Liquor Updates: Wholesale Pricing

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.

Wholesale Pricing

Current System

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.

Wholesale System

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.

Key Omissions

  1. 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.
  2. 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.
  3. 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.
  4. 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…
  5. 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.

Impact: Selection

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.

Definitions

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.

Mark-Up Schedule Effective April 1 2015 (2)

I would love to hear your feedback so please engage.

May Quality Be Ever In Your Glass

The DorkUncorked

Competitive Edge

September 28, 2013 § Leave a comment

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The only real competitive edge that private liquor retailers have in BC is their product selection. The absolute risky-est position to be in is having a photo-copy of a government store in terms of selection. As a private liquor retailer I have found that the only way for me to best maintain my market share, or to make it grow, is by walking the fine line between listed and spec products.

By having about 40% (and growing) of the products on our shelf that are only available at our stores or in other private retailers, allows me to 1) clearly distinguishes me from government stores, 2) have more control of my margins while maintaining price confidence with the customer, 3) Allows me to focus on customer service in the form of product knowledge, 4) means I can truly say we are professionals.

Why do you choose the lawyer, doctor, dentist, accountant, personal trainer, hair stylist, plumber, etc. that you do? Part of the answer comes in your belief that they are qualified professionals that have spent hundreds of hours being an expert at solving problems that you have in their area of expertise. Chances are you have found them by referral or by meeting them. They conveyed an air of professionalism and confidence that you have come to trust and that trust has always been vindicated. For us in private liquor retail it is no different. What kind of confidence will your customer have in you if your selection says ‘I don’t know anything about this beer/wine/spirit and I don’t care, I just want you to buy it. All I know is that someone told me it sold well”? You need to be their ‘doctor’ of wine, beer and spirits. Your selection should say “in your case I would I’m going to prescribe this wine over that one. That one will work for you to but I think that for today this is the best choice.”

Customer loyalty comes from developing personal relationships and sharing your customers day to day successes and failures, feelings of confidence and defeat, feeling great or suffering from a cold. By saying “I know just the perfect comfort food wine for you, you can’t find it everywhere, but I loved its depth of flavour and boldness of body” you are telling your customer that you care about them. The old saying “I don’t care what you know until I know that you care” is so true when comes to developing lifetime customers in our business. Your selection is your customers silent witness to how much you care about them.

There are hundreds if not thousands of items available right now that offer 40% and 50% margins, are priced for the average joe and blow the doors off the leading brands in terms of quality. It takes work and dedication to find them, but the work and time pays off 10 fold.

Someone I admire once told me to focus on the critical few and forget the trivial many. When your selection says you care, you can then spend most of your time focussed on customer service. This means staff education, product knowledge and engagement, developing better hiring practices, improving the flow of the store, keeping the store clean and having truthful and informative signs on products throughout the store. This is one of the ‘critical few’ and is perhaps the one that delivers the most tangible and intangible positive results in your business.

Start to pare down the ‘me too’ items and replace them with ‘I love this and will stand behind it’ items and your business will be far more secure and fun to operate… no matter what happens with the Liquor Review.

Cheers
The DorkUnCorked

What Do I Know

August 28, 2013 § Leave a comment

I have now been in the beverage alcohol industry for 20 years. I have been a sales rep, sales manager, importer, category manager and now a retailer. The problems that retailers and suppliers ‘enjoy’ are the same now as they were 20 years ago. The fact is that no one has looked at the process and offered real solutions. It is those solutions that I have to offer after twenty years.

For suppliers – don’t guess at the market and don’t rely on ‘what the numbers say’. This is a relationship business. Test your proposition first and this means ask for real orders. A guess always leads to either out of stocks or having to reduce your price and neither improves your bottom line.

For retailers – ask yourself who is in charge. You are not in charge if all you do is give BDL (Labatts and Molsons) or the LDB your money each week. The fact is that they are in charge if this is what you do. You need, I stress need, to reduce your dependence on them in order to improve your bottom line or to maintain your current approach to business. There is more risk in ‘staying’ safe than ever before. You are guaranteed to lose by standing still and being okay with the status quo.

