Critics say new B.C. wholesale pricing model will lead to more expensive wine and job losses

The B.C. government, however, insists it's merely creating a level playing field

    1 of 4 2 of 4

      The memo from Vancouver lawyer Mark Hicken sent shock waves through the B.C. wine industry. On November 19, the man who created the winelaw.ca website concluded there that the Liquor Distribution Branch’s new wholesale-pricing formula would lead to higher prices for everything but the cheapest wine on store shelves.

      In his analysis, Hicken indicated that as of April 1, 2015, a $30 bottle of wine would sell for $34 to $40. A $40 bottle would go for between $47 and $56, and a $100 bottle would sell for $125 to $151. Only at the lowest end—$8 and $10 bottles—might consumers pay a little less.

      Wine enthusiast and public-policy analyst Bill Tieleman is one of several people contacted by the Georgia Straight who said that Hicken’s analysis is accurate.

      “I just see consumers paying more, particularly in the middle and upper range,” the long-time NDP supporter said.

      The new pricing formula is among several changes announced since the government released its final report last year from MLA John Yap’s review of liquor policies.

      Next year, wine and beer sales will be permitted in separate retail outlets within grocery stores as long as they aren’t within one kilometre of an existing shop selling liquor. At the same time, government liquor stores will be allowed to open on Sundays and sell cold beer and wine.

      Hicken’s analysis was based on retailers maintaining existing profit margins at private beer and wine stores and independent wine stores. But Tieleman wonders if some will even survive in the face of new competition.

      The communications consultant predicted that over the long term, the government’s decision to allow beer and wine sales in grocery stores will benefit huge corporations such as the Jim Pattison Group, Loblaw Companies Limited, and Walmart.

      In the meantime, the B.C. Government and Service Employees’ Union’s recent five-year agreement requires the Liquor Distribution Branch to retain at least 185 government liquor stores over the life of the contract.

      “The government will make more money,” Tieleman concluded. “The big boys will make more money. And the small guys—whether they’re a small LRS [licensee retail store] or independent wine stores—are the ones who are going to get the immediate knife in the ribs.”

      That’s because the government intends to scrap a 30-percent discount for independent wine stores, 16-percent discount for private liquor stores, and 12-percent discount for rural agency stores.

      They’re part of the existing system in which wholesale wines are marked up by the province 117 percent on the first $10.25 and 51 percent on the remainder of the supplier’s cost. In the future, wholesale wine prices will rise 89 percent on the first $11.75 of a supplier’s cost plus 67 percent on any amount above that.

      The 195 government stores, 670 private stores, and independent wine retailers will pay the same wholesale fees and be allowed to choose their own retail markups.

      Wine store owner expresses outrage

      John Clerides, owner of Marquis Wine Cellars, says the changes will likely lead to significant job losses at independent wine stores. Last year, he doubled the size of his Davie Street store, not knowing that the government intended to eliminate his wholesale discount.

      “It’s like getting hit in the head with a sledgehammer,” Clerides told the Georgia Straight during a tour of his store. “It seems as though someone has it out for the private wine stores.”

      Throughout his 28 years in business, government regulations have prohibited Clerides from selling wine directly to restaurants, holding auctions on the premises, or participating in wine festivals.

      He is frustrated that the B.C. Liberals have granted opportunities for big grocery chains and conferred advantages on government liquor stores, and he claimed that the 12-member Independent Wine Sellers Association didn’t receive any benefits.

      “The 12 wine stores do about $54 million worth a year in business,” Clerides said. “That’s 10 percent of the wine market in B.C., leaving apart B.C. wine. That’s significant. I think they [the government] see us as a threat. We’re growing our market share. We’re giving them [citizens] service.”

      John Clerides feels like he's been hit with a sledgehammer.
      Tracey Kusiewicz

      The blunt-talking Clerides didn’t begrudge the B.C. Government and Service Employees’ Union its lobbying on behalf of its members for Sunday openings. But he questioned why public funds will be spent on new refrigerators in government stores.

      “Those coolers aren’t cheap,” he said. “That’s $50,000, minimum, a store. Where could that money be going? That money could be going to education, health, saving it—better things than putting fridges in stores. Leave that to the private sector.”

      As Clerides walked through his store, he pointed to the impact that the new wholesale-pricing model would have. He estimated that a 2012 Albariño D Fefinanes from Spain would rise from $31.90 to around $45.

      Then Clerides mocked Justice Minister Suzanne Anton’s claim that the government is trying to level the playing field when specialty wine shops are prohibited from selling beer and spirits.

