It’s not all bad news at the LCBO

Yesterday I wrote about the role the provincial liquor boards play in enforcing restrictions of cross-provincial-border trade in wine in Canada.  In the process I make the liquor boards look like the bad guys in this space…and they are.  There is a regrettable law currently in force which restricts trade, the IILA,  and that law may eventually change but I suspect a major barrier to past attempts to amend the law has been resistance by the liquor commissions to support any legislation that would introduce leakage into their revenue or CONTROL model (I have no concrete evidence to support my suspicion…).

In the meantime, for many years, there have been repeated calls for the Province of Ontario to privatize liquor distribution in Ontario.  The general rationale for privatization has been to introduce competition into the wine and spirits marketplace so consumers, importers and wineries can conduct their business unfettered by the policies, restrictions and red-tape associated with dealing with a public monopoly.

The benefit of privatization would be free competition, greater choice, lower prices, easier access to iconic wines, better customer service and an enhanced customer experience, blah, blah, blah. This is the view of the privatization lobby…

Despite careful study of the effects and economic benefits (to the Provincial Government) by many consultants and economists, no Government has yet bitten the privatization bullet and I don’t expect there is very high likelihood that any administration will, in the foreseeable future.  The LCBO dividend is simply so important to the Provincial revenue budget that it is economic folly to enter into a one-time sale transaction and give up a very important and growing annuity income stream.

For the year 2008-2009, the LCBO dividend to the Province of Ontario was C$ 1.4 billion.  This compares with C$1.1 billion in 2004 -2005, or a comp0und growth rate of 5 % over the five year period.  Not bad numbers considering the buffeted economic circumstances during this same period.

Some say the province will still collect its tax revenue if the LCBO were to be privatized and that is correct.  However, the Province would give up the benefits of the product markups that are currently an important component of LCBO net revenue and this is the golden goose that needs to keep laying eggs for a province that has an enormous budget deficit.

The purpose of this posting is not to talk about privatization nor to complain about the LCBO and why we would be better off if we lived in a province that provides a free market  for distribution and sale of wine and spirits.

No, in fact, this note is to express my view that we are better off with an organization like the LCBO delivering the services it provides to the consumers of Ontario.

The context is a posting I made last summer to the Members Forum on Jancis Robinson’s Purple Pages site. In that posting I provided advice to a fellow reader who wished to purchase some Premier/Grand Cru Burgundy wines while he visited Ontario.  My advice triggered a couple of shots across the bow from other readers, expressing the low esteem in which the LCBO is held by consumers and producers.

My response follows:

“First, I would note the General List wines offered by the LCBO – the wines available every day in most stores across the Province – are not very interesting to the fine wine buyer. These are high volume wines purchased by the LCBO for Joe and Jane wine drinker so they have something approachable for their barbecue or dinner party. These wines offer good value and as you note, LCBO prices are reasonably good. There are some good quality wines included in the General List but don’t look for any crus from any of the New – or Old World wine-producing countries: they aren’t there.

The LCBO has other channels and programs to supplement the General List and which make wine buying more interesting for the serious wine consumer.

Every two weeks the LCBO issues some 90 – 110 new wines in its Vintages program and these wines are available in limited supply in a series of boutique-like corners in many LCBO stores. Once the wine in a Vintages release is sold it is gone, until/if it is offered again in some future release. Over the past 30+ years this program has provided a boost to Ontario wine buyers and there is great variety, often good value and sometimes a real winner in the Vintages releases. Each release is broadcast on the web or in a magazine-format catalogue. One of the best volume Vintages stores is in eastern Ontario, just inside the border with Quebec. Montreal buyers travel regularly to this border crossing store to stock up on Vintages wines.

Since the onset of the economic crisis of 2008 there has been a distinctly-cautious, risk-avoidance approach adopted by the Vintages buyers and the effect is to focus on lower-priced wines and repeat releases of wines, many of which are popular but not very interesting. This is disappointing for consumers and also has an effect on agents and their producers who are under pressure to keep prices down, or in fact, to reduce prices. This price pressure has been ameliorated by a strong Canadian dollar and a weak Euro, but nonetheless the LCBO has looked to its suppliers to help keep prices down (= reduced margins). Vintages is not as interesting as it was in the early days and there is a reason for this…

Over the past 10 – 15 years there has been a shift in the management skills and experience at the top of the LCBO house – from wine and spirits to retailing, logistics and marketing. The LCBO is now run by people with these skills and they conduct the business of the LCBO using key performance metrics that come from retailing. Inventory management is a focus area and this affects buying behaviour as Vintages people have to meet their targets or else…whatever that may mean. We don’t get very many obscure wines that might not sell quickly, despite their quality or reputation. The wines in Vintages have to move quickly or there are financial penalties to producers. Too bad for consumers who may seek interesting iconic wines…wines that may not sell fast enough.

