Title: Beer and wine in C-Stores throughout Canada – Will it happen?

Sub-title: Canada has one of the most inefficient beer, wine and alcohol distribution systems in the western world. C-Stores could help. Distribution monopolies, unions and other interest groups are major obstacles.

 

Whatever one’s opinion about Canada’s 23,200 convenience stores, almost no one denies their efficiency. The industry’s unparalleled infrastructure makes it the ideal channel through which to distribute everything from food and household products to emergency items such as flashlights, cold medication and batteries. The C-Store network also acts as an unpaid federal and provincial government tax collection arm, through its sales of cigarettes, lottery and other age-restricted products.

 

However so far, one major potentially lucrative sector has been mostly off-limits to C-Stores: distribution of alcohol products. Judging from experiences elsewhere, it’s a big loss. According to comments by Jeff Miller, chairman of the U.S. National Association for Convenience and Petroleum Retailing in a recent speech, beer sales alone deliver approximately $36,000 in gross profits to each C-Store outlet there.  

 

Canadian convenience store sector stakeholders are well aware of the opportunities says Dave Bryans, president of the Ontario Convenience Store Association. “The OCSA will be doing both qualitative and quantitative research (into the possibility of increasing the flexibility of the province’s alcohol distribution system) over the next few months leading up to the Ontario general election,” says Bryans. “We will have the concerns resolved on this issue and promote the results to all.”

 

Frankly, even initial data appear fairly conclusive. An Angus Reid poll released last month showed that fully 62 percent of all Ontarians would like to see beer and wine available in their local convenience stores.

 

The results shouldn’t come as a big surprise. Ontarians and Canadians in general, pay more (in some cases much more) for their beer, wine and spirits than they ought to, and the service they get is sub-par. For example due to their limited store networks, specialized provincial  alcohol retail monopolies and quasi-monopolies from one end of the country to the other, ranging from BC Liquor Stores to the Nova Scotia Liquor Corporation and their equivalents in most of the provinces between, force Canadians to make “destination trips” to buy their wares. This wastes gas, harms the environment and causes untold stress to time-challenged consumers. As if that weren’t enough, the economy loses out on the untold number of jobs that would be created and tax revenues that would be raised, if alcohol distribution networks were streamlined, to get closer to the consumer, rather than the other way around.

 

A tight set of interest groups

With all of these advantages that such a move would bring, the question begs: will beer and wine ever be sold in convenience stores across the country? More important, if the case in favor of increasing consumer choices is so clear, why hasn’t it happened already?

 

With the exception of a few provinces such as Quebec, Alberta and Newfoundland, convenience stores, have been mostly barred or severely restricted in their ability to sell beer and wine products. In Canada, alcohol distribution tends to be handled by either state owned monopolies such as the Liquor Control Board of Ontario, Société des Alcools du Québec, or foreign-owned conglomerates such as Ontario’s Beer Stores (operated by Brewer’s Retail), which form the vanguard of a group of powerful lobbies against any change in the status quo.

 

“C-Stores will not have any friends at this time, as everyone is protecting their turf,” says Bryans. “The Ontario government is nervous about upsetting the labour unions and Mothers Against Drunk Driving as well as the beer companies.”

 

The Ontario beer, wine and alcohol distribution model: a colossal failure

By all accounts, those powerful liquor monopolies are among greatest obstacles to freeing up beer and wine sales to other players such as C-Stores, says Vic Gupta, principal with Prime Strategies, a government affair consultancy. “They have become vast profit centers,” says Gupta. As a result, over time, because of the lack of competition, their concern for the public has been a secondary consideration.”

 

Nowhere is that more true than in Ontario, where alcohol distribution is dominated by the Liquor Control Board of Ontario and Brewer’s Retail, which, through its Beer Store network controls close to 90 percent of beer sold there. Its dominant market position makes Brewer’s Retail for all intents and purposes a monopoly. And like most monopolies, the Beer Stores have become bloated and inefficient. Yet, because of their monopoly position they are still able to charge exorbitant prices.

 

In a 2005 submission to Ontario’s Beverage Alcohol Review Panel, the OCSA noted that a case of 24 beers cost 50% more in a Brewer’s Retail store than it would in a Quebec convenience store. In random calls for this article, a Beer Store employee said that a case of Molson Export was selling for $33.95, while a call to a Couche-Tard in Quebec outlet yielded a price of $28.99, a difference of more than 17 percent.

