Privatizing Retail Alcohol Sales in Ontario, yes or no?

The question of full privatization of alcohol retail sales in Ontario – sell-off of LCBO and ending remaining Beer Store prerogatives – comes round and round in the years: in the beer community, in politics, by union representatives, and by public health advocates.

Currently, there seems no reasonable prospect of such privatization, even as steps have been taken in recent years to extend the retail environment, e.g. the few hundred permitted grocery store outlets for beer and wine, or emergence of “bottle shops” as described in an article in June last year by Kate Bueckert of the CBC.

The current Conservative government in Ontario led by Premier Doug Ford shows no interest in a LCBO sell-off, despite recommendations from various quarters in past years to do just that.

For some background on that issue, the Wikipedia link on LCBO is helpful (“Debate Over Privatization”). See also e.g. David Clement’s article in the Financial Post in May 2021, and a Fraser Institute report some years ago by Mark Milke, reprinted from the Winnipeg Free Press.*

For a contrary view, see this 2012 article by Warren Thomas in the Toronto Star, the longtime public union official.

There are earlier studies arguing for privatization dating back at least to 2005.

Nonetheless I’d like to state my feelings why privatization is logical and would benefit the people on a net basis. From everything I’ve looked at, government revenue could be secured through maintenance of sales taxes, or the mark-up demanded by most Provinces to sell alcohol.

In Alberta, where for some 30 years alcohol retailing has been privatized, the government secures its mark-up on sales, in part by controlling wholesale distribution. But any government has ways to ensure the tax bill is paid.

Any government has ways to enforce safe selling of alcohol, that licensees of stores pass a “safe serve” test for example, this already exists in the bar environment and for permitted grocery sales.

From my checks, some beer sold in Alberta today costs more than in Ontario, some (or of similar type) is about the same, some is less. It does seem the total tax percentage, federal and provincial, is less in Alberta than Ontario, yet, some beer is higher there than here, yes.

The respective markets though are different. Alberta is further west of course, so European imports travel longer to get there: costs more money, a factor affecting other imported alcohol as well, likely.

Alberta has a much smaller population than Ontario, so economies of scale are different. Etc.

Even if beer, or alcohol in general, on average costs more there, that is not a reason imo to support government control of retailing. Government control originally was predicated on reducing abuse of alcohol. How can selling less booze be wrong from a public health standpoint, particular when medical care is under great stress as at present?

Putting it differently, government should not subsidize cheaper alcohol, should it come to that. Let market forces dictate the final prices, although in many cases I think they will be advantageous.

Government mandarins, as beneficent as they are, should not decide what in practical terms ends up on retail shelves – at uniform price throughout Ontario for the same brand. While union jobs are a factor to consider, at the same time why should alcohol retailing benefit from that status, while many other workers do not?

We might as well unionize the full working population, which I’m sure some would support, but our current political arrangements do not sanction.

Consumer choice, as given effect by private retailers and their suppliers, should be the final determinant for what is sold as beverage alcohol. The private stores I’ve shopped at in Florida and New York, say, but also many other states, offer a luxury of choice we don’t see here, between them of course.

Same can occur in UK, and in all these places some retailers specialize, say in the beers of a particular country or region, or style, or market segment (craft) or… however the market decides to handle it.

We do it that way with thousands of consumer products. Beer and other alcohol should not be different.**

*See my additional remarks in the Comment section.

**75% of the American market is serviced by private retailing, see details in the NABCA site.

 

 

 

5 thoughts on “Privatizing Retail Alcohol Sales in Ontario, yes or no?”

  1. The way I see it, sooner or later privatization is the right way to go, and should have happened long ago.

    The critical piece is that governments should always bargain hard with buyers. The sad history in a lot of places is twofold — one is accepting far too low of a selling price, the other is ridiculous indemnification of buyers against losses, so that taxpayers end up backstopping buyers for the costs of acquisition and operation, and letting them renege on the terms of the deal.

