BUSINESS

LIQUID ASSETS

Will Ontario join Alberta in privatizing liquor sales?

ANDREW WILLIS July 24 1995
BUSINESS

LIQUID ASSETS

Will Ontario join Alberta in privatizing liquor sales?

ANDREW WILLIS July 24 1995

LIQUID ASSETS

BUSINESS

Will Ontario join Alberta in privatizing liquor sales?

The tiny Cave Spring Cellars Ltd. winery near St. Catharines, Ont., has had its share of ups and downs over its nineyear history. Cave Spring president Leonard Pennachetti has won international awards for his Chardonnay, bounced back when his 40 acres of grapes were hit hard by early frosts and prospered through the jarring restructuring of Canada’s wine industry that accompanied the Canada-U.S. Free Trade Agreement in 1989. Nothing, however, prepared the winemaker for the current push by Ontario’s newly elected Conservative government to overhaul—and possibly sell off—the Liquor Control Board of Ontario, the world’s largest purveyor of spirits and wine with $1.8 billion in sales last year. “What’s being considered represents a real sea change for our industry, and some small wineries will suffer,” says Pennachetti, who is also secretary of the Wine Council of Ontario, an industry lobby group. He adds: “Privatizing Ontario’s liquor stores would be as significant an event for us as free trade.”

Ontario’s staid alcoholic-beverage industry is shaping up as the first battleground in Harris’s so-called common sense revolution, an agenda that calls for less government and lower taxes. Last week, the

six-week-old Tory government announced that it was setting up a commission to study the privatization of liquor retailing, with the aim of improving customer service, selection and price, while helping to reduce the province’s debt. Government researchers will examine Alberta’s two-year record of private alcohol sales, along with the partial privatization of British Columbia’s retail liquor industry. But already, Ontario’s wineries, breweries and distillers—as well as about 5,000 liquor-store employees—have launched a campaign of resistance, raising alarms about the possibility of higher prices, increased alcohol abuse and job losses.

The Ontario government’s ability to withstand such fierce opposition will be a measure of its commitment to Premier Mike Harris’s free-market campaign rhetoric. At stake is a sweeping agenda that also includes the possible sale of the provincially owned broadcaster TVOntario and the sale of Ontario Hydro, among the largest public utilities in North America. Analysts predict that the province will eventually break up Ontario Hydro, a monopoly burdened with $34.2 billion in debt, into several smaller, competing utilities. Finance Minister Ernie Eves plans to set out his government’s agenda in an eco-

nomic statement this week. But in an interview with Maclean’s, Consumer and Commercial Relations Minister Norman Sterling, who is responsible for the LCBO, reaffirmed that privatization is a priority. Said Sterling: “This is an issue that reflects the attitude of this government, the ideal that less government is needed in Ontario.” But, he added, “It is high profile and is bound to leave the public with either a positive or negative taste for the whole privatization movement.”

Across the country in Calgary, the response to privatization is still mixed. On one side of the debate are store owners who profited from the policy, as well as buyers who appreciate convenience and competition. But there are plenty of others who complain that the government has botched privatization by licensing too many stores and failing to deliver cheaper prices. Premier Ralph Klein’s government says, however, that privatization has saved the province more than $60 million annually —and that, he says, is what matters most.

Alberta’s free-market approach to selling alcohol is epitomized by a billboard outside the Royal liquor Merchants store in Calgary. Last week, the sign advertised draft beer on tap for $3.49 a litre, along with free tastings of Jack Daniel’s bourbon, Stampede Wine and Lone Star beer. To attract customers, the store stays open from 10 a.m. until midnight six days a week, 10 to 10 on Sundays. Inside, there are draws for rugger shirts and a $2,500 set of golf clubs. And to encourage loyalty, the shop offers customers “Party Points,” the I equivalent of a frequent buyer’s program. Staff I members pour draft beer into plastic bottles, rang5 ing from one to four litres in size—whatever the I customer requests. Says Royal Liquor president g John Dong: “I want customers to have fun in this store. The price is not always the bottom line.”

In fact, alcohol prices in Alberta have increased by as much as 20 per cent since Klein’s government privatized the sector nearly two years ago, according to Léo-Paul Lauzon, a business professor at the University of Quebec at Montreal. Lauzon studied Alberta’s alcohol retailing experiences when Quebec’s former Liberal government was considering a similar move, and he says that Alberta’s prices have risen because there are now more sales agents and distributors involved in the business.

Furthermore, Lauzon notes that product selection has diminished as stores have pared back their expensive inventories and focused on profitable, high-volume brands.

