November 27, 2014 § 3 Comments
In a previous post I wrote about the change to wholesale pricing in BC as of April 1, 2015. At the time of writing that piece I was aware that the BCLDB were soon to release more details including the graduated mark-ups that will be applied to premium spirits and wine. Today they released those formulas and it seems that wines over $20 and spirits over $30 are set to jump significantly in price, whereas wines under $20 will stay roughly the same as what they are today.
To be clear I can only speculate on what the result of this pricing model will be, however my 20+ years in the business leads me to believe that this will have the effect of penalizing mid-range and premium wines and spirits and favouring lower end items.
The fact is that consumers are value driven and understand that a tax increase does not equate an increase in value… no matter how good the retail store they are purchasing from is. I fear that the real effect will be to chase premium consumers out of premium price points, exchanging them for good values at lower prices. Note that the consumer is not likely to increase the quantity they purchase, they will simply spend less. On the supply side, small artisan producers can expect slower sales for their products making it harder to justify selling them in B.C. and will be forced to either seek other markets (Alberta, Asia, US, other Canadian Jurisdictions), business channels (divert volume from retail to restaurants or ‘cellar door’ sales), or simply close their doors.
There are those, however, that are very pleased with the new calculations. Retailers in Alberta and Washington State will be eagerly expecting windfall gains as more BC residents load up or make special trips to save hundreds of dollars on their purchases. I can tell you that this happens right now within the specialty spirits category. The most ardent Scotch collectors have long been making most of their purchase outside of BC.
Admittedly I am not privy to the discussions and calculations that saw the powers that be opt for this model vs a flat tax or less oppressive percentages. I can only speculate what their short and long term motivations are and what the results will actually be. However, although I remain hopeful that they will take another look at the numbers, I believe the smart move would be to find a model that reduces the potential of sending more money to Alberta and pushing artisan producers out of business.
Attached is the pdf as issued by the BCLDB regarding the new formulas.
As always let me know your thoughts and feedback.
May Quality Be Ever In Your Glass
The Dork Uncorked
November 22, 2014 § 8 Comments
My phone was ringing off the hook prior to and after the announcement by Suzanne Anton and the GM for the BC Liquor Distribution Branch. The biggest, and really only, question is ‘What does this mean?’
There is a ton to talk about as the announcement involved Grocery Stores, Wholesale Pricing, Separation of LDB Retail from Wholesale, perhaps the item that will have the most short and long term impact is Wholesale Pricing.
Currently BC Liquor Stores do not purchase product from the Wholesale division of the BCLDB. They simply order it, it arrives and they retail it. Private stores do pay LDB Wholesale for their product. The price is a function of the BC Liquor Store retail price. In other words a discounted retail price is what private stores pay. The discount is based on the license type. Licensed Retail Stores (LRS) receive a 16% discount off retail, while Private Wine Stores (Everything Wine, Marquis, etc.) receive at 30% discount on import wine, 15% on domestic wine and cider and are prevented from retailing beer or spirits. Rural Agency Stores (RAS) receive a 12% but are not allowed to carry anything but BC Liquor Store skus. These stores are usually in small rural communities.
As of April 1, 2015 a new pricing model will be adopted that will apply to all liquor retailers in the province. The price will be a true wholesale price and not a discount from BC Liquor Store retail. As of this writing it appears that pricing will be a function of product type and not be a flat tax as it is in Alberta. What this means is that there will not be a standard price. All retailers, including BC Liquor Stores, will have the choice to retail at any price they choose.
- The new wholesale pricing structure will not be afforded to on-premise (restaurants, hotels, bars) accounts. On-premise accounts will continue to pay full retail and only from BC Liquor Stores or domestic suppliers.
- Private Wine Stores will not be allowed to add beer, spirits or coolers to their selection, but will pay the same price for all their products as all other retailers. In other words they are losing a 14% product cost advantage over LRS stores without gaining product options. I would guess that this might change between now and April 1.
- At present BC Liquor Stores can solicit advertising, or co-op dollars from suppliers, whereas it is illegal for private stores to do the same. If we are talking about a true level playing field, what’s good for the goose should be good for the gander.
- In the current system when a supplier reduces their price, the supplier ‘buys down’ all the inventory on-hand and incoming for BC Liquor Stores for the duration of the price reduction. It is illegal for suppliers to buy down inventory at private stores. Once again, what’s good for the goose…
- Speculative Listings: Under the current system BC Liquor Stores are forbidden from putting ‘Spec Listings’ on their shelves. This was done to offset the huge discrepancy in cost of goods between BC Liquor Stores and private stores and give private stores a ‘selection’ edge. Presumably under a wholesale system, speculative listings will be scrapped.
Impact: Consumer Pricing
With all retailers paying the same price for goods it will likely encourage greater competition which, for the consumer, could mean greater selection, although I’m not certain this will be come to pass, but it will likely mean greater price variation, competition and, I believe that this will be in the form of price agility.
At present BC Liquor Store can only change their prices once per month. Private stores can change their prices daily and thus be far more strategic about the timing and value of sale pricing. There are hundreds of shelves in business schools filled with thousands of books and papers dedicated to pricing strategy- agility is the winner hands down. With this in mind I suggest that everyday prices will remain relatively the same, however BC Liquor Stores are likely to start doing ‘one-day’ or ‘this weekend only’ sales which will trigger a market wide long-term response.
It is well known that British Columbians pay the highest prices in Canada and these changes ensure that this will continue. The structure will continue to be ad-volerum vs flat tax (see below for definitions of each) which means that low end products are price favoured while premium priced items are penalized. Alberta is a flat tax and that is why a product priced $70 will likely only be $50 in Alberta.
Addendum Nov. 27: We now know the graduated mark-up schedule in totality. Consumers will not likely see any differences in wine under $20 or spirits under $30, however for those that purchase at the premium end of the scale, the new model promises significant price hikes the value of which increases as the price of the product increases.
The argument was made during the announcements that overall selection would be improved. I have doubts that this will happen unless you consider 3 new sizes of Budweiser or brand extensions of Copper Moon and positive increase in selection.
Above I mentioned the doing away with Speculative listings. If this is the case, then you will likely see a plethora of new items on the shelves in BC Liquor Stores, however overall provincial selection will not likely change that much.
Addendum Nov. 27: The graduated mark-up schedule will likely negatively impact the selection of premium wines and spirits in BC. Price hikes on premium wine and spirits will significantly slow sales, meaning that importers and suppliers are likely to redirect offerings to other markets where sales are likely to be better.
Ad-Volerum: An ad-volerum tax system is one that adds a percentage tax to the cost of goods instead of a consistent dollar value. In the new system that starts April 1, 2015 the tax on wine will start at 89% (there will be graduated values on premium and super premium wines). 89% on a wine that starts at $3 a bottle has means the government receives $2.67 in tax. 89% mark-up on a wine that starts at $6 is $5.34. In this simple calculation (prior to PST, GST, Volume mark-ups, etc.) a wine that starts at $3 would retail at $5.67/bottle whereas the $6 bottle would retail at $11.34/bottle; a difference of $8.67 which only $3 is found in the product cost.
Flat Tax: A flat tax is consistent dollar value applied to every bottle no matter the value of the bottle. In a flat tax system, the only price difference between a $3 bottle and $6 bottle is $3 as the tax value is the same for each bottle. For example in a system with a flat tax of $2/bottle the $3 bottle would retail at $5 and the $6 bottle would retail at $8.
Attached is the pdf outlining the new wholesale pricing model as issued by the BCLDB.
I would love to hear your feedback so please engage.
May Quality Be Ever In Your Glass