Striking the Right Balance: Modernizing Wine and Spirits Retailing and Distribution in Ontario
Read the recommendations from the Premier’s Advisory Council on Government Assets on how Ontario can modernize wine and spirits retailing and distribution in Ontario.
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In April 2015, the Premier’s Advisory Council on Government Assets (the Council) presented its report to government entitled Striking the Right Balance: Modernizing Beer Retailing and Distribution in Ontario.
That report outlined changes to the beer retailing and distribution system under a new ten-year beer agreement and introduced a new Beer in Grocery channel. The government’s aspiration was that beer would be available in grocery stores by the 2015 holiday season. That was achieved. The level of interest from grocers was high, and there was lively competition for the first 60 stores.
Following the publication of our report on beer, the Council moved to examine wine and spirits retailing and distribution. We examined all aspects of the system, consulted extensively with industry stakeholders, and worked closely with government. That enabled us to refine our thinking and to develop an achievable framework of proposals that has the support of government and stakeholders.
The issues examined were complex and there were divergent views among stakeholders. These competing interests and the intricate structure of the wine sector inherently required a multifaceted solution. The Council is satisfied that our recommendations represent a balanced outcome for the people of Ontario.
We would like to express our appreciation to all of the stakeholders who worked with us. The constructive and collaborative manner in which they approached the process demonstrated their commitment to reshaping the wine and spirits retailing and distribution system for the benefit of all Ontarians.
This report presents our final recommendations to government on the future of wine and spirits retailing and distribution in Ontario.
The Council’s review of the beverage alcohol system in Ontario aimed to develop proposals that would maintain and enhance the benefits and efficiencies of the existing system, while improving consumer convenience and choice. We wanted to find a solution that stakeholders could support.
We believe strongly that our recommendations:
- materially improve convenience and choice for Ontario consumers;
- introduce additional competition into the market; and
- offer better retail access for import and domestic suppliers while improving equity and fairness of treatment among suppliers.
They also take into account:
- the Province’s strong commitment to socially responsible retailing standards including hours of sale, staff training, and minimum and uniform pricing;
- historical investments made by existing Winery Retail Store owners;
- the Province’s commitment to fostering a vibrant Ontario wine industry; and
- free trade obligations.
As outlined in this report, the Council is recommending two substantive changes to the existing retail system for wine in Ontario. These changes should be phased in over time in order to allow the industry to adapt.
First, we are recommending the creation of a new retail channel for wine that is separate from the Liquor Control Board of Ontario (LCBO) and the existing Winery Retail Store (WRS) network. This new channel would bring imported and domestic wine, together with beer, into 150 grocery stores across Ontario, improving consumer access and convenience.
The second element of the new model builds on the existing WRS network by addressing its shortcomings in convenience and assortment. Up to 150 WRS outlets that are already located in grocery stores outside of the checkout could operate their stores inside grocery with a shared checkout, pairing with beer licences in the process. These stores would sell any Ontario wine.
The Council’s wine and spirits recommendations, combined with the recommendations we made for beer in April 2015, would represent substantial changes to the beverage alcohol marketplace in Ontario and the largest increase in competition that the LCBO has ever faced. This competition demands that the LCBO adapt its business model to reflect these new market realities.
The LCBO has recognized this imperative and is developing a new strategic plan. This includes investing in frontline staff, strengthening data-based decision-making, further developing its wholesale business, and launching a new online eCommerce platform that will begin to roll out later this year. This platform will improve consumer choice and further open the Ontario market to products from around the world. The Council strongly supports each of these initiatives.
At the outset of our work, we committed to finding ways to improve the system for the benefit of consumers and producers. We are satisfied that our recommendations offer meaningful gains in a socially responsible way.
The proposed system would provide significantly improved convenience and choice by allowing wine and beer to be sold together in up to 300 grocery stores across the province, establishing a one-stop shopping model for consumers.
In the LCBO, the bag-in-box wine selection would be expanded to feature both imported and domestic wines, providing consumers greater variety in this more affordable package format.
Finally, we expect that average wine prices in Ontario would remain the lowest in Canada while access and convenience are improved.
The new grocery channel would be accessible to any Ontario beer, wine, fruit wine, or cider producer, providing additional market opportunities for producers. Fair access to a competitive retail environment is a good thing for producers because it provides another channel for consumers to determine which brands will be successful and encourages innovation.
Our recommendations also ensure that access to the WRS channel is more equitably shared across Ontario producers.
Imported wine suppliers
Imported wines enjoy a favourable position in the Ontario marketplace. In the LCBO, imports comprise around 75% of wine sales. In the LCBO’s Vintages section – where LCBO staff most actively provide advice to consumers – imported wines represent 96% of sales. The Council views this as very positive. We believe in open markets.
Our recommendations were developed to provide a balanced package of measures designed to improve the availability of both imported and domestic wines. The new grocery channel would be open to wineries from around the world, providing imported wine producers with an alternative retail channel to the LCBO. The LCBO will also expand its offering of imported wines through its new eCommerce marketplace, which is currently under development. This will provide an avenue for imported wine producers to reach consumers directly, rather than having to obtain listings in grocery or LCBO stores.
