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Booze Economics 101: Why the LCBO happily charges more and earns less than it might

(Image: Mike Gifford)

Better grab a bottle of Wild Turkey and sit down before trying to understand this one. In an annual report released on Monday, provincial Auditor General Jim McCarter sank his teeth into a policy that makes the Liquor Control Board of Ontario pay more than it has to for wholesale booze—sometimes even demanding the privilege. You’d imagine the LCBO, as one of the largest purchasers of alcohol in the world, could, if it wanted to, use its clout to get lower wholesale prices, thereby reaping greater profits for provincial coffers or passing those savings on to consumers. Instead, it ascribes to a mystifying stratagem that brought on the Toronto Sun headline “Welcome to Suckerville, Ontario.”

Under the current system, the LCBO first decides what it wants to charge for a particular new listing. The price has to be low enough to produce solid sales numbers without unduly boozing up the province (it is a control board after all). Next, it references that number against the amount of profit it is prescribed to earn—for example, 65.5 per cent for Ontario table wine—and calculates backwards what it wants to pay the supplier. If the supplier’s quote falls outside an acceptable range, the LCBO asks it to revise the asking price, even if that means paying a little more. In its defence, the LCBO states in the report that other Canadian jurisdictions also use the fixed markup model and that it provides a balance between “generating revenue, promoting social responsibility and providing customers with selection and value at all price points.”

Finance Minister Dwight Duncan conceded in an interview with the Toronto Star that the policy is “counter-intuitive,” but argued (with a straight face) that Ontario’s higher prices had some advantages. “The infant mortality rate in Detroit—where you might go to buy a bottle of wine for $6 that you pay $18 for here—is much higher,” he said. “I choose our system. I choose social responsibility.” But that still doesn’t explain why the LCBO couldn’t charge the same higher prices and simply pass more money on to the province—especially with Ontario facing a $16-billion deficit. To be honest, we’re not entirely sure whether it’s stubbornness on the LCBO’s part or a legislative straitjacket that’s preventing the agency from adopting a more price-competitive model. Like we said, this all goes down smoother with a bottle of Wild Turkey (that’ll be $28.25).

  • Tdot

    That is why monopolies dont work. unreal

  • Cosmo Mannella

    I don’t agree with the economic model explanation BUT I will take the Social responsibilty explanation. :)
    Cosmo Mannella

  • Winnie

    I can understand the desire to fix a price level for social responsibility purposes, but I agree with the author regarding not taking a higher profit-be it for the deficit, social responsibility, or other education programs. If the LCBO isn’t taking the profits, the for-profit companies are!

  • winegeekinTO

    What most people do not realize is that, not only has the LCBO increased their mark-up to 71% from 65% to make up for a small loss of revenue due to HST, the monopoly has one of the highest operating costs with remarkable inefficiency that have NOT improved.

    While there are many wineries desperate to get a listing in this province, there are are many more top quality producers who prefer not to sell their wines to the LCBO, as they get better sales and reception elsewhere.

    Indeed, why should a wine that sells at $6.00 in Alberta be twice more expensive in Ontario? Social responsibility is a lame excuse for such highway robbery. Alberta has not seen a rise of alcoholics since liquor sales have been privatized almost 20 years ago.

  • AS

    But in Alberta and BC healthcare is not free.

  • James P.C.

    Firstly, “alcohol abuse” has nothing to do with “social responsibility”. Regardless of price, a SMALL percentage of people will always NEED TO abuse alcohol AND drugs !!!!!

    Wine and beer have been available at PRIVATE CORNER STORES for more than Eighty years in Quebec and Quebec has the lowest rate of Alcohol Abuse in Canada. The HIGHEST rate of such Abuse (8.92%) in Canada is in Ontario, with the maximum, provincially, in Toronto !!!!!!

    When Alberta “LCBO” went private, they doubled the “net” “provincial” “return” of 92cents per litre to $1.92 per litre, as a tax add-on. If the same was done in Ontario, thru Wine & Beer in corner stores, then the Greedy Provincial coffers would go from a “net return” of
    $480 million to $2.7 BILLION per Annum !!!!

    AND the alcohol abuse “traffic rate” would immediately plummet, saving lives, AND general illegal access would go down by 50% or more AND ONTARIO Wineries would have “free” outlets for their wines that would cost them nothing and would expand their market, within Ontario alone, by 825% !!!

    Oh yeah, such a move would create at least 5,000 NEW jOBS that are unaffected by the economy AND are
    multi-generational.

    This has happened in all provinces in Canada EXCEPT Ontario……. When do WE get SMART ?????
    Mr. Premier of the people ?????

