Ontario remains stuck with liquor control regulations that were written in the 1920s. It's time to break up the regulated beer monopoly and let entrepreneurs innovate and compete fairly.
By Lorenzo Somma
Published July 20, 2011
Since the August 2010 closure of Lakeport Brewery and administrative relocation to London, Ontario was completed, Hamilton - a city of half a million - has no brewery to date. After Lakeport closed, many breweries have made offers to buy the existing facility to continue manufacturing beer. Labatt, the breweries current owner, has declined all bids for property for the use of brewing beer.
The Teamsters Union Local 938 called for a boycott of Labatt products due to this, but the problems with our beer and all the industries connected to it requires actions larger than a boycott. It's time we end this prohibition-era economic and cultural stagnation. It's time to take our booze back!... please drink responsibly.
The first part of this equation looks at Canada's three largest beer companies: Labatt, Molson and Sleeman Brewery. And I use the term 'Canadian' loosely, as all three of these companies are controlled by foreign investors. Labatt is controlled by InBev of Belgium; Molson is now a division of MolsonCoors, (which has entered a joint venture with SABMiller to form MillerCoors), and Sleeman is controlled by Sapporo of Japan.
Together, these three companies represent nearly 90% of beer sold in Canada.This in itself is fair enough, as we live in a free market society and this freedom allows for the sale of companies to those who can pay it.
The real problem lies in the second part of the equation, which we face here in Ontario, and that is a company called Brewers Retail Inc (BRI), which sells to the public as The Beer Store. The Beer Store is a privately owned company that supplies Ontario businesses and residence with 90% of its total beer consumption.
Here is a short history lesson about the formation of the alcohol retail business in Ontario:
The Ontario Temperance Act was a law passed in Ontario in 1916 to prohibit the sale of alcohol, a period known as Prohibition. A two-question 1924 referendum on the Temperance Act showed a majority in favour of maintaining the Temperance Act (the first question), but also showed a majority for allowing the government to sell and control alcohol (the second question).
In 1926, the Conservative Party used the results of the 1924 Temperance referendum as their re-election platform. The people voted the Conservatives into power for a second term (1923 to 1926 and 1926 to 1930).
Following Prohibition's end in 1927, the provincial government decided to temper the angry mob of Ontario citizens who had been denied their booze by founding a network of liquor distributors and forming the Liquor Control Board of Ontario (LCBO) for the controlled distribution of wines, beers and spirits.
The concept was that one can control the consumption of alcohol in a population if one controlled the retail means to buy that alcohol. In LCBO stores, this control went as far as to require permits in order for a retail store to retrieve one's order from a warehouse. Permits were back-checked regularly to stop alcohol abuse and there were even laws that prevented women from drinking alcohol in the presence of unmarried men without an escort.
LCBO order retrieval form
To placate the various breweries that were harmed by prohibition, the government also set up an organization called Brewers Warehousing Ltd. This company was owned by the brewers of Ontario and was charged with the creation of a distribution network from which the beer they made could be sold - and, more importantly, controlled. Brewers Warehouse Ltd was the governing body and the brewers (as well as being businessmen) were the legislature.
Over the years, many of these breweries either merged or were bought out. Soon, what was once several brewery companies were reduced to only a few: Labatt, Molson and Sleemans. These companies, one by one, either merged with a larger foreign company or were bought outright. What started as the Brewers Warehousing Company Ltd, slowly evolved into Brewers Retail Inc (BRI), whose job remained the same - the distribution of all beer in Ontario.
Since the root method by which beer was to be distributed remained the same as its founding in1927, these three companies now run not only their own business, but also the body that regulates the sales of what their business produces i.e. beer.
BRI's ownership breaks down as follows: 49% owned by Inbev (Labatt), 49% owned by MillerCoors (Molson) and 2% owned by Sapporo (Sleeman). Labatt, Molson and Sleeman are the primary manufacturers of all beer sold in Ontario. These brewers sell their beer to the wholesalers BRI, who in turn sells and distributes beer to all retailer stores and other venues (bars and restaurants).
Thus, 90% of all beer in Ontario is made by Labatts, Molson and Sleeman, which is then sold to the wholesaler (BRI) which is in turn sold in the Beer Store (owned by BRI) or to bars and restaurants (by BRI).
These companies own Ontario beer and the 10% of sales they don't control belong to the remaining Ontarian or Canadian breweries that pay a hefty toll to have their beer sold in Beer Stores.