      “Now we’re at a competitive disadvantage,” Clerides insisted. “How am I supposed to reinvent my business when my prices go up 15 percent and my competitors have beer and spirits—and I don’t?”

      Clerides noted that his store has become a destination for wine buyers, contributing to the revival of the West End. After what he’s witnessed with the liquor-policy changes, he promised that he will never again vote for a B.C. Liberal politician.

      “Davie Street used to be a dump, and it’s not anymore,” he declared. “I think we are an important part of that metamorphosis and now they want to take that away. I’ll thank Suzanne Anton and I’ll thank Christy Clark and I’ll thank [deputy premier] Rich Coleman and I’ll thank John Yap for marginalizing our business.”

      The Justice Ministry refused to make Anton available for a phone interview with the Straight. Instead, it sent written statements claiming—you guessed it—that the government is “levelling the playing field” and that it’s “not about changing prices for consumers”. The government also didn’t make Yap available for comment.

      NDP liquor critic worries about higher prices

      For private operators, one consolation is that they’ll be allowed to move licences across the province. That concerns MLA David Eby, the NDP critic for liquor policy, because small communities could lose their liquor stores to more populous urban centres, only to see them replaced by liquor counters in other retail outlets.

      In an interview in the back of his West Broadway constituency office, the lanky MLA highlighted some contradictions in the government’s handling of the issue. On the one hand, the government has promised beer and wine sales in grocery stores, but Eby said the one-kilometre rule means that there are only two or three locations where this could occur.

      He also claimed that Anton had said the government wouldn’t touch wholesale prices because that would create winners and losers, only to change her mind a few months later.

      “What I’ve heard from the wine industry, and certainly from the craft brewers, is concerns that prices may go up significantly under the wholesale-price reforms,” Eby noted. “So you’re talking about more expensive alcohol, and in many communities across B.C., there’s less available, which is almost entirely the opposite of the message that the government heard in the consultations.”

      David Eby (left, with NDP MLA George Heyman) is the NDP's critic for liquor policy.

      When asked what worries him the most, Eby replied: “As somebody who likes a beer and a glass of wine, I think, for me, the concern is the price is going to continue to go up. We’re already one of the most expensive jurisdictions for alcohol in North America.”

      The MLA added that he’s also “very concerned” about the potential loss of thousands of retail jobs across the province when grocery stores start selling beer and wine.

      “The private stores will close and the government stores will close,” Eby predicted.

      Industry rep concerned about his members

      One of Eby’s constituents happens to be Jeff Guignard, executive director of the Alliance of Beverage Licensees of B.C., which represents 400 of the approximately 670 private liquor stores across the province. In an interview at the Georgia Straight building, Guignard agreed with Hicken’s analysis that the new wholesale-pricing structure would lead to higher wine prices starting in April.

      “They’re taking a smaller markup on the lower-priced items and increased the markup as they go along,” he said of the higher-priced beverages.

      According to Guignard, the government is floating a false idea that beer and wine in grocery stores will lead to lower prices and greater selection, just as occurred in California.

      “It’s going to be more like what happened in Washington,” he cautioned. “It led to higher prices and lower selection and neighbourhood shops closing.”

      He also alleged that the overall effect of the changes, including the Sunday openings at government stores, will cause his members to lose market share. But he pointed out that the private operators will still face the same fixed costs, including rent and refrigeration costs, forcing them to either raise prices or cut staff.

      Guignard added that government stores, too, will face higher capital costs as they introduce refrigeration services, so that will put upward pressure on their prices as well.

      “The only thing that’s different between the two of them is where the retail profit goes,” he said. “The owner of the store has invested in his community, whereas they [government stores] take a little bit of extra money there and that goes into government coffers.”

      Not every private-liquor-store owner shares Guignard’s concerns, however. Legacy Liquor Store brand manager Darryl Lamb told the Straight in his store in the Olympic Village that he likes the uniform wholesale-pricing model because it makes it more difficult for the Liquor Distribution Branch to subsidize underperforming government stores.

      Lamb also said he’s not concerned about government stores opening on Sundays or offering refrigeration, saying he’s eager to compete with them because he feels he has more knowledgeable staff.

      Legacy Liquor Store is ready to take on the competition.

      However, the magnitude of the changes has alarmed some who finance the private-liquor-store industry. Guignard said that a couple of months ago, he spoke to one of his members’ lenders after the bank became concerned about his line of credit.

      “They wanted to talk about it because the risks were changing,” Guignard recalled. “Our financial institutions are absolutely nervous.”

      Meanwhile, Vancouver lawyer Shea Coulson has trashed recent reforms on his long-running Just Grapes wine blog. He wrote that claims of “greater consumer choice and convenience” and “fair and equitable wholesale pricing” cannot be supported.