Along with those changes has come intense competition. Albertans can now buy alcohol at 576 liquor stores across the province, up from 202 outlets when the provincial government relinquished control of the system in September, 1993. The Calgary suburb of Forest Lawn, for one, now has 11 alcohol outlets in a 12block area. And, according to local business people, the value of a liquor franchise in the community is falling fast. One liquor store in

the area was originally listed for sale at $175,000, but is now available for $145,000. Says John Klemp, who runs a Calgary wine store: “I’m not happy with the way Alberta privatized. It was done without any planning, and, today, there are far too many retail outlets. It’s a mess.” For his part, Sterling concedes that Alberta’s strategy was flawed: “One lesson we have already learned from Alberta is that you pace yourself, and don’t try to change everything in one go.”

In the absence of the status quo, wine growers in Ontario clearly support a go-slow approach to privatization. In fact, Ontario’s wineries already enjoy a limited form of privatization: under provincial law, they are allowed to operate their own retail outlets, a privilege denied their foreign competitors. That, along with marketing support from the LCBO and the steady improvement in the quality of domestic wines— partly because of competition under free trade—has translated into improved revenues in the past five years. Sales of Ontario wine in the province totalled $211 million last year, up from $188 million in 1990.

But if the LCBO disappeared, companies like Cave Spring would lose a major advantage. According to Pennachetti, small wineries such as his can exploit economies of scale by making one call to the LCBO and tapping into the largest single distribution network in North America. ‘To penetrate a market like Massachusetts, where one person can own three stores, we need to spend far more time and money,” he says. “Ontario is simply one of the most efficient wine markets in the world.”

Brewers are equally leery of embarking on significant changes to the existing system. Currently, about $1.9 billion of beer is sold every year through 600 provincially owned liquor stores and 440 beer stores. According to Jan Westcott of the Brewers of Ontario lobby group, whose members include the province’s two largest brewers, John Labatt Ltd. and Molson Cos. Ltd., recent studies suggest that buying beer at corner stores is a low priority for most consumers. And Frank Heaps, chairman of the Ontario Small Brewers Association and president of Upper Canada Brewing Co. of Toronto, says that putting beer on sale in corner stores and supermarkets will benefit only the two or three best-selling brands. By contrast, smaller, independent brewers would lose shelf space and distribution channels—along with sales and profits. Heaps adds that smaller breweries, many of which are already struggling for financial stability, “will simply disappear.”

Upper Canada is one of the breweries that could end up on that endangered list. The privately held company turned what Heaps terms

“a small profit” last year on sales of about $22 million. Having to set up its own retail distribution operation would mean a whole new set of costs for Upper Canada. Now, among its 90 employees, there is only one truck driver to deliver beer to wholesalers. Heaps estimates that he would have to hire dozens of drivers if his ales and lagers had to be sent straight to retailers. “When the public thinks of privatization, they see better access to beer and cheaper prices. But, experience shows what they will get is less choice and higher prices,” says Heaps. “We are scared to death by the prospect of beer in corner stores.”

Meanwhile, Canada’s major distilleries say that they are encouraged by the prospect of increased competition under privatization. Ronald Veilleux, president of the Ottawa-based Association of Canadian Distillers, says that his members would like to secure access to the same number of outlets now allowed to brewers. Veilleux also maintains that any system that

raises prices for liquor will simply increase smuggling, an underground industry that is estimated to have cost the Ontario government $772 million last year. Indeed, Sterling acknowledges that the spectre of increased smuggling is a major concern for the government. “Higher prices,” he quickly adds, “are certainly not my goal.”

One group that would leap at the chance to sell alcoholic drinks alongside milk, butter and bread is the Toronto-based Ontario Convenience Store Association, which represents mom-and-pop operations as well as major chains. Executive director Russ Egerdie says that consumers would be better served by more liberal laws, and he notes that Quebec’s grocery and corner stores have sold beer and wine for years without problems.

But for Ontario’s 5,000 unionized liquor store employees—who stand to lose jobs that pay an average of $17.73 an hour—the prospect of privatization is bleak. Union leaders contend that there is little economic justification for the move: last year, the LCBO contributed $585 million of its $599 million in profits to the provincial treasury, in addition to $845 million in tax revenues and licensing

fees. John Coones, president of the Ontario Liquor Boards Employees Union, says the cash-strapped government would forfeit much of that money to the private sector if it sells the LCBO. The province, he predicts, would then be forced to make up the shortfall with higher liquor taxes.

In fact, Coones maintains that the province would only receive about $500 million from selling its 600 liquor stores, which he says is a drop in the bucket for a province with a $89.6billion debt. Sterling counters, however, that it is impossible at this early stage to put a value on the liquor stores. And he adds that if the privatization plan goes ahead, LCBO employees will have an opportunity to bid on the stores themselves. Whether that makes common sense has yet to be seen, but there is no doubt that, in Ontario as in Alberta, a revolution in alcohol retailing is under way.

ANDREW WILLIS

JOHN HOWSE