  • DOWNTOWN MAN

    L C B O

    absolutely no accountability on what the expense , why do they produce such an expense magazine month in and month out for free??????? what a waste of money and effort!

  • Gayle Y

    Correlating infant mortality with the price of wine is absolutely ridiculous.

  • Richard S

    It has nothing to do with social responsibility. The cost of alcohol is not a deterrent for those who want to drink.
    Go to the US and walk into a Trader Joe’s. They have table wine for $3/bottle. You don’t see vagrants and beggars outside of Trader Joe’s, and I wonder what Oregon’s infant mortality rate is.
    The LCBO is archaic. its day is done.
    open up the market. enough with this monopoly.

  • Keith T

    Agree with Gayle – the comparison is absurd and offensive.

  • Otis T Firefly

    Let’s even assume that this bizarre logic applies for say wine that sells for less than $10 per bottle. What about the $25, or $50 or $100 a bottle wine? Would po folks “abuse” a $75 a bottle wine from the LCBO that would otherwise have sold for $65 per bottle without the bogus “SOCIAL RESPONSIBILTY” premium? No wonder this province is in such diffcult circumstances.

  • PiccadillyLineToCockfosters

    Thanks-a-million, LCBO, for saving us from Detroit-levels of infant mortality.

  • Gord

    I bet Canadian Book retailers used this same model, and we all know how the consumer was screwed with that pricing model.

  • Scott Koch

    Sounds like the LCBO was caught with their pants down…once again excuses for responses…it would be nice one day when someone within a government position would stand up, take responsibility and simply fix the issue.

  • Peter

    Is anyone else shocked that the minister compared Ontario to Detroit? I mean, beating Detroit on Quality of Life measures isn’t something to write home about…

  • Andrew

    Why doesn’t the Ontario government just set prices at a profit maximizing level? It is both a monopoly and a monopsony (it is the sole buyer of alcohol in Ontario). Marginal Revenue = Marginal Cost (Econ 101)

  • Marc

    @AS You’re wrong. Albertans don’t pay for healthcare. It’s just as ‘free’ as it is here. Combine that with no HST, no PST, and a privatized liquor system, and it’s probably the most progressive province there is.

    When it comes to booze, Ontario is years behind. The LCBO monopoly does nothing more than rip off Ontarians and take advantage of the fact that they can’t go anywhere else.

    LCBO – Liquor Communist Board of Ontario.

  • Henry

    The extra bit of profit that could be gleaned would be much appreciated by the hundreds of casual workers who have no benefits in the Lcbo. Not even sick days are available for workers less than 12 years in!

  • Jerry

    What research can the minister refer to proving the relationship of cheaper wine to infant mortality?

  • Tom West

    So people want a governemnt monopoly to force down the money producers receive?

    Also, I suspect the higher infant mortality rate in Detroit has a lot more to do with Canada’s superior health system and education levels. If you know alcohol while pregnant is bad, then you won’t drink it, and the price is moot.

  • peachy

    o dear

  • Ignatz

    CSR =/= higher prices.

    Even if it did, this is paternalism of the highest order. Where is the tobacco control board? The trans fat control board? The had-too-much-overpriced-LCBO-wine-with-dinner-and-slept-with-someone control board?

    Let’s be clear: this is all about revenues for the Province. If we have an honest conversation that user fees or taxes will have to be put into place to make up for the revenue shortfalls, that’s one thing. But this whole line of reasoning from both the Province and the LCBO is completely disingenuous.

    I need a drink.

  • Ignatz

    Oh, and a rebuttal to Mr. Duncan’s Detroit example, I give you Japan. Where you can buy alcohol anywhere and everywhere, including convenience stores and vending machines. It almost goes without saying that there is a rather significant difference in infant mortality between Japan and Detroit.

    What a farce.

  • Mike

    All those pregnant women in Detroit sipping fine $18/btl Pinot Noir, having miscarriages…tisk, tisk. So glad we have the LCBO.

    As idiotic as the lcbo.

  • MDP

    What’s counter-intuitive is that most of us suckers (that are forced to shop at the LCBO) understand business and some of us may understand good business models. Anything government run is totally inefficient! Dwight Duncan’s comparison of Detroit stats are laughable at best….well that goes for the whole damn lot!!!

  • Havingalook2

    They produce an expensive magazine because it is a profit centre. Or is revenue neutral. It is totally funded by the advertisers both wine and liquor producers which are coerced to advertise and non-liquor advertisers. Plus it is a great venue and the public loves it. It is one of the most expensive magazines to advertise in and for good reason. Its demographic reach is second to none. So this magazine is an excellent thing and likely adds money, real money to the organization, covers all its operating costs from production to staff.