There are some very good wine people at the LCBO but they march to the beat of the retail drum in their decision-making. The LCBO has become very sophisticated in its retailing, merchandising, logistics and consumer marketing activities as the leadership skills transition has been completed. The LCBO team is very good at data management and it manages sales programs throughout the year aimed at different consumer segments. There is even a third-party customer loyalty program available for LCBO consumers to collect air miles reward miles – this is loyalty program offered by a monopoly!

There are several other programs/channels aimed at collectors in the LCBO retailing kit, including:

 

  • Bordeaux Futures – an excellent cross section of wines purchased for future delivery in the en primeur market;
  • Classics – a four-time per year limited offering of very fine wines, unfortunately often available on an alotment basis. Offered by paper or online catalogue, these wines are ordered by fax form;
  • Vintages On-Line Exclusives – just what it sounds like, an online mart for sale of very fine wines, on a constantly-changing availability basis.

Wines are delivered to a local store for pick up under each of these programs.

All of this is to say I think consumers are well-served in Ontario by the LCBO and by the various programs which serve the different segments of our market. Not everyone agrees with me on this conclusion and there have been rumblings every few years over the past 15 years that the Province of Ontario should privatize the LCBO. Each time this topic is considered the decision is taken by the Province to stay the course and stay in the beverage alcohol business. The LCBO pays an annual dividend to the Province and this dividend is an important source of revenue for the provincial accounts.

For consumers who think the LCBO falls short there is still the agent distribution system. This is the system I described in my earlier posting whereby consumers and licensees can purchase wines from an agent. Agents are licensed to conduct business by another regulator, The Alcohol and Gaming Commission of Ontario and all agents place orders, receive shipments and hold inventory (if they have access to the warehouse) through the Specialty Services department of the LCBO. This relationship with Specialty Services ensures the LCBO receives its markups and taxes on the wines and spirits sold by the agency channel.

Our market is serviced by several hundred agents and these businesses range in size from one-man operations to very large and sophisticated businesses. It is noteworthy that since the LCBO does not source much of its products directly, the LCBO purchases wines and spirits for its various programs and channels through agents. In addition, agents carry wines that are not available in LCBO stores and it is in this area that gaps in the the fine wine market are filled for consumers and licensees.

Agents benefit by working with the LCBO in the areas of logistics and trade finance. All paperwork and arrangements for shipping are handled by the LCBO. In addition, due to its buying power and volumes, LCBO shipping costs are very low. The LCBO operates on an open account basis so there are no financial complexities – such as a letters of credit – to be dealt with by the agent when orders are placed. These may not be major benefits for large agents but they are a boon for small players.

Complex and multi-layered as it may be, you can get anything you might want in the Ontario wine market. I didn’t say it is easy, however.

As for producers attitudes to Ontario, there is an issue.

In my travels throughout the world many small producers have complained to me about how difficult it is to do business with the LCBO. They, too, are right. The LCBO is rigid in its processes and the paperwork required is a real pain. In addition LCBO buyers can seem to be slow to make decisions when dealing directly with producers.

The LCBO is automating/digitizing its procurement processes but this is a slow process and has not always been smooth. In the meantime it is important for the agent to lubricate the procurement process so the producer is shielded from the complications of the LCBO system – this is the agent’s job and often it is not done well, if at all. When the agent drops the ball it is understandable that producers will refuse to do business with the LCBO, which is a loss for the consumer.

I don’t have personal experience with the supermarkets in the UK or France but I understand producers consider them difficult to deal with…packaging, pricing, payment terms, etc. Not unlike the LCBO, n’est-ce pas?

This is a digest of some aspects of the Ontario wine distribution story, from a consumer and supplier point of view.”

All things considered I truly believe the consumers of Ontario are well served.  We have choice that is available on a consistent basis all over Ontario. We are served by a front-line staff that is increasingly knowledgeable,. There are programs that cater to different levels of purchasing power and sophistication.  The wines are well-handled throughout the supply chain so risk of damage or spoilage is minimized.  Product turnover is managed to be high so wines are not stale and over-aged when you buy.  The stores are bright and clean and are designed an maintained to make shopping an appealing experience.

You will rarely find all the things the LCBO delivers on any kind of predictable basis in most private-distribution markets in North America.  The UK and most countries in Western Europe are another story…

My two cents…comments?

à bientôt…

Copyright© W. John Switzer 2003 – 2011.

 

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Author: John Switzer

I am wine writer, educator and tour guide. From 2005 to June 2014 I published a bi-weekly newsletter, the Winesights Vintages Newsletter (WVN). This Newsletter was closed in July 2014 when the Government of Canada put in place the onerous administrative requirements of Canada's Anti-Spam Legislation. The legacy of WVN continues on this blog spot where I post wine-related articles as well as reviews of a small selection of best-value wines from each bi-weekly LCBO Vintages release. I hold the WSET Diploma, I am a WSET Certified Educator, I teach in the WSET program at the Independent Wine Education Guild in Toronto where I am the past Director of the WSET Diploma program. Since 2010 I have been a judge at Decanter World Wine Awards on the Rhône panel and I am a member of the Society of Wine Educators.

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