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B.C. Wholesale Pricing Reform on the Horizon?

18/09/2014


This article was originally published on Canadian Grapes to Wine.

Last year, when the BC government announced it was seeking public input in to a comprehensive review of the Province’s liquor policy, many in the wine industry (both producers and retailers) hoped the review would lead to changes to BC’s wholesale pricing system for wine. Critics of the current wholesale pricing system have said that the current system is hard to understand and results in many layers of tax that are buried in the retail display price. The end result is high consumer prices, particularly in bars and restaurants. They say the playing field is not level for all retailers due to the different discount factors. Finally, some experts wonder whether the practice of rebates to producers of BC VQA wines would withstand scrutiny under international trade agreements, since it favours BC wines over imports.

BC has a mixed retail delivery system for liquor. While the government controls all aspects of licensing and wholesale distribution of alcohol, the retail sector is comprised of a combination of government liquor stores and privately-owned licenced retailers (private stores, restaurants and bars, and manufacturers with tasting room licenses). When it comes to BC wine, retail prices are set by the winery. This may be done in conjunction with the BC Liquor Distribution Branch (BCLDB) when the winery is seeking a listing in a government store. A price and a SKU is registered with the BCLDB for each individual product. The retail display price includes Federal GST (5%) and BC PST (10% for liquor). There is no true “wholesale price” that a winery charges to a licenced retailer. Instead, the wholesale price is determined by backing out the taxes (mentioned above) from the retail display price as well as a LDB mark up, which is currently 117% for BC table wine. The BCLDB has a program that rebates a portion of this mark up to producers of BC VQA wine as an incentive to sell through the government store channel.

From there, private retailers get a discount which varies depending on the type of licence. Licenced retail stores get a discount of 16% from the LDB wholesale price. Independent wine stores get a 30% discount and a small group of Rural Agency Stores get a 12% discount. Licenced retail stores (LRS) get a 16% discount while licenced establishments such as restaurants and bars get no discount. They pay the full LDB retail display price less the 5% GST and 10% BC PST. Restaurant and bar owners must mark up their prices more than normal to cover higher purchase costs resulting in prices that leave many visitors to the province will a case of sticker shock.

During public input, several key stakeholders had included recommendations regarding the current system in their BC Liquor Policy Review submissions. Here is a summary of the key points on wholesale pricing outlined the submissions of some of the BC industry’s stakeholders:

Modernize Wine British Columbia
  • The current system is complicated & results in high consumer prices in the medium to high categories (motivating consumers to seek cheaper, imported wines)
  • The system does not treat retail level licensees equally
  • The fact that LDB pricing formula/ mark up combines both a government revenue element and a built in profit margin does not promote efficiency or competition
  • Wineries must adopt the "wholesale discount" policies and therefore are denied a normal economic pricing model
  • RECOMMENDATIONS:
    • Replace current system with simpler flat tax or percentage-based tax
    • Implement the same wholesale price for all retailers
    • Keep policies which support BC producers
Canadian Restaurant and Foodservice Association
  • Licensed establishments are unfairly disadvantaged. Decreasing restaurant sales ultimately decreases government revenues
  • RECOMMENDATIONS:
    • Move to an Alberta-style flat tax
    • Implement a 16% wholesale discount for licensed establishments
    • Increase Licenced retail store discount from 16% to 20%
BC Wine Institute
  • The current Ad Valorem system is fair & consistent
  • Move to a volume-based flat tax would favour high-end import wines at the expense of medium priced BC wines
  • RECOMMENDATION:
    • Keep the system as is
BC Estate Winery Association
  • The Current Quality Enhancement (QEP) & VQA Support programs are critical for BC wineries
  • RECOMMENDATIONS:
    • Keep the current system but reduce PST on liquor from 10% to7%
    • Apply PST & GST at the till
BC Restaurant and Foodservice Association
  • A flat tax works better in a fully privatized retail environment (like Alberta). It is not realistic in a blended retail environment like BC
  • RECOMMENDATIONS:
    • Keep the current system
    • Give licensed establishments the same 16% discount as LRS stores

The BC government released its Final Report from its BC Liquor Policy Review in November 2013. It contained 73 recommendations, but despite submissions on the topic, there was no mention of changes to the wholesale pricing & distribution system. However, a BC government March 6, 2014 Press Release, dealing primarily with the concept of allowing liquor sales in grocery stores and farmers’ markets, the government made the following comment:

“The B.C. government will be developing a new price-based wholesale pricing model for wine and spirits distributed by the Liquor Distribution Branch, so that the price all liquor retailers pay is consistent across the board”

It appears that the BC government is committed to making changes, but any revisions to the current wholesale pricing model in BC will have to meet two important criteria set out by the Liquor Policy Review:

  • Revenue neutrality – the costs associated with any reforms or changes must be less than or equal to the incremental revenues to the government, and
  • Any changes must respect existing obligations under collective agreements and interprovincial/international trade agreements

Despite the calls for more simplicity in the system, a move to a flat tax based on volume, as has been implemented in Alberta, does not appear to be in the cards. Rather, the government’s reference to consistency for retailers seems to hint at a move to level the playing field by equalizing the discount percentages available to different types of retailers. But with no clear direction coming from industry stakeholders, it’s anybody’s guess as to what a revised wholesale pricing system for BC wine will look like. Stay tuned...