 people. That’s population growth just in that cohort of 24,580 people. That’s all immigration. Consider people who will be turning 19 in 2036. Currently that cohort is 149,235. Statistics Canada makes that 176,915 by 2036. That’s immigration of 27,680. 

Incidentally, that’s about the size of the current 23 year old cohort. From a demography standpoint, even with medium growth, even with immigration, we are in a population trough until 2036 or so. An increasing percentage of the population are going to be first, second, and third generation immigrants.  Canadians. 

(Ed. Note: A friend who I frequently enjoy a pint with, has been in touch to say that second and third generation immigrants might not be quite the way to put that. Second and third generation Canadians on the other hand is more the thing. Living here is kind of the point, after all.)

You need to diversify your outreach or you’re going to be selling beer to a proportionally smaller percentage of the population every year. Try selling beer to everyone. It just might work.

Large Brewers and Excise

I know I bang on about the low end of the market, but it continues to be important, if only to give you a sense of how things are valued. We’re going through something of an inversion at the moment. A 24 of bottles of value brand beer at The Beer Store is currently $38.50.

Remember: in order to get to “Buck-a-Beer” which was just about the dampest of squibs, we had to remove the minimum price floor, which regulated on an annual basis the amount that a case of value brand beer would increase in cost. No longer tied to CPI, the large brewers who predominantly make value brands bumped the cost of a case of their beer by four dollars over the course of three years. In January 2018, a 24 of value brand beer was $34.50. 

This means, incidentally, that since the advent of “Buck-a-Beer” the price of beer has actually gone up faster. Factor of something like 1.604 since 2007. That’s 62% more over 13 years, or nearly 12% more over three years. Value brands now cost a dollar more than Premium brands cost three years ago.

According to the Ontario Gazette ca. Nov 2020, we’re going to see base tax rate adjustments in Ontario starting March 1, 2022 and every March 1st subsequently, so expect the rate of increase to accelerate. Nice little poison pill from Captain Buck-a-Beer on his way out. 

We are in a weird flux period. For me, The Beer Store’s website only lists 18 Premium Brands. I no longer understand the categorical delineation point between Premium and Domestic Speciality. A case of Budweiser or Molson Canadian is now $41.50, which is, like the AB InBev and Molson value brands, four dollars higher than January 2018.

The other players in the market are, for the first time I can remember, not even remotely moving in lock step. Cool Lager is “Premium” but somehow cheaper than the value brands at $36.00. Sleeman Genuine Draught is moving at $39.95. Moosehead is up at $42.50. This doesn’t sound very exciting, but it essentially means that if there was ever detente between Canada’s larger breweries, they are no longer playing follow the leader. 

At the top end of Domestic Specialty, it’s getting very strange. Stella Artois, now brewed in Canada (presumably due to the fact draught volume is toast, shipping is expensive, and there was production space going begging), goes for $66.95 for a flat of 24 cans. Which ties into our next point. 

COVID-19 and Home Delivery

If there’s one thing that has become the hallmark of this year, it’s home delivery. 

There are no pubs to go to and the threat of disease is such that it’s very difficult to justify going out to pick up a single can of something. While the initial Covid lockdown was devastating in terms of volume, even the big players are having to fight door to door. If craft breweries suffered during the initial Lockdown, it was largely on a morale basis. A lot of staff had to be laid off or reassigned to different roles in the brewery. I’ve seen chefs and managers driving delivery and being fairly happy to do it considering. 

The small size of craft breweries allowed for comparatively simple pivot to home delivery. They were typically already delivering at least some of their beer to licensees, so the potential existed day one if they were ready to acknowledge the possibility. 

For the larger breweries, the pivot time was significantly longer. Take Molson, for example, whose Canada Day outing where they were attempting to partner with craft brewers in a frankly embarrassing attempt to draw eyes to their product was initially outsourced. Third party delivery companies did the packing and in some instances included beer from non-participant breweries. Eventually, Molson got to the “Ship and Sip” branding they have currently, but their delivery catchment area is actually smaller than Great Lakes Brewery’s catchment area. A flat of Molson Canadian in 473ml will run you $56.95. 

