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Tag Archives: Privatization

The OCSA vs. The Beer Store

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.

Every Six Months…

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.