      “Additionally, the new policy appears set to have a dramatic negative impact on many small businesses in the province,” Coulson claimed on his blog. “The implication is that both consumers and the majority of the wine industry will be better off under the old rules.”

      What's driving the changes?

      The B.C. government’s approach has given rise to several theories about what’s really going on. Guignard said that some of his members are concerned that there’s a link between the government’s recent negotiations with the BCGEU and liquor-policy reforms.

      In the last round of bargaining, the BCGEU negotiated Sunday openings of government liquor stores, claiming this would generate an additional $100 million per year.

      In addition to retaining a minimum of 185 government stores, the five-year deal included an appendix committing the Liquor Distribution Branch to “working co-operatively to minimize adverse staffing impacts resulting from store closures and store consolidations into signature stores”.

      Guignard said he understands why the government would want to open a busy outlet, such as the liquor store on Cambie Street near West 49th Avenue, on Sundays. But the liquor lobbyist questioned why this is being extended to all such outlets.

      “They may have signature stores in other areas which don’t need to be opened on Sunday because the market may not support it, and they could end up losing money at those stores,” Guignard stated. “It’s a strange sort of piece to throw into a labour negotiation when it’s a business decision.”

      The BCGEU settled for a 5.5-percent wage increase over five years, with additional increases in the final four years if economic-growth rates exceed predictions by the Economic Forecast Council.

      That has some private-liquor-store owners wondering if the BCGEU agreed to a modest wage increase in response to the government abandoning privatization of the Liquor Distribution Branch’s wholesale division.

      Then there’s the question of whether the premier and finance minister wanted to leverage the BCGEU’s wage settlement to drive a harder bargain with teachers and nurses. It’s worth noting that teachers went on strike earlier this year in response to their employer’s demands.

      “Our guys want to run their businesses and they want to offer products to consumers,” Guignard stated. “They don’t want to be used as a negotiation tactic in a multi-union deal.”

      Tieleman, a former B.C. Federation of Labour communications director, rejected any suggestion that the government sacrificed private liquor retailers to advance its labour-relations objectives. “I don’t see that as part of it,” he said.

      Meanwhile, the BCGEU’s director of negotiations, David Vipond, characterized this notion as a “pretty broad conspiracy theory”. He told the Straight by phone that after negotiations concluded, the union approached the minister responsible for the core review, Bill Bennett, to let him know that BCGEU members would be willing to work on Sundays for straight time.

      Vipond said that when Ontario allowed Sunday openings, it resulted in a five-percent revenue increase in the first year, which would work out to $50 million in B.C.

      “Three out of four residents in British Columbia want Sunday openings in the liquor stores,” Vipond added.

      BCGEU staved off privatization efforts

      It’s clear that the BCGEU likes the general thrust of the government’s liquor-policy reforms. The union that’s normally a friend of the NDP even issued a news release on November 19 praising the B.C. Liberal government’s latest moves.

      “We welcome the level playing field,” Vipond stated. “We welcome the opportunity to operate like a retailer. We’re certain we can increase revenue to the province.”

      Vipond also dismissed Tieleman’s theory that the B.C. Liberals are clearing the way for a grocery-store takeover of liquor retailing by first clobbering private liquor and wine stores and later targeting government stores.

      “I think somebody is worried and he’s parroting their lament,” Vipond said.

      The BCGEU has beaten back several privatization efforts in the past. Vipond recalled his members going on strike in 1988 to thwart an attempt by then premier Bill Vander Zalm.

      After Gordon Campbell became premier in 2001, there was more talk of privatization. In the end, the B.C. Liberals adopted a hybrid system, with public and private retail outlets, while keeping the wholesale side of the business in the government’s hands.

      “In 2002, we had to create a new classification of employees called seasonal,” Vipond said. “And they start at a reduced rate. They’re not even auxiliary and work up to 60 days a year, typically in the summer or at Christmas.”

      These seasonal workers’ starting wage is $15.55 per hour and auxiliary workers start at $16.77 per hour, Vipond revealed, adding that regular government-liquor-store employees are paid $19.16 per hour.

      He also praised Premier Clark for removing the “shackles” and letting B.C. Liquor Stores act like a retailer.

      “I think she’s a brilliant politician,” the BCGEU negotiator said. “She’s got a lot of skill. Gordon Campbell could be ham-handed. You couldn’t accuse Christy of that.”

      Political contributions may be an issue

      Some private-liquor-store owners—traditional supporters of the B.C. Liberals—contributed to the B.C. NDP before the 2013 election.