A flat of Great Lakes Blonde Lager will run you $48.00. Hell, Canuck would be $54.00. You’d actually have to order an additional beer with that Blonde Lager to make the $50.00 free delivery cutoff. This is where we live now. Macro flagship brands are more expensive than Craft flagships.

The problem is that the market has been conditioned away from flagship beers. Cass Enright’s Ontario Beer Delivery Index lists a frankly insane number of companies willing to sell interesting beer directly to you. Not all of them deliver Ontario wide, but many of them do. You, sitting in your chair reading this, have the ability to make any number of interesting beers arrive at your house later this week. I just tried counting manually and it looks like 159 companies including bottle shops and cideries and that’s Ontario wide. That probably represents thousands of individual beers that can now just show up at your house. You don’t have to put on pants. 

It highlights the issue that has been dogging beer in Ontario for years, which is that even with increased buy in from the LCBO, it was impossible for brewers to represent their products at retail with any kind of actual strength. The addition of grocery in 2015 with the Master Framework Agreement certainly helped in terms of public facing volume, but still made year round listings more or less obligatory.

The necessity of going through a mandated third party for sales is a thing of the past, but it comes with problems of its own. 

Contract Producers in an Unequal Market

I know that opinion is varied on Contract Producers like Ace Hill and Lost Craft. Believe me, I do. The larger Ontario craft producers view them as unreasonable competition, hence the OCB’s position on their membership. However, they do exist and at present time are disallowed from selling directly to the public for the reason that they do not actually possess a manufacturing facility. I wrote about this last year as the industry was gearing up home delivery. It has taken them awhile, but they seem to have banded together to seek redress for this issue. 

The Independent Craft Producers of Ontario including brewers, distillers, and cideries account for about 700 Million in annual sales. As I pointed out last time, there are knock on consequences to the potential failure of these businesses. Consider the breweries that rent them space. Places like Cool, Brunswick, Equals, Blackburn, Big Rig, Junction all base their business models in part on the idea that these contract brands are going to move volume. With LCBO sales sluggish due to a lack of in person purchasing, the lack of access to delivery hurts the bottom lines of two companies in one fell swoop. 

It offends my sensibilities on the basis of its unfairness. Also, I feel there’s a certain amount of hypocrisy involved given that contract brewing is one of the fundamental ways in which the brewing industry can become more diverse. The cost of a bricks and mortar facility is at least initially prohibitive, and the cost barrier to entry might dissuade new players in the market. Of course, that might be by design.

Bottle Shops

I’m going to say some unpopular things.

Not a week goes by that someone doesn’t get in touch and ask about the legality of opening a bottle shop in Toronto.

What we’re dealing with here is a loophole that looks to be open on a permanent basis, and as happens with loopholes, people are pushing the concept as far as it can go as quickly as they can push it. I’ll tell you the same thing I tell the people who get in touch: It would be a mistake to assume that these changes as they stand are permanent. They’re making it up as they go and it will likely continue towards liberalization. Opening a bottle shop at this point might be fun, but I’m not sure it’s going to work out long term. 

The idea seems to hinge around the fact that you must be a Liquor Sales Licensee with a license issued or transferred before December 9, 2020. It disallows just about anything that might be a chain: convenience, grocery, department, or big box stores are out. You know; corporations with lawyers. It disallows specifically places licensed after December 9, 2020 that do not operate primarily for in person consumption. You know; you can’t just open a bottle shop without pretending to be an actual restaurant. You could, theoretically, operate a bottle shop within someone else’s store if you had the Liquor Sales License prior to December 9, 2020. If you got it after that, it’s a no go. 

Essentially, the AGCO policy is set up to attempt to help actual restaurants that were actually struggling. Places like Bar Volo who legitimately do operate on the basis of being a bar and restaurant have Bottega Volo and that’s just fine. 

Additionally “Food must be purchased along with liquor sold for takeout or delivery, and it must be food sold by the liquor sales licensee holder at the licensed premises.” 