In addition, our proposal for the LCBO to allow more producers to sell their products in the bag-in-box package format would provide significant opportunities for growth.
Our recommended changes to the minimum price regime, coupled with efforts to rebalance mark-ups and taxes, should also be a welcome reform for importers.
The Council is recommending actions to more fairly harmonize tax and mark-up treatments for producers across the three major categories of beverage alcohol: beer, wine, and spirits. We are not recommending any change in mark-ups on spirits at this time, as spirits already have the highest mark-up treatment among the three categories.
We are also recommending a number of benefits for craft distillers, including improved selling commissions at on-site stores and the ability to deliver directly to bars and restaurants.
Our recommendations would not allow gains for consumers to be achieved at the expense of social responsibility. As with beer, there would be restrictions on hours of sale and supplier inducements, uniform pricing, and social responsibility training for all employees facilitating the purchase of wine. This would ensure that expanded access is managed in a measured and responsible way.
Further, enabling off-site WRS outlets to operate their stores inside grocery with a shared checkout would ensure that, when beverage alcohol is located inside grocery stores, consistent social responsibility standards and practices would continue to apply. Adjusting the minimum retail price for wine is also an important step to help maintain social responsibility.
It should be noted that the government is developing a comprehensive alcohol policy to support safe and responsible consumption. The Council supports this work, as it complements the high standard of social responsibility in our proposals.
The Premier’s Advisory Council on Government Assets was announced on April 11, 2014. The Council was charged by the Premier to review a number of government assets, including the LCBO, and to recommend ways to maximize their value to the people of Ontario.
The Council issued its Initial Report in November 2014. The Initial Report included our overall assessment of the beverage alcohol sector in Ontario; our reviews of the LCBO, the Beer Store, and the off-site WRS network; and our thinking on the future of the sector.
The Council’s second report on beverage alcohol entitled Striking the Right Balance: Modernizing Beer Retailing and Distribution in Ontario was issued in April 2015. The report recommended a number of significant changes to the beer retailing and distribution system, including a new beer framework agreement. It also made a number of recommendations designed to increase consumer convenience and choice and to introduce competition into the sector. These recommendations centred on expanding the sale of beer to up to 450 grocery stores across the province.
In our April 2015 report, we noted that we were beginning work on wine and spirits and committed to a consultation process that would lead to recommendations for the future direction of retailing and distribution in these categories.
We completed our work in early February 2016. Throughout our review we consulted extensively with stakeholders and worked closely with the government. We were guided by the government’s broader public policy objectives in developing our proposals.
Scope of review
We examined all aspects of the retail and distribution system: the LCBO, the WRS network, on-site retailing, as well as distribution to bars and restaurants. We included all types of producers, whether large or small, and gave consideration to the concerns of agri-businesses in the province. We also examined subcategories of wine and spirits, including cider, fruit wines, and craft spirits.
In the course of our work, we held extensive consultations with stakeholders in the wine, spirits, and related industries in Ontario, as well as with social responsibility organizations. We also met with groups representing importers to the province.
We conducted detailed analysis and further due diligence on the system. The input from all of these consultations and analysis enabled us to refine our thinking and to develop an actionable framework of proposals that has the support of government and stakeholders.
In developing our proposals, we paid particular attention to free trade obligations. While the government is committed to a vibrant wine industry, it is also a strong supporter of opening up markets for the benefit of the consumer. The Council carefully considered how to respect these objectives in our recommendations.
We would like to express our gratitude to all stakeholders who worked with us and for the manner in which they approached the process. We benefitted greatly from their demonstrated willingness to engage in – and contribute to – reshaping the wine and spirits retailing and distribution system in Ontario.
The Council's perspective
The current landscape
Total wine sales in Ontario amount to about $2.2 billion annually. Imported wine accounts for approximately $1.5 billion or two thirds of these sales with Ontario wine accounting for the remaining one-third – about $700 million annually.
Imported wines are very popular amongst Ontarians. In the LCBO, which is by far the largest retail channel in the province, import sales represent about 75% of total wine sales. In the LCBO’s Vintages section, where sales experts most actively provide advice, imported wines account for around 96% of sales. The significant market share of imported wines reflects the fact that the LCBO has provided fair market opportunities for imports and a broad selection for consumers.
Wine produced in Ontario comprises three groups of products:
- Ontario Vintners Quality Alliance (VQA), a designation that signifies that they are made from 100% Ontario-grown grapes and adhere to certain standards;
- International-Canadian Blended (ICB), a blend of Ontario and imported wine that must have at least 25% Ontario grape content in each bottle; and
- 100% Ontario, wine that is produced using 100% local content but does not otherwise meet the standards of the VQA designation.
The Province has developed a Wine and Grape Strategy to improve the competitiveness of its local wine industry. The strategy focuses on VQA wines, with a goal to compete internationally on quality.
Wine is sold through two primary retail channels in Ontario: the LCBO and a network of WRS outlets. There are 500 stores in the WRS network, which include 208 on-site stores (located at wineries) and 292 off-site stores (located away from wineries). The number of off-site stores is fixed under the terms of various international trade agreements.