      The largest contribution was a $10,000 donation from Prince George liquor-store owner Jordy Hoover. And Vipond hasn’t ruled out the possibility that this might be a factor in how the government is dealing with the industry.

      “I was at the [NDP] fundraisers and saw them there,” he recalled. “I mean, they jumped ship. Popular wisdom was Adrian Dix was going to win and Christy was cooked.”

      As a result, Vipond said, the Clark government doesn’t owe anything to the private retailers.

      Guignard, however, said that if political donations were a factor in the government’s decision, it would be “extremely disappointing”, given that only a few of the 1,000 liquor-licence holders across the province made these contributions. Guignard also said that many of his members would be angry if it turned out that this played any role in the new uniform wholesale price.

      “No one said to me, personally, ‘Sorry, Jeff, I would love to help you out but someone in your organization gave $500 to the NDP last year, so screw you,’ ” Guignard said. “No one has said that. However, of course, we analyze those kind of political calculations.”

      In the meantime, Vipond predicted that grocery chains, including ones owned by billionaire Jim Pattison, will purchase licences of private-liquor-store owners.

      “There’s now a market for private licences, so he just has to look for some failing liquor store within one kilometre and buy him out,” Vipond said.

      Is LDB pushing for a bigger market share?

      Another theory is that the general manager and CEO of the Liquor Distribution Branch, Blain Lawson, launched an attack against private liquor- and wine-store owners without fully apprising the attorney general of the consequences of the single wholesale price. Tieleman said he doubts there’s any truth to this, but he acknowledged that some people are talking about it.

      So what could account for the sudden policy shift on wholesale pricing? The president and CEO of the British Columbia Restaurant and Foodservices Association, Ian Tostenson, told the Straight by phone that he thinks it all comes down to a “mistake”, which he expects to be corrected by next month.

      “I know what Mark Hicken has written,” Tostenson said, referring to the Vancouver lawyer’s analysis of looming price increases. “I think he’s correct. What they need to do is recheck the calculations.”

      When asked how a mistake of this magnitude could escape notice, Tostenson replied that the wholesale-pricing mechanism is “complicated”.

      “You have to go back to what the supplier is selling it at, too,” he said. “So I think when they look at this, it’s quite likely they didn’t see the impact when they calculated this. I’m going to give them the benefit of the doubt.”

      Eby, however, said that he’s quite certain that the government officials knew exactly what they were doing when they approved the new wholesale-pricing model.

      From an office desk he pulled out a sheet that outlined how beer prices are calculated under current and future systems. In the new model, there are two markups: one for wholesale and one for retail.

      “It will result in increased government revenues—essentially, a hidden tax increase,” Eby said. “There’s no way that that didn’t show up in a memo on somebody’s desk—that, ‘You understand this means that wine prices are going to go up 16 percent on a bottle above $20.’ ”

      The Liquor Distribution Branch has not amended its three-year service plan, which forecasts net income to reach $891.1 million by 2016-17. That’s down from the $929.6 million in net income in 2012-13.

      The branch stated in its service plan that lower net revenues resulted when the harmonized sales tax was replaced by the provincial sales tax. At that time, markups were reduced to rates that existed prior to the introduction of the HST.

      However, if wholesale prices rise and government stores capture a bigger share of the pie, expect more money flowing into the government treasury.

      “Each percentage change in the cost of products in the wine, spirits and refreshment beverage category has a direct effect on net income of approximately $7.8 million due to the percentage-based mark-up on these products,” the service plan states. “Each percentage change in the market share of BC Liquor Stores affects net income by $3.9 million.”

      Meanwhile, lawyer Coulson wrote on his blog that the “lifeblood of wine culture in any market is the availability of wines that matter and wines of distinction”, but he claimed that people who source these beverages are facing an uncertain future.

      “Under the new pricing model, import agents in British Columbia that focus on the most interesting, important wines will find it extremely difficult to continue operations because these wines are almost exclusively over $25 a bottle under the current system, meaning prices will have to increase,” he stated.

      Tieleman also said that independent wine stores provide a valuable contribution by searching out unique products often overlooked by government liquor stores. But he believes that’s incidental to the government’s broader objectives of raising more money and allowing grocery corporations with low overheads to move into the beer and wine industry.

      “I don’t think it’s an intentional effort to kill independent wine stores,” Tieleman added. “I just think they are collateral damage in the overall government scheme to move toward, eventually, a private system.”

      Comments

      13 Comments

      Grant

      Dec 10, 2014 at 6:27pm

      I'm in the industry.The discount rate is rumored to be 20% for everyone.We shall find out soon i guess.

