I have a website writing assignment that I should be focusing on, but I have frequently found that it is a good idea to clear ideas out of my head before starting something like that. I want to talk to you about the current status of the beer market in Ontario in the days leading up to the likelihood of beer being sold in corner or convenience stores.

The thing is this: No one actually has accurate data about the shape of the beer market, except possibly the CRA, with whom I am in correspondence about the issue. Let me tell you it’s no fun waking up to a call display that says Canada Revenue Agency. I have done a lot of analysis on this over the years and I’m going to summarize the problem as best as possible.

I had a brief conversation with Scott Simmons about the figure that the Ontario Craft Brewers are using for their statistical representation. He had used a figure in the lead up to the recent Alcohol sales consulting period that the provincial government put on (before doing whatever they were going to do anyway). That figure was 7.7%.

7.7% of the market was craft beer according to the Ontario Craft Brewers. That figure includes accurate readings of the LCBO and Beer Store channels: bought data. Those figures for those channels include all non-import players smaller than Brick and Moosehead (who make up approximately 10% of the market). That includes contract brewers. Crucially, it does not include direct licensee sales or bottleshop sales. It does not include any breweries or brew pubs that do not sell through the LCBO or the Beer Store. Scott helpfully points out that that was up 20% year over year, so you’re probably comfortably above 8.5% at the moment in March of 2019.

Herein lies a significant problem: There is no data source for that sector. According to 2017 data, the beer market in Ontario was 7,850,000 HL. That’s about a third of the Canadian Beer Market according to Beer Canada. If you separate that market based on production, you begin to get some interesting insight. If Brick and Moosehead are actually ~10% of the Ontario Market, that’s 785,000 HL. That sort of jibes with my understanding. If Imports, according to Beer Canada, have been on a constant upswing over the last six years and in 2017 accounted for 1,595,000 HL, we can safely assume that trend has continued to the current day and that they sit at something like 1,650,000 HL at the moment, or approximately 20% of the market.

That’s 30% of the market right there. Brick, Moosehead, Imports.

Craft makes up more than 7.7%. We know that for certain. The uncertainty lies in how much more of the market it makes up. Now, the CRA has production data because everyone submits excise information to them for every batch of beer. Their statistics are not only accurate, but complete.

That means that in breweries below a certain size, there is a not insignificant figure missing between production and sales data. Beerscene.ca puts the figure at something like 290 physical locations. I am assuming that doesn’t include the contract breweries, which, no matter how you feel about them, continue to exist. It is a little less material how you break that down. Mostly contract brewers sell through the LCBO, but there are exceptions.

The questions we need to ask are: What percentage of sales for a large craft brewery don’t go through the LCBO or Beer Store? How many breweries and brew pubs are not represented by the LCBO and Beer Store channels in total?

Consider this: the largest craft players in the market still have volume that isn’t going through those channels. Even the people who are represented in LCBO and Beer Store have taprooms and bottle shops. Amsterdam has two. Steam Whistle is a going tourist concern year round. Beau’s not only have a taproom and bottle shop, but an enormous Oktoberfest. There’s a percentage of their sales that aren’t accounted for. It might not be a huge amount, but it could be a 5-10% variance. If you’re dealing with someone that makes 100,000 HL, that’s not an inconsiderable amount of volume across a small number of players. Let’s assume Muskoka, Steam Whistle, Amsterdam and Beaus are doing 5% -10% of their sales out the front door. Call it 10,000 HL to be cautious. It’s probably higher.

Think, for a moment, about the people who aren’t in the LCBO or Beer Store. Just in Toronto: Burdock, Blood Brothers, Bellwoods, Bandit, Rorschach, Indie, etc. I would bet you that over the course of those 290 physical entities or ~360 brewing entities including contract brewers, you’re talking about a lot of volume. The Beer Canada statistical reckoning from the last time that was broken down in 2014 was based on CRA data. I’ll append it here.

HL 2009 2010 2011 2012 2013 2014 <2000 23000 28000 28000 26000 45000 48000 <5000 24000 15000 23000 31000 22000 92000 <15000 43000 56000 55000 61000 38000 48000 <50000 107000 17000 33000 122000 292000 260000 <100000 110000 209000 252000 221000 254000 388000 >100000 9077000 8095000 9323000 8000000 7815000 6731000

There were 140 breweries in the market in 2014. Breweries under 100,000 HL produced 840,000 HL of volume. Knock 100k off that because we lost Mill Street.