Most off-site WRS are already located in grocery stores and are configured with a separate checkout. The following list depicts the ownership of off-site WRS in the province.
- Ontario Winery Retail Stores (500 stores total)
- On-site WRS (208 stores)
- Off-site WRS (292 stores)
- Constellation (164 stores)
- Andrew Peller (104 stores)
- Colio (13 stores)
- Magnotta (8 stores)
- Château des Charmes (2 stores)
As shown in the list, the vast majority of the off-site WRS network has been consolidated over time under two large, publicly-traded entities: Constellation Brands Inc. and Andrew Peller Ltd.
- Constellation Brands Inc., based in the US, is a leading producer of premium wine in the world. Constellation is also the largest producer of Ontario wines, selling across all categories and price points.
- Andrew Peller Ltd., based in the Niagara region, is the second largest producer and marketer of wine in Canada with wineries in Ontario, British Columbia, and Nova Scotia.
Constellation and Peller are major producers of VQA wine, and they also produce the bulk of ICB wines.
The other owners are smaller wineries:
- Colio Wines of Canada Ltd., based in Lake Erie North Shore, sells over 30 VQA and ICB wines.
- Magnotta Winery, based in Vaughan, is the third-largest Ontario winery, selling over 180 VQA and ICB wines.
- Château des Charmes, based in Niagara-on-the-Lake, sells approximately 30 VQA wines.
Taxes on wine sold at WRS outlets are different from the mark-up structure at the LCBO. However, it is important to recognize that these are not directly comparable. The LCBO pays for its store operating costs with the revenues it generates from its mark-ups; therefore, the net return to the government in the LCBO is equal to mark-ups less the operating costs of the business. In contrast, the net return to the government in WRS outlets is the tax it receives on wine sold, as WRS operators must pay their operating costs separate from taxes paid on wine sold.
The capped network of 292 off-site stores is allowed to operate under grandfathering clauses in international trade agreements such as the North American Free Trade Agreement (NAFTA) and the 2003 Agreement between the European Community and Canada on Trade in Wines and Spirit Drinks. Under NAFTA, only Ontario wines are permitted to be sold in those stores.
The WRS network is an important part of the province’s wine marketplace, but it does have limitations. Stores that are already located in grocery stores today do not offer an optimal shopping experience for consumers, as they have their own checkouts. With the introduction of the Beer in Grocery initiative, many grocery stores could have beer and wine sold in the same location through two separate checkouts. This model is not ideal for consumers and does not support a standardized social responsibility approach. Further, these stores offer consumers a very narrow selection. This also leads to inequities in the domestic industry, as WRS owners have control of a retail channel while their competitors do not.
With approximately $2 billion in annual sales, Ontario is by far the largest spirits market in Canada, accounting for almost 40% of national sales. In Ontario, spirits sales account for around 30% of the beverage alcohol market.
Domestic spirits have a 55% share of the market in Ontario. Although craft distillers have emerged as a popular and growing part of the sector, they have not enjoyed many of the benefits offered to small beer and wine producers.
Unlike wine and beer, the LCBO represents the only major retail channel for spirits. Spirits is the LCBO’s largest category, representing just over 40% of total sales. Spirits are currently subject to the highest level of mark-ups among the three main categories of beverage alcohol in Ontario. As a result, spirits are the highest margin category for the LCBO and critical to LCBO’s dividend to the Province.
A number of considerations influenced our evaluation of wine and spirits retailing and distribution in Ontario.
Starting from status quo, not from scratch. We had to recognize that there is an established retail network that, in addition to the LCBO, sells wine in 292 locations across the province. About 220 of these stores are already located in grocery stores. The off-site WRS network is an important part of the wine industry in Ontario and drives significant demand for Ontario grapes. Consequently, we wanted to preserve the benefits of the current system, including the LCBO and the off-site WRS network.
Introducing greater competition into the retail system. In our Initial Report, we expressed the view that it is important to introduce more competition into Ontario’s beverage alcohol system in order to provide greater access for consumers and to give existing channels a strong incentive to innovate. This belief underpinned the creation of the new grocery channel for beer retailing that was presented in our April 2015 report and began operating in December 2015. We wanted to build on this model by exploring opportunities to offer wine in grocery stores.
Responsibly improving consumer convenience and choice. The Council believes strongly that changes to the system should benefit consumers. We want a system that improves customer access, convenience, and choice. It is essential that this continue to be done in a controlled and socially responsible way as the new Beer in Grocery channel is designed to do. Importantly, we did not want improved convenience to come at undue cost to consumers and sought to achieve our objectives while maintaining average wine prices as the lowest in the country.
Establishing supplier fairness. Levelling the playing field for producers was an important priority for us. Any new model for wine should promote fair and equitable access and treatment for wine producers, both imported and domestic.
Supporting Ontario’s wine industry while respecting trade obligations. The Ontario wine industry is an important part of the province’s economy. The government’s commitment to support the industry should continue. At the same time, as a major exporter, Ontario believes in free access to international markets. Ontario’s beverage alcohol market is very accessible to imports, matching the desires of consumers. Any changes to the system should support the Ontario industry and provide improved access for imports, representing a balanced package.
