They lose a wholesale discount on April 1, which could have an impact on consumers

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The brand manager of the largest private liquor store in the province has good reasons to feel proud of his operation. Standing inside the spacious Legacy Liquor Store in the former Olympic Village, Darryl Lamb told the Georgia Straight that his store is the “number one point of distribution for B.C. wine on planet Earth”.

He said that since opening in 2010, Legacy has never sold a single bottle of “cellared in Canada” wine—i.e., a wine that’s been bottled with juice imported from another country. Legacy also has the biggest selection of B.C. craft beer, which is in its own section in the store.

“The growth in craft beer can be 100 percent attributed to private stores,” Lamb declared.

But now there’s a cloud hanging over private liquor retailers like Legacy, which is owned by Granville Entertainment Group. B.C. government liquor-policy reforms have changed the wholesale-pricing model and removed a discount for private liquor and wine stores, starting on Wednesday (April 1).

Traditionally, independent wine retailers received a 30-percent price reduction but weren’t allowed to sell beer and spirits. Private liquor stores received a 16-percent discount.

Under the new system, the Liquor Distribution Branch’s wholesale arm will mark up prices on liquor it buys from suppliers, then resell it at the same price to private liquor stores, independent wine stores, rural-agency stores, B.C. VQA wine stores, and LDB retail outlets.

“The fundamental change is that everybody is paying the same amount come April 1, including government stores,” Justice Minister Suzanne Anton told the Straight earlier this month. “The big policy change for government is we’re actually separating now our distribution and our retail.”

NDP liquor-policy critic David Eby revealed in the legislature earlier this month that more than 5,300 products will have higher wholesale prices on April 1. Anton responded at the time that suppliers were “taking advantage of the government’s changes on April 1 and raising their prices unnecessarily”—a claim vehemently rejected by the Import Vintners & Spirits Association.

The two politicians also offered differing viewpoints on the impact that liquor reforms would have on the price of Red Racer IPA. Even the producer, Central City Brewers + Distillers, didn't know how much its popular beer would sell for on April 1.

David Eby has questioned the impact of liquor reforms on the price of Red Racer IPA.

Anton has frequently said that she’s trying to create a level playing field between government and private liquor stores.

But several liquor-industry insiders contacted by the Straight say the B.C. Liberals’ reforms will put the squeeze on private retailers, who will face higher wholesale costs after losing their discount. And that, in turn, could have a ripple effect on the domestic wine and craft-beer industries, which rely heavily on private liquor stores to get their products to consumers.

“They’ve ended up charging a lot of liquor-board markup, which is really just hidden tax at the wholesale level,” Vancouver lawyer and wine-price analyst Mark Hicken told the Straight by phone. “So the wholesale prices for everybody are really very high.”

At the same time, he explained, the government has told the Liquor Distribution Branch to keep retail prices in government stores at about the same level as before the changes.

That will have the effect of cutting the retail margin for everyone, public and private, because if private stores maintain earlier profit margins, they’ll have to sharply raise prices and lose market share to the LDB stores.

Hicken said that based on numbers he has examined, the margin between wholesale and retail will be around 15 to 16 percent in government stores if prices remain the same. That’s well below their operating cost of 17.2 percent, which was revealed in last year’s LDB annual report.

In other words, government retail stores could be operating at a loss even as its wholesale division packs away huge profits.

“The declared operating costs for government stores exceed the margins,” Hicken stated. “To me, that’s concerning, because I think they’ve created a wholesaling-pricing system that leaves an insufficient amount of margin at retail.”

Mark Hicken says wholesale liquor markups are a hidden tax.

The end result, Hicken emphasized, is upward pressure on retail prices and a higher likelihood of all stores, public and private, pushing cheaper products to achieve sufficient sales volume to remain afloat. That isn’t good news for supporters of B.C.’s burgeoning craft-beer industry, not to mention the Okanagan wine sector.

“As far as I know, the only retailer that works on a margin that low is Costco, which is 14 percent,” Hicken said.