  • Blake Heathcote

    I was recently in an LCBO, a small outlet on Yonge Street south of Eglinton. I was there to buy 8 cans of Guinness. The pack of 8 cans sells for $20.95, and the packs of 4 cans sell for $11.98.

    The Beer Store only seem to carry the 4 packs, but sell two 4 packs for $20.98. When I approached one sparkling individual at this LCBO two days ago, and asked him if a similar pricing policy was in effect here, he replied, “No, they won’t allow us to do that.” Fair enough, and I commented on how curious that was.

    Tragically, however, he decided to expand on this. “There’s nothing curious about it at all. It’s done so that we can stay in business and be competitive.”

    He was one of those individuals who embodied not only the characteristics of not being the sharpest tool in a rather small shed, but topping it off with a soupy and pompous arrogance. I would have thought that someone of his mature years, working in customer relations, might have learned a few basic social graces.

    I said that I wouldn’t be taking the cans after all, to which he responded, rather tartly, “Well thank you very much…”

    It would be nice if, when such premiums are being charged, that some of those substantial profits were used to at least educate some of the staff in the basics of communicating an appropriate official (LCBO) position, and to do so with a little more grace and consideration of the customer. (I’ve refrained from mentioning this gentleman’s name, or offering a physical description, both of which I took note of. But I was sorely tempted.)

    It simply reminds one that the LCBO, being in many ways a monopoly, should respect and cultivate that privilege, not abuse it.

  • winelover

    LCBO

    Lame Control Board of Ontario?

  • boozer al

    I guess they didn’t know that they could increase their profit by getting out of those high priced leases and over priced decorations by simply applying the Costco model of building site.

  • Victor Ward

    If the price of the bottle was cheaper I would be saving rather than buying more. Higher prices make poorer people!

  • Shea

    Monopolies do not work in the favour of consumers. The social responsibility card is a load of crock.
    Can’t wait for then next big LCBO sale where I can get a whole dollar off my $28 dollar bottle of wine.

  • John Rode

    I’m confused. Social responsibility then is making alcoholic beverages affordable to only those with higher incomes?

  • Elmore Pumares

    Un-F#&^%$ing-believable!!!! Wrapping your head around this will go a long way towards understanding this profoundly F#$&^%ed-up country. “Social responsibility”?! Who are these Klingons trying to kid?! The question that should be asked is “Who is running this grand experiment, and for who’s benefit?”. I mean, that’s what it is isn’t it? A social experiment? To say that the LCBO is “archaic”, as one poster commented, is beyond the realm of understatements. Who grants the LCBO’s mandate? Is it the F#*&^#$ing Queen again? Is it the citizens of Ontario? Who?! GET RID OF IT NOW!!!!!!!

  • Elmore Pumares

    …and believe me, if that billionaire gerbil lover Galen Weston and his family’s other “social experiment” – we call L-O-B-L-A-W-S – wanted to sell booze in their stores…. there would be booze in their stores. End of story. That should tell everyone what is really going on here in “torontoland”….. Boycott, people. Take a stand for God’s sake!

  • John A

    Social Reponsibility? How is that being accomplished when the LCBO has elaborate ads and magazines, etc. Isn’t that encouraging people to buy alcohol!? Shouldn’t they be funding programs to prevent people from buying alcohol?
    As well, the employees are often grumpy, unprofessional (shouting at each other across the store), comfortable (arranging bottles, stocking bottles) and most importantly, very well compensated.
    It just adds to the overall higher cost of living that we Ontarians, and Canadians in general are known for.

  • Jeff

    For the Finance Minister or the LCBO to dress up this brazen scam in the clothes of virtue makes the stench even worse. A mark up is fine, but stealing is never virtuous.

    Are we to believe they’re gouging us to save innocent children everywhere? Why not make whiskey $1000 a bottle and save all of Africa. What nerve!!

  • Robbo

    What pisses me of more is the Beer Store model.What a deterent to the micro beers .Major shareholders a large foriegn mega-breweries

  • Herry69

    you’re a freakin’ liar. the lcbo is pulling in major profit because of their high prices. to believe otherwise, you would be a stupid id-iot.

  • lol

    Mexico has lower income tax and higher average temperatures. CLEARLY the winters wont be so cold if we drop taxes.

  • bruce

    I support the pricing policy of the LCBO because I worked in import export I know that the best scotch, gin, vodka and rum can be landed for a cost of less than $1 per 26 oz. bottle. If we were to suddenly move to a totally free market we would lose a whole generation and productivity would drop by at least 20% in the province.

  • robnox

    bruce … are you drunk? is the sky falling? lose a whole generation … lolololol

 

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