The new retail model for wine
Based on our review, we are proposing two substantive changes to the existing retail system for wine:
- First, establishing a new retail channel for wine that is separate from the LCBO and the existing WRS network.
- Second, offering greater convenience and choice to consumers in the off-site WRS channel.
The first element would bring imported and domestic wine, together with beer, into 150 grocery stores across Ontario, improving consumer access and convenience.
The second element would build on the existing off-site WRS network by addressing its shortcomings in convenience and assortment. Our recommendations would see up to 150 WRS outlets operate their store inside grocery with a shared checkout, offering consumers a one-stop shopping experience for beer, wine, and groceries. These stores would also sell a broader selection of wines than is currently available to consumers.
The proposed structure and characteristics of the new system are described in the following chart.
- Beer in grocery (Up to 450 stores)
- Universal Wine & Beer (150)
- Beer & wine stores (Integrated in grocery)
- Beer and universal (imported & domestic) wine
- Fully integrated in grocery stores
- Beer & wine stores (Integrated in grocery)
- Winery Retail Stores in Grocery (150)
- Beer & Ontario Wine Stores (Operated in grocery)
- Beer and Ontario wine
- Wine has store-in-store model with shared check-out
- Beer & Ontario Wine Stores (Operated in grocery)
- Beer-only (150)
- Beer-only Stores (Integrated in Grocery)
- Beer-only licences as operate today
- Fully integrated in grocery stores
- Beer-only Stores (Integrated in Grocery)
- Universal Wine & Beer (150)
The exact number of grocery stores selling wine would depend on the number of WRS outlets that ultimately decide to operate inside grocery with a shared checkout. If grocers and WRS owners are able to reach agreements, there would be 300 grocery stores selling beer and wine, and 150 grocery stores selling only beer.
The two following sections describe in more detail the characteristics of each element of the new channel: universal (imported and domestic) wine and beer stores and WRS outlets in grocery.
Universal Wine and Beer
The Council is recommending that up to 150 grocery stores be permitted to sell imported and domestic wine and beer. This number would ensure that the operations of the off-site WRS network and the LCBO are not undermined. The LCBO is a valuable government asset that supports important government programs and services used by Ontarians every day. The off-site WRS network is an important part of the domestic wine industry. Both retail networks would be significantly affected by a new channel and, while we want to introduce more competition, we also want to preserve the benefits and efficiencies of the existing system.
This new channel would share many of the same features as the existing Beer in Grocery initiative. For example, the LCBO would act as the wholesaler of record for all wine sales to grocery stores, with full LCBO mark-ups and levies applying to the sale of imported and domestic product. Similar social responsibility requirements would also apply.
- Wines priced below $10.95 per 750 mL bottle should not be permitted in the channel. We believe that, where access is expanded, social responsibility standards should be strengthened.
- The sale of wine-based liqueurs and coolers should not be permitted. We are not recommending that spirits products be included in grocery stores, and we excluded malt-based coolers from the Beer in Grocery initiative. As a result, spirits-like products that are technically defined as wine should not be included in grocery.
We recommend that the government discuss with grocers opportunities for small producers to access this new channel and ways to provide adequate display of VQA wines.
Universal wine and beer licences should be allocated fairly among large and independent grocers. Geographic and concentration restrictions should apply to ensure that all regions of the province are adequately represented and that the majority of licences are not issued to any single grocer. Grocery stores that already have a WRS outlet as a tenant should not be eligible for a universal wine and beer licence at that location.
The new universal wine and beer licences should be offered to grocers by way of a competitive allocation process, similar to the process for beer in 2015. Under this process, grocers would bid on the discount off the net price they would pay to the LCBO. Single-store grocery operators that were successful in the 2015 allocation would be able to bid for a new universal wine licence for their store to combine with their existing beer licence.
We propose the first allocation of 70 new licences take place in summer 2016. Of the initial 70 licences, the Council is recommending that 18 should be reserved for independent grocers. This represents a higher reservation for independent grocers than the initial beer allocation because we anticipate that large grocers would be more able to accommodate WRS locations. We believe that this provides independent grocers with a fair share of opportunities to retail wine, considering together WRS outlets and universal wine and beer licences.
The initial allocation of 70 licences should be split into two equal groups of 35 licences. One group of 35 would allow for the immediate sale of both imported and domestic wine. The remaining 35 would be restricted for the first three years to selling only Ontario VQA wines from producers other than the larger owners of off-site WRS outlets. After the initial three-year period, these stores would automatically be permitted to sell all wine. This transitional arrangement is designed to allow time for the industry to adapt to the new Wine in Grocery channel.
The Council is suggesting that the Province consider allocating further tranches at three-year intervals to coincide with the date that the previous tranche converts to permit the sale of all wine, up to 150 licences in total.
The following list depicts a possible timeline for the allocation of the 150 universal wine and beer licences. Exact timelines and details of the roll-out would remain at the discretion of government.
- In 2016, 35 unrestricted licences and 35 restricted licences were allocated for a total of 70 licences.
- In 2019, the 35 beer and restricted wine licences that were allocated in 2016, would convert to beer and unrestricted wine licences, and 40 more beer and restricted wine licences would be allocated, for a total of 110 licences.
