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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).