 

Brewers Retail’s ownership model has several unfortunate consequences for Ontarians. For one the vast profits that Brewers Retail generates go to its multinational corporate operators, the majority of which are located outside of the country. As in most areas related to its public image, Brewer’s Retail is particularly clever in this respect. In order to project the image of being a modest corporate citizen, the company uses an accounting “slight of hand” trick so that its profits do not appear in its public financial statements.

 

Instead the major beer companies which own the beer distribution monopoly build their markups into the prices they charge Brewer’s Retail, which in turn marks them up just enough to pay their operating expenses. Thus on paper, for the year ended December 28, 2008 (the most recent year for which operating results were published on Brewer’s Retail’s Web-site), the company on paper astonishingly reported breaking even. (A Brewer’s Retail spokesperson refused to comment and referred all questions regarding its pricing policy to the beer manufacturers).

 

The upshot of the accounting trick is that Brewer’s Retail is able to simultaneously gouge its customers and yet show no profit. As a result, consumers walk away feeling they have gotten a fair shake, and the massive markups flow quietly directly into the beer companies’ accounts. Yet no one is the wiser except the accounting nerds who have the time to review the complex notes to its financial statements.

 

The other obvious conflict created by Brewer’s Retail is the limitations that it places on Ontario’s microbreweries who want to get shelf space in its outlets. This in turn further stifles competition which flows additional cash into the multinational beer giants’ pockets.

 

Shiny on the surface….

Yet ironically, Brewers Retail provides a stark example of the challenges C-Store owners face in their efforts to help streamline Ontario’s alcohol distribution system. The reason for this is that like most monopolies, Brewer’s Retail’s Beer Store gives a surface appearance of competence. As a result, to many Ontarians, who have never known another system, the beer monopoly’s performance may even seem adequate.

 

However unlike in Quebec and US states, where consumers can pick up beer at their local supermarkets at no time cost to themselves, in Ontario there is pretty much no place else to go. So every week hundreds of thousands of Ontarians get into the cars to make a special “destination trips” to one of its Beer Store outlets to stock up. When time needed to put on shoes and coat, fire up the car, park, shop, pay the bill and get back home, these trips can take between 20 minutes and one hour. The Beer Store and its beer company owners for their part save tens of millions of dollars that they would otherwise have to spend to build new outlets to better service customers and to ship their beer out to the other retailers that would spring up if there were fair competition. No problem though – the consumer foots the bill, and the Beer Store passes along the profits to its outside owners.

 

The glaring inefficiencies in Ontario’s beer distribution system are important, because they reflect similar problems in the widely differing alcohol distribution systems across the country. (Calls to the Canadian Brewery Association asking for comment regarding beer distribution in Ontario were not returned).

 

For example Quebecers can just pick up a case of beer while visiting their local C-Store or grocery outlet. This flexibility means that Quebecers would be far more tempted buy smaller amounts, say a six or twelve pack, rather than a case of 24. Alberta too allows supermarkets and convenience stores to operate attached liquor stores with separate entrances, and in areas without another liquor retailer within a 15 km radius, any licensed retailer may sell beer wine and liquor. On the other hand, New Brunswick operates a heavily government controlled and regulated marketplace.

 

Yet this contrast, between the shiny outward appearance of Beer Stores and government-owned and operated liquor retailers in general, and their sub-standard performances provides a major challenge for C-Store stakeholders across the country, who are trying to increase competition in the beer, wine and alcohol distribution.

 

For example the Beer Stores maintain a polished Web-site, in which it informs readers of its wonderful attributes - including the 350 beer brands that it offers consumers, an accomplishment The Beer Store outlets is quite proud of.

 

However regular C-Store Life readers will remember that Jean Desrochers, owner of puny little Depanneur Le Resource, located in the small town of Boucherville Quebec also stocks 350 different beer brands, mostly XXX beers. (CStore Life Magazine, April/May Issue, What it your store famous for?).

 

The fact that the Beer Store, a chain with 7,000 employees and 440 stores brags cannot stock more brands, than a one-man C-Store located in small town Quebec, illustrates a key point, about the sloth, inefficiency of Ontario’s beer distribution system, which gouges customers, while leaving a small number of stakeholders reaping in cash.

 

Provincial liquor stores: a key challenge

Inefficiencies at Ontario’s Beer Stores can be seen in other government controlled or sanctioned alcohol distribution systems throughout the country. In fact The Liquor Control Board of Ontario, the Société des Alcols du Québec, the Nova Scotia Liquor Corporation and Canada’s other state owned or sanctioned distribution players, have beautiful, ultra modern Web-sites, are located in well-appointed buildings and staffed by relaxed-looking employees, who are used to the long vacations, short work hours and lavish salaries that come with government related jobs – and which are paid for by a captive public.