- In 2022, the 40 beer and restricted wine licences that were allocated in 2019 would convert to beer and unrestricted wine licences and 40 more beer and restricted wine licences would be allocated, for a total of 150 licences.
- In 2025, the 40 beer and restricted wine licences which were allocated in 2022, would convert to beer and universal wine licences, for a total of 150 licences.
Lead times for producing wine are significantly longer than for beer, and it is crucial for the success of this channel that producers have adequate grape supply and production capacity to fill the shelves of grocery stores. Accordingly, we are also recommending that, before issuing future tranches of universal wine and beer licences, the Province examine the performance of this new channel and the off-site WRS outlets, the impact on sales of imported and domestic wine in the province, and the implications for the Ontario wine industry. The Province should consult with wine and grape grower representatives as part of this process.
Winery Retail Stores in Grocery
Unlike wine sold under universal wine and beer licences, WRS outlets would remain owned and operated by the WRS owner. The Council is proposing that off-site WRS outlets that are currently located in grocery stores outside of the checkout be permitted to operate their store inside grocery with a shared checkout. This model would enable one-stop shopping for consumers, integrate with the Beer in Grocery initiative, and ensure a common social responsibility standard across all beverage alcohol products. At the same time, these stores would broaden their assortment to sell the wines of any Ontario producer. This broader assortment would significantly improve consumer choice.
The Council is recommending that the pace of this process be similar to that for the universal wine and beer licences. Accordingly, we are recommending that WRS owners initially be permitted to operate 70 off-site WRS outlets inside grocery with a shared checkout. To facilitate this process, we are recommending that up to 70 beer licences be offered to grocers that are able to reach an agreement with WRS owners by May 1, 2017. These beer licences would be granted directly to the grocer based on a set discount of 3% off the net price, which was the minimum bid in the 2015 Beer in Grocery allocation. Up to 20 of these licences could be operational immediately, bringing the total number of grocery stores selling beer to 150 by May 1, 2017. This is consistent with our April 2015 beer recommendations. The remainder of beer licences would become operational after May 1, 2017.
We are also recommending that there be geographic and concentration restrictions on the 70 directly-issued beer licences associated with WRS outlets inside grocery. Although independent grocers would be free to negotiate with WRS owners for these outlets, none of these licences would be reserved for independents. This is because only a limited number of independent grocers have the space needed to host an off-site WRS. As referenced above, we have significantly over-allocated the universal wine and beer licences to independent grocers, who would also be free to bid on licences allocated to the large chains.
The WRS outlets that operate inside grocery should be supplier-neutral in their retail and marketing practices. This means that they would sell wines produced by both the owner of the outlet as well as wines from other Ontario producers and offer equal sales opportunities to both sets of products.
The Council’s preference is to take an outcome-oriented approach to ensure that these stores operate in a supplier-neutral manner. The key component of this model is an established and objective set of sales targets for other producers’ wines.
Sales targets in supplier-neutral WRS outlets should be based on the relative performance of the same wines in the LCBO. If sales targets are missed, owners would have a period during which they would take corrective actions, such as improving the prominence of display space for other producers’ wines. If targets are met, concerns about fair retailing practices may be alleviated.
We have also identified other factors to be considered for supplier neutrality:
- Selection. The assortment of other producers’ wines in these stores should be consistent with the assortment of those wines in stores with universal wine and beer licences.
- Employee compensation. Compensation of store managers and employees in the WRS should be based on all sales, not only on the sales performance of wines from the owner.
- Shelf space. Half of total shelf space in the store should be allocated to VQA wines. Half of that allocated shelf space (25% of total) should be dedicated to VQA wines from other producers, including 10% of total shelf space dedicated to small producers. If the market share of ICB wines from other producers reaches 12% in the LCBO (double their current share), supplier-neutral WRS outlets should carry those products as well.
- Sales and marketing programs. Wines from other producers should receive an equitable share of all promotions and sampling opportunities.
Other off-site locations
The Council does not envision that all off-site WRS outlets will operate under the model above. In cases where the WRS outlet does not operate inside grocery, there should be no change in the operation of that particular WRS outlet. In addition, grocery stores that already have a WRS outlet as a tenant should not be eligible for a universal wine and beer licence at that particular location.
In the course of our review of wine retailing and distribution, we identified additional areas for improvement in the existing system.
- Distribution efficiencies. The Council is recommending that wineries be enabled to use an efficient distribution system for sales through all channels. This would include off-site warehousing and pooled delivery to bars and restaurants.
- ICB sales at on-site stores. Recently, Ontario wineries that began operating after 1993 were permitted to produce ICB wines at their winery. However, these wineries are not permitted to sell these products at their on-site stores. The Council is recommending that this restriction be lifted.
- Bag-in-box sales. Bag-in-box wine sales in Ontario have been restricted since the early 1990s due to concerns about non-recyclable packaging. At that time, the LCBO considered phasing out the bag-in-box format, but ultimately grandfathered existing brands. Today, those brands belong to just three domestic producers.