This has resulted in some relatively rough work being pulled for the sake of lip service. 4th and 7 for example are clearly within the bounds of the law because you must order a bag of chips along with your unlimited(?) volume of alcohol. Bevi Birra, which seems to have been the Small Batch Dispatch service prior to now has a place in Woodbridge that sells beer via Canada Post. I’m not aware of too many restaurants that serve their entrees by mail. There are other instances where I’m looking at the website and there isn’t actually any food and I can’t quite figure out how they’re being allowed to keep the ball in the air.

Don’t get me wrong. All of the selections are nicely curated and frankly, there’s so much product out there that you couldn’t sell it all through chains if you wanted to. The bottle shops are at least nominally here to stay and their time has come but it’s going to be fraught. 

This loophole obviously exists in the short term to allow struggling businesses to make a go of things during COVID-19, but my feeling is that the arbitrariness and liberty-taking on display is such that it would probably take a good lawyer about a day to make a case for further expansion on the other end of this crisis. If chips constitute “food’ then why shouldn’t an independent convenience store be licensed for liquor sales? Why should any of this hinge around a certain date except that it’s contingent upon a crisis? Expect a class action from exempted parties in the fullness of time.

It’ll need to be addressed at a time when it’s not a stop gap and when it does, don’t be surprised if it yanks the rug out from under the independent shops that exist currently. 

Draught Volume and Licensee Sales

The “secured container” in the same AGCO Bulletin basically means that growlers are now legal. I’m wondering how successful that’s going to be in the long term. If you’re a licensee and you’re lucky enough to get someone coming through the door of your pub on the other end of COVID, how likely are you to want them to take their beer and go? If they stay, they might order food. And more beer.

I think it’s a good stop gap for the time being and a nice option for the long term, but potentially not a really successful one. 

I think that on the other end COVID, you’re looking at sticker shock on public drinking. Are you happy to go to Real Sports and pay 12 dollars for a pint when you’ve been getting a case of delivered beer for 60 dollars? I think going out to drink is going to have to be vastly more experiential in order to seem worthwhile. For this reason I don’t think draught sales volumes are going to make a quick comeback. 

It does, at the very least, solve the incentivization problem we discussed last year.

The Inevitable

Did you know that the Master Framework Agreement is still technically in effect? It has, as I understand it, been sitting on the Lieutenant Governor’s desk waiting to be announced in the gazette. Theoretically, the threat of lawsuit exists on the part of the large breweries who made the deal in good faith. 

I’ve always maintained that the province of Ontario was going to phase out The Beer Store in 2025 and that the MFA was a graceful way of doing it. The conditions I’ve outlined are just making that more likely, not less.

To Sum Up

When we emerge from COVID-19, potentially some time in the mid summer, we’re emerging with a sea change of variables and essentially, from a forecasting standpoint we’re accelerating through ten years of change that I’ve been forecasting since about 2015 when grocery store sales kicked off. 

The MFA that more or less spelled the demise of The Beer Store has actually been outpaced by the changes the AGCO made and the changes the market demanded during COVID-19. Eventually grocery sales were always going to be available to any grocer that wanted one, but that was forecasted to 2025. 

With brewery direct delivery now being a significant driver of small brewery success, and bottle shops allowing for third party sales to consumers of small brewery products that are not year round listings, things are looking up. Selection is better than it has ever been. Everything is going to get expensive. At some point further out than we’re talking now, the LCBO is probably not going to be able to set the price point for sales anymore. Bottle shops are already competing on pricing, so that’s going to need to be addressed eventually.

To date, a year in to COVID-19, we’ve lost less than three percent of the brewing entities in the province and four of those were the ABE ERB chain which many people would count as one. Knock on wood. 

It’s going to be messy after COVID-19 when large companies who want to open bottle shops of their own lobby for the ability to do so. There are, for example, chains in Alberta who would really love to be in this market and are hovering about offstage. 

Given politics in Ontario and the insistence of whichever party is governing to make populist decisions about alcohol liberalization in the run up to elections for a cheap polling pop, I’d bet you’re looking at really significant movement on that front by about April of next year, just after the escalating tax rate is set to kick in and just before the election.

In the meantime, stay indoors and see if you can answer this question: “How much money would you need on the table to purchase The Beer Store outright from its shareholders?”