This is unfortunate, as there are lots of great beers out there that you won't find at a beer store, or if it is on their big list of beers (like McAuslan Apricot, a personal favourite of mine), they never seem to have it in stock.
The sales of wine in Ontario was also given to a private organization, the Winery Retail stores (now owned by two wineries), but wine is largely sold in the LCBO. Despite various problems, the three organizations have muddled through into the businesses that stand before you today.
When one organization controls an entire market, we get that magic word: monopoly. I may be a business idealist, but I truly believe that monopolies are bad for the economy. Monopolies create commercial inequities, snuff competitiveness, stagnate innovation and lock up economic value.
In order for any brewer to enter the market, it must go through the BRI. Thus you must seek the approval of your largest competitor in order to gain access to the greater market. Your beer will have levies placed against it (even if it is placed on the shelf) and you will have no marketing representation among the distribution network besides your beer being placed on the 'Wall' at the beer store.
Mean while, your competition, (Labatt, Molson and Sleeman) will receive front and centre marketing and a convenient 'Big Sign' that lists all the top 10 beers in Ontario ("oh sorry you didn't make the cut, maybe your beer just isn't that good").
An organization called Ontario Craft Brewers is trying to represent the smaller breweries out there and in many ways is the organization the BRI should have become. Ontario Craft Brewers is comprised of 28 microbrewery members. This group has long lobbied for change in the way Ontario's beer market works and has argued that it should either be allowed to buy shares in BRI to give representation outside the monopoly three, or to be allowed to open competing stores.
Both the government and BRI have flat-out denied the request. The BRI went on further to suggest that should the Ontario Brewers Craft ever be allowed to open stores,the BRI and its other Canadian counterpart, Canada National Brewers (also owned by the Big Three breweries), would boycott OBC products and not sell or distribute them in any store. A very open-handed and fair position from two obviously unbiased groups.
The Ontario government asked this question in 2005. A panel was formed featuring various experts to research and determine if the 78-year-old piece of legislature that formed the modern Ontario beverage alcohol system needed revision. All of our beverage alcohol distributors' fates are linked to the LCBO. What happens to the LCBO can mean the confinement or freedom of beverage alcohol in Ontario. In the end, the buck stops with the LCBO.
This panel was specifically tasked to find the following:
As well, the government established five principles to guide the review. These were:
This is a brief summary of their findings. The report outlines the various methods used to conduct the research needed to draw a valuable conclusion: researching the history of the various influences on the current alcohol situation in Ontario, interviewing key experts and stakeholders in the industry, conducting various round table discussions and surveying the general populace.
After months of research, the panel came to the unanimous conclusion that the beverage alcohol system in Ontario is in a great need of a complete overhaul. The panel put forth an entire new system that would ensure the following:
Much of the research was on social responsibility and the role of government in regulating alcohol. After looking at many systems in 19 regions around the world, the conclusion was made that government can very effectively ensure all possible steps are met to keep alcohol from becoming a problem without the need of direct distribution.
When the LCBO was originally created, retail ownership was a means to the end of alcohol control. Now retailing has almost become an end in itself. The government is deeply involved in a complex, fast-changing business. While the LCBO has evolved positively in recent years, our work has convinced us that the LCBO will find it financially challenging to keep pace with broader consumer and retail trends over the long term while maintaining or increasing its dividend to the province. This is not a line of work that government should be in...
Our fundamental conclusion is this: To create an open and competitive system, maximize government revenue and protect social responsibility and other public interests, we unanimously recommend that the government withdraw from retail and wholesale operations and implement a licensing system for the retailing and wholesaling of beverage alcohol in Ontario.
Essentially, the panel suggested that instead of having three monopolies (LCBO, BRI and the Wine Retail) running all of our beverage alcohol, all LCBO in a geographical region should be given a licence that would be bid on at an open auction.
The highest bidder would receive a 10 year licence and acquire a full LCBO store with all the assets that entails.
In order to bid, a business would have to meet strict requirement and have a record for social accountability. Once bought, a store could be moved within that geographical location within curtain guidelines. The auction fee would be paid over the term of the licence.
At the licence's expiration, it would be auctioned again, and the former holder would be allowed to bid again for it.
BRI and wineries with off-site stores could include some or all of their retail outlets in the auction. If they did so, they would receive an appropriate portion of the auction proceeds. Any licence would allow for the full range of alcohol to be sold, although a retailer may choose to specialize.