Packaging and recycling technology has advanced considerably since the early 1990s. As well, the bag-in-box format represents a growing proportion of overall wine sales in many countries around the world. Consumers benefit from lower prices while producers benefit from packaging efficiencies. The bag-in-box share of the total wine market varies from around 20% in the US, UK, and France to up to 50% in Australia, Sweden, and Norway.
As a result, the Council is recommending that the LCBO move gradually to permit the sale of both imported and domestic wine in the bag-in-box format. This would increase convenience and choice for consumers and open up greater opportunities for producers.
- Taxation at Winery Retail Stores. We recommend that the government adjust tax rates on sales at WRS outlets. Where WRS outlets operate their store inside grocery with a shared checkout, further adjustments should apply. Additionally, the Province’s revenues on any incremental sales in those stores should be similar to the revenue it receives through the LCBO (less a cost of service allowance for the WRS owner).
These adjustments will incrementally remove any inequity that exists between the rate applied to owners’ wine sales in the WRS channel and the mark-ups applied to wines in the LCBO. However, as we have stated, LCBO mark-ups and taxes on WRS sales are not directly comparable.
Given that Ontario has uniform pricing for wine (meaning that prices for specific products must be the same in all channels) and that these tax rates only apply to the WRS channel, we don’t expect these recommendations to impact consumer prices.
- Minimum Retail Price for Wine. Minimum retail prices are an important component of Ontario’s socially responsible beverage alcohol system. Social responsibility groups have argued and public health research has shown that there are strong links between price and consumption of beverage alcohol.
In the course of our review and in discussions with the LCBO, we identified a number of anomalies in the minimum price regime for wine. Minimum prices for wine in Ontario are currently significantly lower than minimum retail prices for beer and spirits when compared on the basis of cost per litre of absolute alcohol.
Accordingly, the Council is proposing that a new minimum retail price for wine be established at a comparable price per litre of absolute alcohol to beer and spirits. We have proposed that this change be phased in over time.
Other beverage alcohol categories
Most of our work in this phase of our review centred on wine retailing and distribution. However, we also examined the retailing and distribution of several other categories of beverage alcohol and have developed recommendations for spirits, cider, and fruit wine.
We started from the view that the LCBO provides a fair and competitive retail channel for spirits producers and a broad assortment of spirits products. As a result, our main preoccupation was with fair treatment for spirits producers with respect to LCBO mark-ups, rather than looking for ways to open up additional retail channels. We have specifically recommended that there be no increase in spirits mark-ups at this time. However, we would urge the LCBO, as the exclusive retailer of spirits in Ontario, to continue to find customer-focused ways to offer new and innovative merchandising and promotional opportunities for this important product category.
Spirits producers operate under a regulatory framework that is different from other categories of beverage alcohol producers. Regulatory barriers that have been removed for other producers constrain market access, particularly for small spirits producers, and limit their ability to grow. To address some of these inconsistencies, we are making three specific recommendations:
- Direct delivery to bars and restaurants. Today, spirits producers are not permitted to sell their product directly to a bar or restaurant; that transaction may only occur if the LCBO serves as an intermediary. This creates a significant barrier for small spirits producers to access this important customer segment. The Council recommends that small spirits producers be permitted to sell their product directly to bars and restaurants.
- On-site retail sales. Retail stores located on spirits manufacturing sites earn a selling commission of 13%. The Council believes this is too low in comparison to the LCBO, where operating costs represent 16% of sales, or typical food and beverage retailers, where gross margins are about 25%. We recommend that the selling commission for small spirits producers at on-site stores be increased.
- Promotional allowances. Spirits producers today are required to pay full LCBO mark-ups on product that is provided free to consumers for promotional purposes. This is different from beer and wine producers, who are permitted to give away a certain amount of product each year without paying taxes. The Council recommends that a limited amount of spirits products provided for promotional purposes be exempt from paying LCBO mark-ups and levies.
Cider in Ontario is currently sold through the LCBO, WRS, and directly to bars and restaurants. Total annual cider sales in Ontario are around $70 million, of which 70% is imported cider. Ontario craft cider has a small share of sales – around $4 million annually. Cider is a rapidly growing category with overall growth of 40% last year, while Ontario cider is growing even faster – at 55%.
Although cider is officially classified as a wine in Ontario, it is considered by consumers to be more comparable to beer. Having looked carefully at the cider market, we are proposing to include cider in the Beer in Grocery initiative. To this end, we recommend permitting the 60 grocery stores licenced to sell beer in 2015 to also sell cider, both imported and domestic. We recommend that a certain proportion of a grocer’s cider shelf space be set aside for products from small cider producers.
We are also recommending that craft cider be included in the province’s Farmers’ Market initiative.
Fruit wines are sold through the LCBO, WRS, and directly to bars and restaurants. Fruit wine is a small category, with total sales of under $4 million annually.
Based on our review of fruit wines, we are recommending that they be included in the new grocery channel. We are also recommending that fruit wine be included in the province’s Farmers’ Market initiative. Lastly, fruit wine producers should be allowed to deliver directly to bars and restaurants at the same rate as VQA wine producers.