According to Jeff Guignard, executive director of the Alliance of Beverage Licensees of B.C., aka ABLE B.C., the previous 16-percent discount barely enabled many of his members to break even. “Most stores need to be charging [a markup] in the low 20s to do it,” he told the Straight by phone.

Over at Legacy, Lamb is eager to go head-to-head with retail outlets owned by his wholesaler, the Liquor Distribution Branch. That’s because he believes his store offers products that aren’t available anywhere else. But he questioned how serious the government is about creating a level playing field when its stores enjoy a monopoly on selling alcohol to restaurants and others in the hospitality industry.

“If a restaurant wants to have that rare bottle of Scotch or that really interesting bottle of liqueur, they’re not allowed to come and buy it here,” Lamb said. “So it really hurts the restaurant industry. I don’t believe that’s a level playing field. A level playing field would be everyone having the same rights.”

Some reforms have been applauded

B.C.’s blizzard of liquor-policy reforms during the past year have caused a mixed reaction. Some of the changes—such as allowing B.C. wine and craft beer in farmers markets and permitting happy hours in pubs and lounges—have been greeted positively.

Last year after the happy-hour announcement, Donnelly Hospitality Group founder Jeff Donnelly told the Straight that his company had been waiting for this announcement for a long time.

"I think it will be really good for our industry," he said at the time. "Any little bit helps to bring us into the 21st century."

Other measures have created enormous anxiety. It’s still not clear how many private or public liquor stores will apply to transfer their licences to grocery stores. Supermarkets with more than 10,000 square feet will be allowed to sell liquor after April 1 in a separate-store-within-a-store concept.

Guignard said his members still don’t know how many licences will be made available to sell B.C. wines on grocery-store shelves or what price the eventual licensee will pay for those products from the LDB. “There are a lot of questions about how the grocery model is going to come down,” he stated.

ABLE B.C.'s Jeff Guignard moderated the meeting with senior liquor officials. Stephen Hui

Meanwhile, wine producers in Australia and California have written letters of complaint to Premier Christy Clark about plans to reserve shelf space in grocery stores for B.C. wines, arguing that this contravenes international-trade rules.

Others argue that B.C. wines in grocery stores won’t necessarily give preference to B.C. wineries. According to Robert Simpson, general manager of Liberty Wine Merchants, the term B.C. wines refers to products that are bottled in this province, including those dreaded cellared-in-Canada wines that Lamb abhors.

Simpson told the Straight by phone that with wine selling at 28 cents a litre in Spain and 45 cents a litre in Argentina, consumers should expect grocery stores to sell bulk wine purchased in other countries but bottled here. That, he said, will not enhance B.C.’s wine sector.

“It would be packaged differently,” Simpson predicted. “So the consumer would come in and think there’s a whole raft—maybe 300 different wines on the shelf—but, in fact, there’s maybe a half-dozen or a dozen.”

But the biggest complaints of all revolve around wholesale pricing. Simpson said that his four independent wine stores have lost a discount that was created almost three decades ago by the government to promote a fine-wine culture in this province.

Moreover, he pointed out that his stores aren’t allowed to sell beer and spirits and he expects that business at his Commercial Drive outlet will fall by 30 percent when a nearby government liquor store starts opening on Sundays.

“Are we quaking in our boots? Yes,” Simpson said. “We don’t want to raise prices. We would rather maintain the great-quality wines we have at the prices we have.”

Liquor bosses field questions

On March 22, the province’s two senior liquor czars met with more than 300 liquor- and restaurant-industry officials at the Sutton Place Hotel in Vancouver. ABLE B.C. organized the event.

It marked the first time that Blain Lawson, general manager of the B.C. Liquor Distribution Branch, and Doug Scott, general manager of the B.C. Liquor Control and Licensing Branch, had ventured into a public forum to field inquiries about the government’s controversial policy changes.

Liquor-policy critic Eby was among those in attendance.

“At points, the meeting was quite tense,” the Vancouver–Point Grey MLA told the Straight by phone later that day. “I think a lot of people feel or are starting to feel the impact of the changes on their businesses. So there were some challenging moments, certainly, for the LDB reps as they tried to explain what they’ve been asked to do by the government.”