 

But looks can be deceiving. Those appearances mask a startling reality says Frederick Laurin, an economist at Quebec’s Université de Trois-Rivières. “Because they don’t have to compete for business, monopolies can be extremely inefficient,” says Laurin, author of Ou sont les vins: le problème de la distribution du vin au Québec, a book that takes on that province’s alcohol distribution monopoly. “Here in Quebec we see it in the lack of diversity of products available and the high prices that consumers have to pay for those products.”

 

Laurin isn’t kidding. The Société des Alcols du Québec, like most other monopolies, literally gouges its consumers. During the year ended March 31, 2010, the company netted gross profits of $1.34 billion on sales of $2.54 billion, which means the company marks up its products a staggering 110%. Of course the solutions to Quebec’s staggering inefficiencies are not new, says Laurin simply: “Consumers need more choices.”

 

Ironically, despite its inefficiencies, Quebec probably has one of Canada’s most efficient alcohol distribution systems says Michel Gadbois, president of the Quebec Convenience Stores Association. In Quebec, beer and several categories of wine are sold in all major grocery and convenience stores, so consumers can pick them up when needed.

 

“It works very well,” says Gadbois. “Because of the minimum pricing requirements and tough competition here, C-Stores are forced to charge low prices for beer, too low in fact, a factor we are hoping to change. However customers really appreciate this and the sales serve as an excellent traffic builder to drives the sales of other products.”

 

Gadbois also challenges critics who argue that the expanded alcohol distribution networks would hurt provincial liquor outlets. “Anyone can see that the SAQ’s (Société des Alchols du Québec’s) performance has improved recently. For example they have opened many express outlets, which enable customers to get what they need faster.”

 

Yet according to research done by the Montreal Economic Institute despite the its success relative to that of other provinces, even the Quebec model does not go far enough. In a paper titled Le Monopole de la Société des Alcools du Québec : Est-il toujours Justifié?  released in 2005, the MEI criticized the province’s restrictions on liquor and hard alcohol distribution. “Neither theoretical arguments nor economic performance justify maintaining SAQ’s current policy,” wrote Valentin Petkantchin, the report’s author. “Their origins in Quebec and the other Canadian provinces go back to the inglorious days of prohibition and the United States dry laws of the early 1920s.”

 

Safety issues: are they still a concern?

In fact Quebec convenience stores’ excellent record in the distribution of beer and alcohol products provides an excellent role model for industry stakeholders who want to argue for similar efficiencies in other jurisdictions. Quebec has allowed beer to be sold in C-Stores for decades and has no shortage of micro-breweries and imported brands rushing to try to get in – a clear sign of the market’s profitability. Convenience stores also coexist nicely with provincial owned liquor distributorships which despite their inefficiencies continue to prosper.

 

In Ontario too, objections to expanding alcohol products distribution channels are slowly withering away says Bryans. “Ontario has done three years of mystery shops under the We Expect ID program and the convenience store channel has always outperformed the Beer Stores and way outperformed the government-run LCBO outlets,” says Bryans. “Remember there are about 200 LCBO agency stores located mainly in rural Ontario that sell a full line of alcohol in a convenience store setting and there has never been an issue with the handling of these products.”

 

Hurdling the obstacles

In short, Canadian convenience stores clearly have the facts on their side in the alcohol products distribution debate. The problem is that when powerful lobbies line up against a cause, the facts are not always enough. Experience shows that hardened special interest groups (eg. Cuban exiles in Florida, the US gun lobby, unions and so on) can often take on, and consistently overturn the general public interest.

 

As a result, many C-Store industry players may prefer to move gradually on the alcohol distribution file, by asking just for small steps to open market access. For example when the Ontario government last explored the opening of the market for alcoholic beverages the recommendation at the time was that government get out of the beer selling business, while keeping its liquor distribution arm. Quebec convenience stores on the other hand too are also asking for small changes such as access to a wider range of wine products, and alterations in the beer pricing system. C-Stores in other provinces such as Prince Edward Island, where government owned stores have a monopoly on alcohol distribution, may also want to try to move gradually.

 

However at the same time, the industry needs to accept the inherent justifications of its demands and to let them be known says Gupta of Prime Strategies. “We need to pull together, to find allies and fight for our rights,” says Gupta. “Other industries stand up for their interests and we need to do the same.”

 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business writer.

 

 

 

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