BC Business
Walking into the Penticton Plaza liquor store – one of the so-called Signature stores that mark the forward-looking direction of B.C.’s government-run liquor stores – my visitor from New Brunswick is anxious for a beer. The temperature outside is approaching 35 degrees Celsius, and warnings that a cold beer might be hard to find in a government outlet go unheeded. Sure enough, my guest walks in, does a circle of the floor and can’t find the walk-in cooler that’s at the back of most of New Brunswick’s government-run liquor stores. With a sense of the moment, I step up to a clerk stocking shelves. “Do you have any cold beer?” I ask, launching into an impromptu skit. “No, I’m afraid not,” he says affably. “And why is that?” I ask, baiting my unwary straight-man with the question on my guest’s mind. “We’re a government liquor store,” he says. “To accommodate a greater selection of products, we don’t have a cooler. But if you go to Summerland, our store there does have a cooler, but not as many products.” “There you go,” I tell my visitor. “It’s a government liquor store. You can have cold beer, or you can have choice.” The scenario epitomizes the problem that is B.C. liquor retailing five years after the Campbell government turned its back on plans to privatize the province’s liquor trade. Rather than privatize the wholesale and distribution business – which racked up revenues of $2.5 billion in its most recent fiscal year – the B.C. Liquor Distribution Branch (LDB) has expanded its distribution activities, set up 20 large-format stores and renovated 60 of its smaller stores. And while private stores now total 654 – up from 327 in the 2002-03 fiscal year – they depend on the government distribution system for product, and are in direct competition with the government when it comes to price. Private stores can set the price of the items they sell, but the province establishes the discount from the government’s list price at which the private stores buy product. BC Liquor Stores, the province’s retail network, offers the same product at the government’s list price. It wasn’t supposed to be this way. Retailers-to-be and consumers alike expected a dramatic overhaul of provincial liquor regulations when the BC Liberals under Gordon Campbell swept to power in May 2001. The sweeping review of government services that followed the election determined that government shouldn’t be in the liquor business and, accordingly, the LDB prepared itself for privatization. “It is not a core service of government to be directly involved in the warehousing, distribution and retailing of beverage alcohol,” wrote Jay Chambers, general manager of the branch in a letter prefacing the three-year service plan for the Crown corporation that followed the review. The plan set forth a program to close up to 40 government liquor stores by the end of March 2004 and a further 30 to 40 stores in the following year. In total up to 130 government stores were to be shut by March 31, 2006, with sales projected to shift to the new private stores that were expected to open. Moreover, private licensees were promised the opportunity, by July 2003, to receive product via private distributors rather than through government channels. Other changes were already in progress: cold beer and wine stores were allowed to carry spirits in April 2002, and a long-standing moratorium on new licence applications was lifted that summer, which opened the door to the involvement of new private-sector retailers. Restrictions on the size of private stores were also lifted. Indeed, full-blown privatization seemed a sure thing – until the union backlash. Despite promises of a “new era” that would “unleash the power of a thriving free enterprise economy” in the province, in October 2003 the Campbell government negotiated a contract with the B.C. Government and Service Employees’ Union that swapped privatization for contract concessions. The details of the contract were never disclosed, but the agreement effectively put an end to plans for the closure of government-run stores and the privatization of the liquor business in B.C. Only six government-run stores had been shut by the time the deal with the unions was struck. [pagebreak] Shift to Plan B. With approximately 3,500 government jobs spared and a fight with one of the province’s biggest unions avoided, the Liberals forged a new plan: it would attempt a makeover of government stores in the image of the new private licensees that had been approved across B.C. The branch hired a director of real estate to oversee plans for the launch of a series of new stores to operate under the Signature banner – large-format locations designed to be destination stores offering a higher level of service and enhanced customer experience. The first of the new stores was an 11,000-square-foot outlet in Burnaby’s Highgate Village, and today 20 of the 199 government-run stores are Signature-branded locations. While the growing demands of private licensees have led to a doubling of the number of products the government distributes, most LDB stores still don’t offer any more booze than they did five years ago. They have access to 10,000 products through the distribution wing of the LDB – but their flagship store at 39th and Cambie in Vancouver, for instance, stocks just half that number. Smaller Signature stores, such as Penticton Plaza, carry significantly less. For private licensees such as Lisa Lepinski – who has operated the John B Neighbourhood Pub in Coquitlam and an associated liquor store with her husband, John Lepinski, for the better part of three decades – competition has increased in the past five years. The pressure is felt not only from the revamped government stores but also from the more than 300 new private licensees that have opened their doors since 2002. Three stores have opened in the vicinity of the John B alone, while the government store across from the Lepinskis’ operation has extended its hours. Private stores have lost the competitive advantage they once had against government liquor stores, Lepinski says. The longer hours many government stores are keeping means there’s no need for thirsty consumers to turn to private retailers, except out of convenience. Meanwhile, LDB outlets offer comparable product without the markup on which private stores depend for survival. “It’s much more difficult,” Lepinski says. “I try to pick up a lot of products that the government doesn’t carry . . . but the consumer still always goes for price.” Competing against government stores, not to mention private stores that undercut Lepinski’s in the hopes of racking up sales volume, is a challenge she finds difficult to meet. It requires close attention to her business’s cash flow if she’s to have enough money to pay staff and expenses. “It costs money to hold inventory. Big time,” she