He broke down the audience’s concerns into three broad categories. There were technical questions about how the policies will be implemented. In addition, hospitality-industry officials, including restaurateurs and pub owners, expressed frustration that the LDB won’t reveal its new price list before the reforms take effect.

“Blain Lawson confirmed that they won’t be getting it until April 1, which is a bit of an April Fool’s joke,” Eby said. “They don’t know how much they’ll pay for beer and wine unless they’re able to get ahold of an agent that will tell them that information.”

Another major concern, according to Eby, is that restaurants will continue to have to pay the full retail price for liquor from government stores. There will continue to be no wholesale discount, and none of the private retailers, including independent wine stores, will be permitted to sell their products to restaurant owners.

Lawson declined the Straight’s request for an interview.

Premier Christy Clark supports Suzanne Anton's reforms.

Meanwhile, ABLE B.C.'s Guignard described the meeting as "quite positive" and he praised Lawson and Scott for showing up to answer questions.

"There is a lot of anxiety and frustration in the industry," Guignard said. "I hope that they saw that and felt there are still some areas we need to fix and we need to work together on."

Mark Taylor, a sommelier and owner of Siena Restaurant in Vancouver, was also at the meeting. He told the Straight by phone afterward that the government’s raft of liquor reforms is meaningless without any wholesale discount.

“It’s like putting lipstick on a pig,” he declared.

High wine prices remain a concern

Taylor explained that liquor sales account for almost one-third of his restaurant’s revenues. He said that although it’s nice that patrons are now permitted to carry a drink from the bar to their table (yes, that was forbidden in B.C. a few years ago), that’s insignificant compared to B.C. restaurant customers paying sky-high wine prices in comparison to their counterparts south of the border.

He joked that Americans know they’re in Canada by two things: the people are more polite in this country, and when they enter a restaurant, they pay far higher wine prices.

Hicken, who writes a popular blog on wine law, said wine prices in Washington state are about half of what people pay in B.C. In Alberta, he added, prices are about a third lower than they are in B.C. According to Hicken, B.C. is simply “out of whack” with neighbouring jurisdictions.

“In Alberta, restaurants can order from the wholesaler if they have a large enough order, or they can negotiate discounts from their retailer—a private retailer,” he stated. “In Washington state, restaurants get wholesale pricing.”

At the heart of the reforms is a consultant’s report on liquor by EY (formerly Ernst & Young), which the government has refused to release. That prompted the NDP’s justice critic, Leonard Krog, to say sarcastically in the legislature: “The rich get a two-percent tax break, working people get an increase in the price of beer—and they paid for the very report that led to this fiasco in the first place.”

Simpson of Liberty Wine Merchants praised the NDP, and particularly Eby, for asking tough questions of the government about its liquor reforms.

"The amazing thing here is that the NDP is kind of coming out as the champions of small business," Simpson said. "I mean, it's an upside-down world."

For his part, Eby has repeatedly expressed concerns about the impact of the government's liquor reforms on the craft-beer industry.

"When I add 16 percent to the new wholesale prices, I see significant retail increases, especially on craft beers," he said.

Meanwhile, Hicken worries about the longer-term consequences of liquor reforms on B.C.'s burgeoning wine culture, which is being promoted by independent wine stores and private liquor stores.

"We've got a thriving wine industry," Hicken said. "It's proven that wine culture is generally very important to that industry."

B.C.'s thriving wine industry relies on a healthy wine culture.

He pointed out that when Hong Kong eliminated an 80 percent import duty on wine, its wine culture took off. Within a decade, the Chinese metropolis went from being a backwater wine-culture region to one of the leading wine-business cities in the world.

"It was a dramatic transformation that was brought about by government deciding we had policies that were actually hindering the economic growth of the wine business," Hicken stated. "Literally, all the leading wine-auction houses and businesses decided they would move to Hong Kong and start doing business there."

Similarly, he said that Vancouver is well-positioned to replicate this success. But then the Vancouver lawyer added that this will only occur "if we had more reasonable taxes on wine".

Under the B.C. Liberals' liquor reforms, that doesn't appear to be on the agenda.