    Privatize, but drive the hardest bargain possible and then enforce it. Don’t swallow sob stories if it turns out privatization has costs the buyers didn’t anticipate.

    And definitely insist on highly transparent negotiations along the way. It’s in the taxpayer’s interests to know all of the details every step along the way. Any private interest who balks isn’t interested in fair bargaining.

    Reply
    • All in agreement here. I don’t see the need to give wide indemnifications, the buyers can do their DD and then run with it. The risk should be very low, as they can rationalize operations and realize further opportunities using an enterprise model. I imagine it might look how Total Wines is run, say, or chains of similar scale. And the currently underserviced part of the market (geographically) can be licensed to independents, the “growth” part Clement talked about, or something like that.

      Also Clark, government will get a chunk of the annual rents (profits I mean) back in corporate taxes, eh? That plus maybe 15-20 billion upfront – sounds okay to me, but I’m no valuation expert. Plus the sales taxes annually of course.

      It should happen but who knows. Ontario can be very small c conservative, irrespective of party in power. There is a strong impetus here not to change, not to innovate except incrementally. Not so much in the past but today, imo.

      Reply
  2. I think privatization is smart. I’d be skeptical of any claims that it’s a net positive in terms of revenue for the government though — government alcohol monopolies can be awfully lucrative considering the markup they can charge.

    There are industries where privatization can be a big winner for governments, but they tend to be ones where there are expected to be major increases in consumption after privatization. Former Soviet Bloc consumer goods are a prime example. State radio factories made zero sense.

    I don’t think there’s strong evidence in the US of privatizing doing much to increase alcohol sales by anywhere near the same levels. (That’s different from removing prohibitions, which definitely increase consumption and sales).

    There can be a short term bump in revenues due to license sales, but the net value over time tends to be small after considering lost retail markups. And the challenge with selling the asset in whole is that private bidders with the capital for a complete takeover tend to be ruthless — Ernie Eves has ridiculed offers based on how they compare to annual profits.

    https://www.thestar.com/news/ontario/2009/12/21/ernie_eves_says_lcbo_sale_wont_be_easy.html

    Which is not to say privatization is bad, simply that the public benefits accrue in other ways than what appears in public coffers, and proponents should be willing to provide an honest accounting. Clement’s article doesn’t even mention annual revenue transfers to the givernment, which is a glaring omission. Greater consumer choice is a good thing, and so is money flowing to the private sector. But if that comes at a cost, that shouldn’t be waved away.

    Reply
    • Clark, always appreciated, thanks. I didn’t mention annual transfers because imo it’s not relevant (although Ontario can always boost its taxes to include that too, if it wants). That profit should go to private interests and recycle through the economy, rather than give government more largesse to spend, to redistribute if you will.

      Consumer choice IS a vital point, as well. Otherwise socialize the whole economy and give people limited choices for clothes, foodstuffs, cars etc. This was tried and found wanting in many places, most, as we know.

      It is my money. I should be able to spend it as I want, not as government fiat says.

      I’ll try to find the 2005 study, by Grant Thornton iirc. I think it deals with many of the points you raise.

      Reply
  3. Just to add, David Clement’s article foresees the current Doug Ford government – likely to be returned to power in the not-so-distant election – as setting the tone for a possible hybrid approach. This would freeze LCBO expansion while allowing private ownership of retail alcohol stores. As Clement himself, I view this as a secondary solution. A full sell-off is best. Under a previous government, minister Ernie Eves estimated some 16 billion could be gained in a sell-off through an income trust. Today that is likely to be much higher. Imagine the dent that will make in the yawning provincial deficit. But apart this, a neither-here-nor-there approach seems inadvisable. Will private stores be allowed to set their own product list (grocery stores cannot, currently)? What about pricing, will they be able to undersell LCBO stores? It should be all or nothing.

    Reply

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