The key question to me is do we get privatization or deregulation, or both? These are two very different horses.
If you just privatize the existing LCBO, either whole, or in two, three or ten pieces, what have you changed? It's like converting a state telephone monopoly into the pre-deregulation Bell Canada. In fact, it could be worse from a pricing standpoint because now the state has to make its profit off wine and spirits as well as the shareholders in the new privately owned monopoly. So the use of terminology here is critical.
Do we want privatization?
Do we want retail deregulation (anyone can retail wine and spirits, but a state monopoly continues to be the wholesaler)?
Do we want full deregulation (anyone can buy wine and spirits and importers and distributors or a new catagory of distributors would take over the wholesale and distribution functions now performed by the LCBO.)?
The question of retail-only versus full deregulation takes us into discussions about the purchasing power/critical mass of the LCBO versus an unlimited number of smaller buyer/wholesalers and the effect on price and selection. For example, if instead of a vertically integrated province-wide state liquor monopoly turning over a single dividend to the province each year, what would be the impact on us as consumers if private entities takes over acquisition, others take over warehousing and distribution (perhaps outsourcing to private truckers), still others take over retail. Look at beef prices post Mad Cow. A lot of people thought prices would have fallen a lot further and faster at the retail end because they saw farm prices implode. But the packer, the trucker and our friends at Loblaws padded their margins as long as they could get away with, so prices trended downward slowly, and less than we would have expected.
Back to wine. In a privatization-only scenario, with the breakup scenerio for LCBO you might have, say, five son-of-LCBO networks which can compete against each other, you might see a bit of price competition for Wolf Blass Yellow Label, but you might lose the buying power of the current LCBO, unless it continued to be the monopoly wholesaler. Is that worth breaking up the retail monopoly. We wine drinkers in Ontario dream of having the price and selection that New Yorkers or Los Angelenos or Chicagoans have, but we don't have that in cars, computers, DVDs, and other retail items, do we? So why would we have it in wine? We might be better off going further into full privatization/deregulation, but I don't think we're ever going to have the kind of benefits you would find in NYC. It's supply and demand. We're a smaller market than the US, our currency, even with the current runup, doesn't have the clout of the US dollar.
The one privatization scheme I would reject outright is to auction off the entire system to a single buyer. You have to break up the LCBO or a privately owned LCBO will be as powerful, bureaucratic and market dominant as it is today. Labor relations might well deteriorate if the new private owner sought to cut costs to increase its margins.
Okay, we break up the LCBO into five son-of-LCBOs (SOBOs!). What would be the consequences. In that scenario, one SOBO chain might stock a foreign wine that another doesn't, but with less critical mass, prices for some of these wines might go up. And are people living outside Toronto, Ottawa and their burbs better or worse off? They might not end up with as good a selection as they have now. So to me, privatization without deregulation might not give the kind of benefits we want to see... As a matter of fact, if the government continues to get its existing revenue stream equal to the current LCBO profit, and the SOBOs charge a separate profit margin, it is very likely that we will end up less well off.
So that begs the question, if we privatize, should we not deregulate? If so, should we deregulate the entire sector - including acquisition, warhousing and distribution, or just retail? If we deregulate we might get a wave of new entrants who, through their advertising, creativity, etc, provide us as consumers with net
benefits even though the government is out there taking the same tax revs? Might not vigorous competition stimulate sales so that there are price breaks without a reduction of the government tax take?
I believe that's probable.
Which is why if we privatize we should go all the way. But that still doesn't mean we're going to get the kind of retail scene they have in NY or Paris or Frankfurt or Chicago. As per my observation above, we will never be as well off as they are in the big markets of the US and Europe.
We have an additional anomoly in Ontario. Toronto and burbs are contiguous to a rather large wine industry - yes, Niagara is a large wine area even if Wine Spectator doesn't acknowledge it very often. And Niagara is growing every year. Because of the existence of the LCBO, or in spite of it, the province has allowed the wineries a limited retail presence which gives them urban retailing experience. Ontario wine sales account for about 40 percent of LCBO wine sales, but if you include winery-owned stores, I would guess that about half the wine sold in Ontario is Niagara/Pelee Island wine. Now that's a far cry from the dominance that Australian wines have in Australia, or California wines in California, but it's significant, and it comes with this oddity that because of the LCBO and the wineries' fight for retail visibility, that the wineries are likely to be the biggest beneficiaries of retail deregulation. They already have stores, they warehouse and distribute out of their wineries or they have their own local warehousing around TO.
I'll make a prediction. If competition is allowed, as opposed to the creation of a regulated monopoly a la the old Bell Canada pre-dregulation, the first in with both feet will be Ontario wineries. They will front their own wines, while adding popular foreign labels to broaden the appeal of their stores. You already have dozens of Ontario winery stores around Toronto. Andres, Magnotta, Vincor... They are in supermarkets, and in prime traffic areas. Some, like a few of the Vincor and the Hillebrand/Peller(Andres) are large and very attractive and have that neighborhood liquor store characteristic already. They could add 150 foreign labels and undercut the popularity of any neighborhood wine store. And they would be wine-only stores. My view is that a lot of neighborhood spirits stores would gravitate towards imported beer and spirits for competitive reasons, and that it would be difficult if not impossible for new entrants to compete with the privatized wine stores and the expanded network of Ontario winery outlets.
Magnotta has fought a legal battle just to be able to operate seven stores in Ontario. The day privatization occurs, you can bet that it would have 50 more stores ready to open around the province.
You will certainly have room in downtown Toronto for a few specialty stores that stock some upscale stuff. A store like Pusateris will certainly open a wine counter for the expensive imports. But as for pricing, how much competition is there to sell Davidoff cigars or Caspian caviar?
It would be a brave new world. I don't have all the answers, just hunches. I'm not sure if we end up better or worse off. I am not sure if people outside the Golden Horseshoe end up better or worse off, but I am pessimistic about the benefits for anyone living outside of the three or four largest metro areas in Ontario. I do think we should have some rip-roaring debates to consider all points of view. This is one area where a diversity of views would be helpful.