I didn’t really want to think about numbers today. I had hoped to finally get to Rule Four for craft beer, but that’s probably going to have to wait. The Ontario budget dropped yesterday and there are changes transpiring for the Craft Beer industry in Ontario. In fact, this is not a bad time to check in on Ontario because there are a number of changes coming down the pipe over the course of the next several months. 

We have news from the provincial budget yesterday. 

One of the difficulties that we’ve had in Ontario, one senses, is that it’s hard to know exactly how to address the excise situation surrounding the beer market. Since the Ford administration took office in 2018, we’ve had the excise rate for beer in Ontario frozen. While the cost of inputs have gone up for breweries, the actual excise rate for Ontario has not. 

Federally, it has gone up as it escalates annually, but the Federal excise on beer is actually fairly low especially since it increases with brewery size. The vast majority of breweries in Ontario are actually under 2,000 hL a year, so while a freeze or reduction in Federal excise would be nice, it’s not exactly make or break.

Rejigging the provincial excise rate to a gradated system like the Federal would be a nice thing to do, but it’s complicated. Cutting the beer basic tax by 50% for small brewers looks decisive. Instead of $0.3975 cents per litre, it’ll be $0.1988 cents per litre. (thanks to eagle eyed reader, David Chang Sang for pointing out the decimal error) This only applies to brewers under 49,000 hL.

If you’re making 2,000 hL, that means you just saved the difference of $39,740. That’s a great change, but it’s not the only one.

There’s also a change to LCBO mark-ups for small brewers.

In this political environment, what we’re looking at is a real desire to give advantage to Canadian owned businesses at the expense of Multinational conglomerates. Molson Coors and AB InBev are Multinationals, so they’re a good target since Coors and Budweiser respectively are Fourth of July Apple Pie Coal Rollin’ Roll Tide American. Giving them a tweak plays well in the media.

If the LCBO is the wholesaler to grocery and convenience stores, but is an arms length Crown Corporation, it has the ability to provide an elegant solution for you. The LCBO, as a retailer, has an in-built mark-up on all the products it sells. These mark-ups are determined by category. 

According to their July 2023 pricing example sheet, a 750ml bottle of whiskey would be marked up 139.7% from the price supplied by the manufacturer. The supplier gets $7.09 cents. The LCBO gets $15.53. That seems steep, but remember the profits get remitted to the province instead of into a corporation’s pockets. Also, that’s fairly low globally. Don’t get mad about it. That’s just how it works.

Here’s the clever bit: Mark-ups are different depending on the volume of your brewery. If you make over 50,000 hL you are a “Beer Manufacturer”. If you make under 50,000 hL you are a “Microbrewer.” This means that there’s an already existing delineation between large foreign owned brewers and small locally owned brewers in the wholesale channel. 

The large brewers are subject to a mark-up of $0.8974 a litre. The mark-up is actually based on a six pack of 341 ml bottles (which should probably be updated since cans are now king). This means that for every six pack sold, the LCBO gets $1.836. The small brewers pay $0.3975 a litre. For every six pack of small brewery beer sold, the LCBO gets $0.813.

What our provincial government has done is reduce that by 50% for small brewers. 

That means that the markup for a six pack of small brewery beer is $0.4065. That’s not really helpful math since most breweries sell 473 ml cans. Translated, that’s $0.939 cents per can. Going by the earlier example of 2,000 hL of cans sold, you’re actually doing better by about $39,700. If you were a larger regional like a GLB or Nickel Brook doing 10,000 hL in cans, you’re looking at a couple hundred grand. 

The government gets a nice win, because they can say they cut a tax by 50%. No one really wants to understand what I just explained, so there won’t be any probing questions about tax vs. retail markup. The small brewers get some relief that doesn’t apply to larger brewers, which everyone likes since the political climate is ripe for this kind of manouvre. It pushes local business and it also has the upside of being inherently scalable up to 50,000 hL.

Some kind of relief was needed, and this is a very simple solution. It’s comparatively elegant. It’s a generous amount of money: extra employees or a couple of part time servers for a taproom. Maybe some fermenters. Maybe a small, local, targeted marketing campaign.

There are problems. Clearly, in order to take advantage of this, you need to raise your supplier price by the amount the LCBO has reduced its markup. You can get margin out of it that way. I presume that if you held your supplier price steady, the LCBO would simply drop the end pricing, which could make you more competitive on a volume basis (if you have the volume to compete). I can’t imagine anyone will do that in this economy.

Also, you need to be in the LCBO wholesale environment to take advantage of the second half of this package. If you’re a very small brewery, you might never be on a retail shelf at all, in which case probably excise isn’t your biggest problem.

The question people in the media might ask is whether Ontario can afford to do this given that LCBO revenues have decreased. In 2023, the LCBO’s craft beer volume was 238,970 hL. That’s about 50,522,198 473ml cans of beer. At $0.939 per can, you’re really only looking at a cost of $4,744,034 to support local industry.

In the long term, as The Beer Store shutters stores over the next two years and the LCBO takes over more of their market share as wholesaler for beer in the province, five million dollars is a drop in the bucket. LCBO remittance to the government grew by a billion dollars over the course of the last decade and a lot of that is grocery and convenience scale. As the alcohol industry goes through this period of transition in retail, this is a welcome adjustment.