      0 0Rating: 0

      Ali

      Dec 10, 2014 at 11:36pm

      On a level playing field:

      Everyone has the same discount
      Everyone can sell wine, beer, and spirits
      Everyone can provide liquor to restaurants
      Everyone carries listed and specialty items.

      Unfortunately, this is not true now; nor will it be true after the proposed government changes. I've seen the numbers. In a public court of law or opinion, a citizen would never get away with this scheme. But since liquor in BC is ruled by a dictatorship, our politicians are going to get away with this if we; people who buy, drink, gift or order wine.

      We shouldn't stand for this. We already pay too much for wine. We're one of, if not, the most expensive place in North America to buy alcohol. Isn't it bad enough that our elected officials flunked math?

      0 0Rating: 0

      Try getting

      Dec 11, 2014 at 8:29am

      Someone other than a NDP windbag, or a retailer who’s been subsidized by the government for 20 years, to comment on these changes. Here’s the bottom line. A select few retailers benefited from restricted competition and price breaks for years and now that’s changing. Big deal. Welcome to the real world of retail you cry babies. These stores made money hand over fist under the old rules and now they might have to reduce their margins to compete like every other business. People I talk to in the liquor cartel are just fine with these changes. In fact, one guy just bought a new license. I’m sure he wouldn’t be doing that if these changes were so bad for business.

      0 0Rating: 0

      EMC

      Dec 11, 2014 at 10:12am

      How about us comsumers? This deal will see pay more for products that are already among the highest priced in N. America.

      Oh, but the GCGEU likes it.

      SPM

      Dec 11, 2014 at 12:06pm

      That Anton woman needs to go - back to her Kerrisdale "Creme de la creme" world. #GetLost

      0 0Rating: 0

      Really?

      Dec 11, 2014 at 12:58pm

      "We’re already one of the most expensive jurisdictions for alcohol in North America.”

      Add to that the following...

      - Housing mostly due to allowing rich foreigners to buy property without any restrictions,

      - Gas prices due to heavy over taxation,

      - Food prices due to bad agricultural policy and loss of productive land for Food security,

      - Hydro now that the Bc Liberals gave their frineds above market rate guaranteed power prices paid for by the all of us including the smucks who voted for them,

      - Prices for all sorts of essential goods,

      Please give it to us up the ass we are Canadian in this particular case British Columbians and we keep going back for more, make you wonder maybe the majority like it that way.

      Rod Phillips

      Dec 11, 2014 at 1:05pm

      There is a bit of 'Chicken Little' in this story, however, scratch the surface and there is a lot of truth. As a former buyer for a private chain, pricing and distribution were the two big nuts in leveling the playing field, but not the only ones.
      I have yet to see an economist or market expert suggest the ad-volerum pricing system (current and future) is preferable to a flat tax model. A flat tax would have guaranteed revenue neutrality for the government, level the wholesale field and been 100x simpler to manage. Why was this ignored?
      PS- I'm shocked and more than a little dismayed, that the Restaurant Assoc. is not up in arms about being left out of wholesale pricing.

      0 0Rating: 0

      Suck Me Dry of Wine

      Dec 11, 2014 at 2:33pm

      Yes this is stupid policy but...

      If the Private sector is so much more competitive than they should be able to "compete" as follows...

      * Labor Costs one of the biggest Costs in Retail is an easy win for the Private Wine Stores they can pay Minimums $10.50 and/or upto $15 for most of their staff,

      * Vs $19.16 per hour in government stores,

      * Offer really better service via training your staff properly in Retail,

      There are other competitive things that can be done to beat out sloppy could not care less Government run Stores.

      I know this as a former Multi Unit Store Manager in Vancouver for a Billion Dollar + Corporation before venturing out on my own in my Business.

      So if your truly a Private business stop your whinning get to work tweak your business model and/or sell, but please shut up about your complaining already.

      0 0Rating: 0

      Tom from Burnaby BC

      Dec 11, 2014 at 3:17pm

      Yes prices are going down like fish someday will breed with humans one day.

      Everything in BC is going up or haven't you noticed.

      Hydro, gas, taxes, food, haircuts, booze, toilet paper, coffee. You pick a few.

      I remember when our govs told us canadians were paying too little for everything compared to other countries.

      Stupid canadians watch it comes to fruition and it will never stop because most rich canadians are to comfortable in our own self made misery.

      0 0Rating: 0

      Wino

      Dec 11, 2014 at 8:41pm

      Correct me if I'm wrong but haven't these private wine shops enjoyed dual licensing this whole time. Acting as both import agents and public retailers? While this is illegal for everyone else, they have been getting paid on both ends. I would be whining too!

      0 0Rating: 0