These recommendations are aligned with the Council’s view that the best way to support small and growing beverage alcohol producers is by providing fair access to competitive retail markets. However, we understand that high mark-ups and taxes can act as an impediment to growth. As a result, we are recommending that government consider whether there are alternative mark-up structures for spirits and cider that would better enable small producers to grow.
Rebalancing charges and ensuring fairness
As we reviewed the major categories of beverage alcohol, it became clear that inter-category competition (between beer, wine, and spirits) is just as important as intra-category competition (within beer, wine, and spirits). In light of this, we examined carefully the relative tax rates and mark-up levels across the three main categories.
We found that significant inequities existed and have grown over the years. Spirits are subject to a higher mark-up than wine and, in turn, wine is subject to a higher mark-up than beer. As a result, mark-ups and taxes have increasingly become barriers to fair competition. Establishing equitable taxation of beer, wine, and spirits is also a view that is supported by social responsibility groups.
In light of this, the Council recommends that government act to ensure fairer tax treatment across the major categories of beverage alcohol. We have specifically recommended that there be no increase in spirits mark-ups at this time.
Throughout our review, we worked closely with the LCBO as the cornerstone of the province’s beverage alcohol system. In our Initial Report, we made a number of proposals related to the LCBO’s operations. LCBO management took into consideration many of our proposals as well as a number of initiatives that they had already planned. There is a clear recognition in the organization that the future will not be “business as usual” and the leadership team has embraced the challenge of adapting to this new landscape.
In our Initial Report, the Council focused on two issues related to the LCBO of the future: pricing and the introduction of competition. In the course of our work, we have had detailed discussions with the LCBO on both topics.
Pricing and competitive tendering
In our Initial Report, the Council proposed that the LCBO consider changing its pricing strategy to more effectively leverage buying power. This suggestion has been challenged by some stakeholders.
The argument against variable pricing is that, since the LCBO is for all practical purposes a government-owned monopoly, full use of its buying power is inappropriate. Since in many cases the LCBO is “the only game in town,” it could use its power to exclude brands or suppliers from the Ontario market. Further, as a government business enterprise, the LCBO follows government principles of fairness and equitable treatment of suppliers that it believes are best met by way of transparent and fixed mark-ups.
The Council accepts some of the weight of this argument and, accordingly, we have refrained from recommending radical changes to the pricing system currently used by the LCBO. We do, however, believe that there are opportunities for the LCBO to improve its margins while providing better value for suppliers and consumers and adhering to transparent and objective criteria.
Along these lines, the Council has explored with the LCBO ways in which it could tender unique opportunities through special product calls. Suppliers would be offered the opportunity to participate in these programs and could choose whether to do so or not. The LCBO would offer additional promotional benefits for the tendered products. We are recommending that the LCBO launch this program on a pilot basis in summer 2016 for certain new products.
The impact of greater competition
Our Initial Report stated that the Council wanted to introduce competition into the beverage alcohol sector in Ontario, putting pressure on the existing players to improve and innovate. Our recommendations in this report achieve that, expanding the sale of beer in up to 450 grocery stores and enabling up to 300 of those stores to sell wine.
The proposed changes to introduce beer and wine in grocery stores would create a new channel in the marketplace that would compete directly with the LCBO. For the LCBO, these changes represent the biggest increase in competition that the business has ever faced and create an imperative for the LCBO to adapt its business model to reflect the new competitive environment.
The LCBO has recognized this imperative and is developing its strategic plan to take account of the new realities of the beverage alcohol system in Ontario. Initiatives already underway include merchandizing innovations like “Products of the World” that offer greater assortment in select stores as well as a much broader selection of craft beers. The LCBO also continues to pursue improved efficiency and has developed supply chain innovations such as the award-winning automatic palletizer.
LCBO management has recently articulated a number of priorities for the future. These include investments in frontline staff training and skill development, data-based decision-making, and further developing the wholesale business. In addition, the LCBO is significantly upgrading its online offering. The plan for this is to launch an advanced version of its eCommerce platform in 2016 and then evolve that into a full-scale global marketplace in 2017 that will offer a massively increased assortment of products from all over the world. The Council strongly supports all of these initiatives.
The LCBO will undergo a leadership change later this year when Bob Peter, who has been the President & CEO of the organization for the last 14 years, retires. The Council would like to take this opportunity to congratulate Bob on a nearly 50-year career in retailing, and we wish him well in his retirement. Bob made dramatic and positive changes to the LCBO. He created a great consumer experience and improved market share in product categories such as beer where he faced a large and determined competitor.
We would like to thank the leadership team of the LCBO for their support throughout this process. We have greatly appreciated their assistance in outlining how the system works and their co-operation and advice in the development of our recommendations.
The Council’s review of the beverage alcohol system in Ontario aimed to develop proposals that would maintain and enhance the benefits and efficiencies of the existing system, while improving consumer convenience and choice. We believe that our recommendations achieve this.
As a result of our proposals, consumers would be able to purchase wine at up to 300 grocery stores in the province in a one-stop shopping model that is integrated with the Beer in Grocery initiative. This model means that imported and domestic wine producers would have access to a retail channel outside of the LCBO. As with beer, these changes would be implemented in a socially responsible way, ensuring that standards are upheld and consistently applied in grocery.