Specialization would allow us niche market stores that tailor to a specific market of alcohol consumptions, thus we could have 'Bert's Cider Shop' or 'Erny's House of Malt Liquor' instead of generalist stores.
A similar setup would be implemented for wholesales. For efficiency, the government would impose levies at the wholesale area of sales. On top of the $1.5 billion the government makes on alcohol sales, it is projected, after a short 18-24 month transition period; the government would earn a minimum additional $200 million in annual sales.
To ensure competition and fairness, certain restrictions would be placed on who and how many stores a business could own, along with restrictions as to how a store could be designed. Where BRI or wineries choose not to include their retail outlets in the initial auction process, the government could offer additional licences at auction to ensure an appropriate number of full-product-range licences in each zone.
The strategy also includes incentives for small alcohol distributors to have fair opportunities to compete against larger firms, mostly in the form of a deduction in the amount of money the government charges.
Wholesalers would participate in a province-wide marketplace, competing for the business of retailers and licensed establishments on the basis of service, product selection and price.
As opposed to dictating the business to retailers and licensed establishments. These licences have various stipulations to ensure social responsibility, healthy competition, superior customer satisfaction and a positive revenue impact. The panel's final recommendation was summed up as follows: Recommendations To provide the benefits of a more open, flexible and competitive market to the people of Ontario, including increased revenue, we recommend that the government of Ontario do the following.
Give the existing private-sector participants - Brewers Retail Inc.(BRI) and off-site winery retail stores - the opportunity to participate in and transition to the new system by
Redesign the system of alcohol charges to establish flat per litre charges. Collect these charges when the products enter the wholesale channel.
Apply a reduced rate of government charges to the products of small producers of beer, wine and spirits, based on an annual threshold production. Maintain the existing provincial charges on sales at winery retail stores.
Included in the report were other recommendations about recycling other bottles like wine and spirits (the only part of the report the government seemed to heed) and 4 other systems that could result in change to the current one. Those other systems were:
Retain and improve the LCBO: Make it better, more profitable and more involved with the government. Nothing would change and none of the key issues would be addressed. More money could be made if the private sector was more involved. The government would also need to encourage increase consumption and increased prices. As opposed to a focus on regulation and responsibility
Divest the government of the LCBO: Sell the monopoly to a single buyer. The government and the people of Ontario would be trading a sizable continuing cash flow stream for a one-time lump-sum payment. In addition, these options do not increase consumer choice, promote competitive prices or offer increased convenience. Nor do any of these models make the system more accessible or flexible. In effect, under all these options one monopoly is exchanged for another monopoly. It was not felt this was in the public's best interest.
Form a joint venture with BRI and the winery retail stores: One Super-Monopoly, fraught with problems as the two private and one public sectors strive for control.
Once competition appeared, the revenues of the LCBO would fall, and because it lacks the flexibility to lower its high cost structure, returns to the government would decline. An orderly transition that clearly allocates risks and returns at the start is the only way to achieve full value from an open marketplace.
In the end, the panel found the four other alternatives to go against the best interest of the people and economy of Ontario. The main solution was rejected by the minister of finance.
The real problem is not with Labatt or any of the businesses behind the making of the beer we drink. They are all legitimate businesses operating in a free market and should be able to make the beers you enjoy.
What we should not tolerate is the system our past government set up and that private enterprises have perpetuated, a system that has not been actively revised in over eight decades.
The history of Ontario and alcohol is one of conflict, prohibition and control. We are not the Ontarians of the 1920s nor any other previous decades. Our laws and regulations should reflect our morals and our judgements.
We need laws that reflect the Ontario of the 21st century. We need to decide if we want a new way of looking at alcohol. We need to decide what is considered socially responsible or socially outdated. We need to decide if prohibition era laws should still affect our lives. We need to let our politicians know we want change.
This issue needs to be revisited and these monopolies need to come to an end. I suggest we really look at the current state of Ontario's beverage alcohol system and decide for ourselves if the system is in our best interests or the system's best interests.
Look into these matters yourself and say what you think. Support Ontario Brewers Craft, visit their website, look at the great beers that have aligned with them. Drink those beers, demand them! Demand change.
I personally am all for changing up our system. I say, let the government regulate and protect the citizenry and let entrepreneurs innovate and stimulate the economy.
I want to visit 'Bert's Cider Shop', I want to see the floodgates open up and bring some new opportunities into our province. Opportunity Knocks. Bottoms Up!
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