Systematic Privatization of Liquor Control Board
The Ford government has long been implementing a program of privatization at the Liquor Control Board of Ontario (LCBO). This latest move of expanding alcohol sales through grocery stores and convenience stores follows the privatization of the LCBO's "specialty services" operations and online services in the 2020 to 2021 period.
Specialty services refers to the sale of products that are not sold in LCBO retail outlets. Private entities, many of them very large corporations, directly contract with wine, beer and alcohol producers to be their exclusive sales representatives in the province. The LCBO serves as the middle man for these transactions.
Prior to 2021, the LCBO operated this service out of its headquarters in downtown Toronto, staffed with unionized employees. It was a combined office and warehousing building from where orders were processed, filled and distributed by unionized workers. In the name of modernizing, including building a new headquarters to replace an old building, the LCBO chose not to build the public character of its operations, and certainly not to retain unionized employees. Instead it hired a private global monopoly – the Supply Chain division of DHL Group (then Deutsche Post) to take over significant areas of operation.
In a May 2020 announcement to the trade, the LCBO described DHL as "a leader in supply chain solutions with significant experience in the logistics and warehousing of beverage alcohol in a regulated environment." Not only was the specialty service taken over, the LCBO announced that DHL would "locate, set up and operate a distribution centre to perform our non-core and online operations including our e-Commerce, Vintages Shop Online, and Specialty Services."
At the time, the LCBO declared that contracting out this work would mean "increased efficiencies, improved processes and productivity, enhanced operations and, in turn, improved supply chain capabilities and better service to our customers."
The DHL Trillium Supply Chain service, a massive warehouse operation in Caledon north of Toronto was up and running by 2021, with LCBO unionized employees having been bought out, transferred, or otherwise severed from these LCBO operations.
The Ford Government changed the liquor laws in 2019 to allow grocery stores to sell wine and beer. Now, private sales will be allowed at an increased number of grocery stores and convenience stores of not only wine and beer, but also of hard liquor-based drinks, referred to as "ready-to-drink products."
Convenience stores can obtain a licence for an annual fee of $500, while grocery stores need to pay $3,250 per year. Both licences entitle the holder to sell and deliver beer, cider, wine and ready-to-drink products. Existing grocery store licensees can begin selling ready-to-drink products on July 18 while convenience stores can begin sales on September 5. New grocery store licensees can start selling on October 31. By that time, every convenience, grocery, and big-box store in Ontario will be able to sell beer, cider, wine, and ready-to-drink alcoholic beverages if they choose to.
This is the precursor to large chain stores and "food" monopolies expanding their dominant position by taking up the distribution of alcohol. This will certainly include using their economic power to control pricing and other crucial elements of the business.
For the time being, the LCBO remains the sole wholesaler of alcohol. It retains the right to set minimum prices and taxes. At this time, the mark-ups set and collected by the LCBO are very significant. The Alcohol and Gaming Commission informs that "as the exclusive wholesaler, LCBO coordinates with all supplying sources." This includes the LCBO itself, the Beer Store which is owned by brewery monopolies, and Ontario producers. It also includes companies operating under the specialty services division of the LCBO. Retailers will pay the LCBO directly and the LCBO will pay the supplying sources. Deliveries from the LCBO to retailers will be handled by third party logistics companies.
Revenue Generated by LCBO
For the year ending March 31, 2008, the LCB0 had net sales of $4.13 billion, including a profit (or dividend) of $1.35 billion transferred to the general revenues of the Government of Ontario. This is the revenue the public treasury stands to lose should the LCBO be privatized for private profit. That year it also collected $383 million in provincial sales tax, and sent a further $458 million to Ottawa in federal sales tax (GST).
Over the five years prior to that, LCBO profits totalled nearly $6 billion for the province. At that time, the agency operated at a profit margin of 48.9 per cent. The LCBO's amounts for the claims of workers in wages and benefits and operating expenses as a percentage of net sales totalled only 16.1 per cent during the 2007-08 year.
Today, based on information in its annual report, the retail stores appeared to turn a profit of at least $1.9 billion, accounting for more than 75 per cent of the money that flowed to the province from the LCBO.
CBC's Mike Crawley breaks down how the LCBO currently turns a profit and how things are expected to change with the Ford government's reforms -- including the premier's plan to sell select alcohol in Ontario convenience and grocery stores. Crawley writes:
"The LCBO brings in about $2.5 billion for the Ontario government each year. ...
"LCBO retail outlets – the 680 stores currently shut by strike -- account for nearly 80 per cent of the Crown corporation's gross revenue, according to its most recent annual report. The rest comes primarily from LCBO's role as a distributor to bars, restaurants and supermarkets.[...]
"[Ontario Premier] Ford insists that the reforms will not hurt provincial coffers. However, industry sources and an LCBO internal document obtained by CBC News suggest the changes will take hundreds of millions of dollars away from the public purse each year.
This is because the LCBO provides its products to the convenience and grocery stores with what it calls a "wholesale discount," 10 per cent off the pre-HST and deposit price.
Breakdown of LCBO's Revenues in 2023
Crawley explains that the LCBO's gross revenues totalled $7.41 billion in 2023. "The vast bulk of that, $5.87 billion, came through the LCBO's own retail outlets, including its online direct-to-consumer sales," he writes.
The other most significant contributors are:
- Licensed establishments (bars, restaurants, venues): $598 million;
- Grocery stores: $410 million;
- LCBO Convenience Outlets: $252 million;
- The Beer Store: $229 million.
Subtracting the following figures from the $7.41 billion in total sales leaves the LCBO with a net income of $2.46 billion, all of which flowed to the provincial government.
- $3.78 billion product costs (including the price the supplier charges, excise tax and freight).
- $1.19 billion in claims to the workers for wages and benefits, and expenses, including administration costs.
Based on information in its annual report, Crawley points out that the retail stores appeared to turn a profit of at least $1.9 billion, accounting for more than 75 per cent of the money that flowed to the province.
The LCBO says the cost of products accounted for 51 cents of every dollar in revenue, while the amounts claimed by the workers and expenses, amount to 16 cents on the dollar, leaving 33 cents in income from each dollar in gross revenue. Thirty-three per cent of the $5.87 billion in revenue from the retail stores works out to $1.94 billion in net income.
How the LCBO Prices Its Products
Crawley writes that the LCBO makes its profit the way just about any retailer does by selling products at prices that are higher than what it pays its suppliers. However he notes, "What makes the LCBO different from just about every other retailer: the calculations it uses to set those prices are standardized and publicly available."
For examples of pricing from the LCBO's website, click here.
This article was published in
Volume 54 Number 6 - July 2024
Article Link:
https://cpcml.ca/Tmlm2024/Articles/M5400612.HTM
Website: www.cpcml.ca Email: editor@cpcml.ca