In modernizing the wine retailing and distribution sector, there are a host of issues that the government will have to monitor. For example, we cannot be certain of the ability of producers to respond to new retail opportunities. The government will also need to examine the impact of these changes for the WRS network and the LCBO and to make the appropriate adjustments, including with respect to taxation. Despite this uncertainty, given the long-term investment requirements of the wine industry, we believe it is important to outline a roadmap of how we see the industry and retail system evolving.
We would like to thank stakeholders once again for their collaborative engagement in reshaping the wine and spirits retailing and distribution system. Continued stakeholder input and cooperation will be critical to realizing the opportunities that these recommendations offer.
The Council has now completed its review of beverage alcohol retailing and distribution in Ontario. This section of our report presents our final recommendations on wine, spirits, and the LCBO.
Universal wine and beer
- The Province should create up to 150 Wine in Grocery licences, combining wine with the existing Beer in Grocery initiative. These licences should allow for the sale of both imported and domestic wines.
- The LCBO should act as the exclusive wholesaler of record for all wine sales to grocery stores. Full LCBO mark-ups and levies should apply to all imported and domestic wine sales.
- Similar social responsibility requirements as are in the Beer in Grocery initiative should apply. In addition:
- wines priced below $10.95 per 750 mL bottle should not be permitted; and
- the sale of wine-based liqueurs and coolers should not be permitted.
- The government should discuss with grocers opportunities for small producers to access the new Wine in Grocery channel and ways to provide adequate display of VQA wines.
- The competitive allocation process for universal wine and beer licences should commence in mid-2016 with an initial tranche of 70 licences, split into two groups as follows:
- Thirty-five of the new licences should allow for the immediate sale of imported and domestic wine.
- Thirty-five of the new licences should carry a restricted assortment for the first three years. After this initial three-year period, these licences should automatically permit the sale of all wine.
- Licences should be fairly distributed across the province and equitably allocated amongst large and independent grocers. Of the 70 licences in the first tranche, 18 should be reserved for independent grocers with the remaining 52 available to both large and independent grocers. Grocery stores that already have a WRS outlet as a tenant should not be eligible for a universal wine and beer licence at that particular location.
- Before issuing future tranches of universal wine and beer licences, the Province should examine the performance of this new channel and the off-site WRS outlets, the impact on sales of imported and domestic wine in the province, and the implications for the Ontario wine industry. The Province should consult with wine and grape grower representatives as part of this process.
Winery Retail Stores
- Off-site WRS outlets that are already located in grocery stores outside of the checkout should be permitted to operate their stores inside grocery with a shared checkout.
- This process should take place at the same pace as for the new universal wine and beer licences, with 70 stores initially permitted to operate their stores inside grocery with a shared checkout.
- The Province should issue up to 70 beer licences to grocers that agree to have a WRS outlet operate inside grocery with a shared checkout before May 1, 2017. Beer licences should be subject to geographic and ownership concentration restrictions and should have a set discount of 3% off the net price.
- Off-site WRS outlets that operate their stores inside grocery with a shared checkout should carry any Ontario wine. These outlets should be required to sell wine in a supplier-neutral manner.
- WRS outlets that do not operate their stores inside grocery with a shared checkout should continue to be permitted to operate as they do today.
Additional wine recommendations
- Producers should be enabled to use an efficient distribution system.
- All Ontario wineries should be permitted to sell their own ICB wines at their on-site stores.
- The LCBO should gradually expand the assortment of bag-in-box wine to additional imported and domestic products.
- The government should adjust tax rates on sales at WRS outlets. Further adjustments in tax rates should be applied where WRS outlets operate their store inside grocery with a shared checkout.
- Minimum prices for wine should represent a similar price per litre of absolute alcohol as with beer and spirits.
Other beverage alcohol categories
- Small distillers should be granted the right to sell directly to bars and restaurants.
- Small distillers should have an improved selling commission at on-site retail stores.
- Distillers should be permitted to provide a limited amount of spirits products for promotional purposes without paying LCBO mark-ups.
- Cider should be included in the Beer in Grocery initiative, including for grocery stores that were licenced in 2015. There should be shelf space requirements for small cideries.
- Craft cider should be included in the Farmers’ Market initiative.
- Fruit wines should be included in the universal wine and beer licences.
- Fruit wines should be included in the Farmers’ Market initiative.
- Fruit wine producers should be allowed to deliver directly to bars and restaurants at the same rate as VQA wine producers.
- The government should consider whether there are alternative mark-up structures for spirits and cider that would better enable small producers to scale up.
Rebalancing Charges and Ensuring Fairness
- The government should take steps to more closely harmonize the relative mark-ups and taxation between beer, wine, and spirits. There should be no increase in spirits mark-ups at this time.
- The LCBO should launch a pilot program in 2016 offering suppliers the opportunity to tender for unique or exclusive product calls that would include special promotional benefits in exchange for higher margins on these products.
- The LCBO should continue to address the challenges and opportunities arising from increased competition through its strategic planning process. Priorities should continue to include investments in frontline staff and improved efficiency, growth in the wholesale business, stronger data-based decision-making, and advancements in key programs such as eCommerce.