says. “If I’ve got a lot of inventory here to give the selection and try to entice the customer because I’m trying to be like a boutique, it’s not a cheap proposition. And it’s difficult to have that selection, to have the knowledgeable staff which you spend money on and then to keep doing it.” Lepinski says government and private retailers need to have a long-term strategy for liquor retailing in the province if both are to coexist. Otherwise, she says, independent stores such as hers will lose out to larger players, whether that’s the LDB or the privately held chains from Alberta that are gaining ground in the province. The challenges Lepinski outlines are familiar to John Clerides, owner of Marquis Wine Cellars, a private wine store on Davie Street in Vancouver’s West End that boasts more than 2,000 listings, many of them specialty products. The biggest competitor Clerides faces when it comes to listings is the LDB, which is searching for importers to supply better wines in response to consumer demand. And with its network of 199 stores, the LDB can offer importers the biggest sales volumes in the business. What frustrates Clerides five years after the Liberals backed down from privatization is that he’s still only allowed to sell within his own store. He can’t sell to restaurants or promote his selection with off-site tasting events, and with one store he can’t offer the large-scale distribution the government system can. But if he had the freedom to service restaurants and other licensees, the market would be opened up and private stores such as his would enjoy a more level playing field alongside the government network. The province would still receive its share of sales through taxes, agents would have more options when it comes to distribution and private licensees would have opportunities to develop their businesses. “It would help free up the system,” Clerides says, citing Manitoba as one jurisdiction in which private stores sell to restaurants (and noting that the sky hasn’t fallen there). “If we as a business are ever going to get to the next level, we need these tools.” Being able to sell to other licensees would also help Clerides make better use of exclusive listings that he obtains when government stores choose not to list some items. “If an importer can’t get a listing with the liquor board, I say, ‘I’ll take that wine.’ And we’ll have an exclusive on it. But where [the system] falls short is, I have only one store,” explains Clerides. “If that importer wants to drive more volume, there’s only so much I can do.” [pagebreak] Despite store makeovers and the enduring privileges the LDB enjoys, Kelly Wilson, executive director of retail and wholesale operations for the LDB, maintains that the government is no more interested in going head-to-head with private operators such as Clerides and Lepinski than it was prior to 2003. She explicitly denies any competitive impulse is at work, noting instead that stores are no larger than they were six years ago and that any changes have been largely cosmetic. “It’s refreshed now, you know,” she says. “When you go over to the beer section, there’s beer corrals and they’re much more contemporary and neat and tidy looking. But their orientation in the footprint of the store is basically the same.” Still, the shift at the LDB is consistent with changes made at other Crown corporations, including BC Ferries, B.C. Lottery Corp. and BC Pavilion Corp. (PavCo). The transformation in 2003 of B.C. Ferry Corp. into B.C. Ferry Services Inc., a corporation wholly owned by government, was seen by many as the prelude to a privatization bid that never happened. More recently, B.C. Lottery has rebranded and expanded its community gaming centres under the Chances banner, while PavCo – also once tagged for privatization – is considering adding the development and hosting of trade shows to its role as a facilities manager. The government may not be able to divest itself of some of its non-core operations but it seems intent on making those operations more market oriented. What makes the liquor business different, says Vancouver retail analyst David Gray, principal of retail consultancy Dig360, is the province’s ambiguous social stance toward liquor. Despite a thriving provincial wine industry that enjoys significant support from government, the managers of the liquor distribution system appear to question the social impact of selling alcohol. While Ontario, for example, has spent the past decade giving government-run liquor stores the freedom to flex their retailing muscle (by stripping away much of the Liquor Control Board of Ontario’s regulatory role and handing it to the Alcohol and Gaming Commission of Ontario), Victoria is being, well, very Victorian by keeping a tight rein on B.C. liquor sales with its monopoly on distribution and a restrained approach to merchandising. “The social good is very high on the agenda,” Gray says. “The social good being more than just access to inexpensive product in a convenient manner – all the things that retail normally is.” Gray believes policy-makers in B.C. are more concerned with managing the social impact of alcohol than creating a positive retail environment for the liquor trade – even though the evidence from both well-run private markets and well-run public markets is that there’s little to fear, and much to recommend, from allowing retail sales to flourish. Since Alberta sold off its government-run stores in the early ’90s and made the trade a private enterprise, annual tax receipts from liquor sales have risen by $200 million to $650 million – a boon for public coffers. In Ontario the government-run liquor board has become one of the world’s single biggest buyers of beverage alcohol, with nearly 20,000 products available through its own stores and via consignment orders – a boon for consumers when compared to what’s available in B.C. Just as important, the shift in Ontario didn’t cost the government its power. “The state-run liquor stores are probably even more powerful than they were a decade ago, but they did that by becoming very good retailers,” Gray remarks of Ontario’s system. Gray is sympathetic to the challenges faced by B.C.’s liquor stores and notes that the current muddled relationship between public and private retailers limits the potential of both. “You can see the challenges they have as professionals,” he says of LDB managers. “They’re hired to be the best retailers they can be, and retail managers and leaders, but from a policy perspective there’s some handcuffs.” He doesn’t believe those handcuffs will come off – and the liquor trade allowed to operate to the benefit of consumers and itself – until Victoria recognizes that those who sell liquor require the autonomy to be retailers. Without that autonomy, the coldest beer in Penticton will remain in Summerland.