That’s a production of 740,000 HL in 2014. The LCBO and Beer Store Channels in 2017, three years later, are just over 650,000 HL. That’s right. The LCBO and Beer Store are selling the entirety of the beer volume that was produced in Ontario in 2014 by breweries under 100,000 HL in size. IE: Craft Beer, for our purposes.

There are 150 new physical breweries that have started since then that cannot have been accounted for in terms of volume. Even the small breweries that have managed to get SKUs in the LCBO are probably not completely represented by those sales. I was talking to Left Field about their model for Original Gravity several months ago and they claim the taproom and bottle shop account for 36% of their volume.

Now there are barely extant breweries in terms of volume like Laylow and Small Pony and Evergreen, but it’s not like they produce nothing. There are also things like Bellwoods and Dominion City out there that have massively expanded their production facilities. For the purposes of just estimation, let’s assume that each of those 150 physical locations has a production of 1,000 HL a year. That’s low for a number of them and extremely high for some, but assume it balances out. That’s 150,000 HL. I think when you take into account the front door volume sales for small breweries represented in the LCBO and Beer Store Channels, you might actually be significantly higher than that. Maybe 200,000 HL.

The point is this: We don’t know. We don’t know about a sales figure that is twice the size of the entire PEI beer sales for 2017 or about a third the size of Nova Scotia or Saskatchewan. Someone ought really to do something about that.

However, we’ve got to make an assumption: The small brewer segment in Ontario is well above 10% of the market. I suspect since that 7.7% figure is based on 2017 data and was low then, we’re probably above 12% if you bring it forward to the current day.

That means that AB InBev, Molson Coors, and Sapporo are now fighting over 58% of the market. The domestic market in Ontario decreased in 2017 by 2.7% according to Beer Canada. I have just displayed to you that the craft market has increased by a factor of about 1.5 since 2014, so we know who is losing volume.

One of the things that I use as a predictive element when talking about the Ontario market no longer exists. Because the Ontario Government decided to attempt to bring back buck a beer last August, we are now in a situation where annual floor pricing doesn’t increase on March 1st because there is no longer a floor pricing mechanism. For the first time in a decade, Molson and Labatt are not marching in lock step on the pricing of their products. If you go to The Beer Store website, you’ll see that Molson value brands like Carling and Old Style Pilsner are sitting at 36.75. The Labatt value brands like Blue are holding steady at the old pricing.

For my entire career writing about beer, there has been detente between these two players. No more. The market is bad enough for the big players in Ontario that they are competing on price for the first time in a decade. Labatt is winning. Molson has sold their Montreal lands and graphically rebranded Molson Canadian as a package deal with Molson Dry and Molson Export. They are de-premiumizing their own product by lumping it in to the value brand category. Canadian is going to go the way of Blue.

Big question, then, is what happens when you get to the point where the Ontario Government decides to open up convenience store sales. For the purposes of this post, I’m politically agnostic on the issue. I think privatization of the market was a can of worms opened with grocery store sales in 2015. I think it’s an ongoing continuum from a consequence standpoint and will proceed regardless of which party is in control. I hope that we derive a lot of tax money out of it and that it is sensibly rolled out, but I’m dubious of the ability of any party currently involved to limit chaos in that regard.

You’ve got Ted Moroz saying that convenience store sales are likely to drive up the price of beer, but you’ve also got Labatt demonstrably not raising the price of their value brands. The Beer Store works for Labatt and Molson on the basis that it reduces the overall cost of labour and distribution. Maybe half a billion dollars in annual savings between them.

Now, not only does an additional sales channel complicate that model for them, but we know that despite being in all the grocery stores (an additional ~250 locations at the time and higher now) the big brewers managed to lose 2.7% in sales over the course of 2017. Less volume sales over more shelf space. Now imagine what happens with convenience stores. It’s not like you can choose not to participate in that channel if you’re Labatt or Molson. You pretty much have to do it. That’s 2588 potential licensees in Ontario further diluting the cost savings from The Beer Store chain. If you’re buying a six pack at a convenience store, you’re not buying a 24 at The Beer Store. Opportunity cost and volume loss.

From a craft beer standpoint, there might be a little pickup in convenience stores for well organized players, but the craft market has done an end run around retail channels. Shadow volume the size of the 2007 Ontario craft beer market now exists out of taprooms, bottle shops, and direct licensee sales. If we’re able to get that 20% Craft Beer stipulation on convenience stores, you probably hit 15% within a couple of years. On the other hand, it’s going to further imbalance the Molson/Labatt situation, handing AB InBev less competition in the premium sector over the next five years.

It’s almost that old punchline. “I don’t have to outrun the bear, I just have to outrun you.”