If you want specifics let me know ’cause I’m happy to share.

Private Liquor Retailing vs Public Liquor Retailing: Operational Differences Part II

July 27, 2012 § Leave a comment

In Part I I focussed on a number of the largest differences between public and private liquor retailing in BC. Part II showcases four behind the scenes differences that are a big deal.

The first of which is the ability to transfer product between stores owned by the same people or group. At present BC Liquor Stores can and commonly do transfer between their own stores. That means if a product is moving in one store but not another, BC Liquor Stores can legally move product from one store to another no matter where the two stores are located. It is illegal for private retailers to transfer product between private stores even if those stores are owned by the same person, or group.

Second, on average 30% of revenues generated by BC Liquor Stores are through the back door. In other words by sales to licensees such as restaurants and private liquor stores. It is illegal for private retailers to sell to licensees or other private liquor stores.

Third, any new product or a product that has arrived back into inventory gets uploaded into the computer systems at the BC LDB before anyone, including BC Liquor Stores, can order it. However BC Liquor Stores have access to order these products 2 days before private liquor stores.

Private liquor stores pay business taxes to the province that are calculated per store, thus the operations of each individual store are subject to traditional accounting practices. BC Liquor Stores are not subject to business taxes.

Part III will wrap this all up and make some conclusions as to the best plan of attack moving forward.

Private Liquor Stores vs Public Liquor Stores in BC: Operational Differences

July 19, 2012 § 11 Comments

It seems that the underlying assumption about liquor retailing and distribution in BC is that it is a level playing field. I have to make this assumption for two reasons. 1) the level of debate by our political leaders never discusses the structural differences between operating a public and private liquor store, and 2) whenever I point out the differences people are incredulous and respond with ‘no way… That’s not possible!”

Disclaimer: the following is not controversial, full of sound bytes or going to impact your day one way or the other tomorrow. It will simply outline the operational (read: dull) differences between operating a private liquor store and a public liquor store in BC.

The first issue for a private liquor store operator is always cost and primarily cost of goods. For public liquor operators the first question is always about public safety and here is why.

In BC, public liquor stores, also known as BC Liquor Stores or BCLDB, are never charged for the goods they sell. On the other hand private retailer is charged the BC Liquor Store retail price less 16%. In addition private stores must pay in full 2 days in advance of the order being compiled. No terms are available. The base gross margins BC Liquor Stores start at is estimated at 80% whereas as private liquor stores start at 16%.

When the BCGEU and the BCNDP suggest it isn’t fair that private stores get a discount when BC Liquor Stores don’t get the same discount, keep in mind that there isn’t a private liquor store operator in the province that wouldn’t rather have the same deal BC Liquor Stores have when it comes to cost of goods.

In BC all spirits and imported product must be distributed by the BCLDB. That’s right the same organization that supplies and operates BC Liquor Stores, the direct competitor for private liquor store operators. As a result the LDB can block orders from private stores and redirect that stock to their own BC Liquor Stores without notice to the private retailer or importing agent. The only way for a private liquor store operator to block LDB stores from access to an imported product is to buy all the stock available in BC. If a product is yet to arrive in BC, the BCLDB can block the sale to private stores even if the private store has paid the supplier and the freight forwarder for the product.

In BC, BCLDB buyers must approve all purchase orders requested by agents. Thus they have the power to refuse the order for a private store or have advance knowledge of the orders existence and arbitrarily decide to take the order for themselves.

In BC, BCLDB buyers have access to purchasing data of every private liquor store in the province. Private Liquor Stores only have access to their own data and not the data of their private or BCLDB competitors.

In BC the BCLDB can decide to open a store wherever it wants and is not subject to municipal zoning by-laws or community consultation. A private liquor store is subject to municipal zoning by-laws and must go through a re-zoning application process and community consultation if the property has not been zoned for a private liquor in the past. Furthermore, the LCLB, through the BC LDB forbids an LRS license (full service private liquor store) for being situated within 1000m of another LRS. Strangely an LRS can open directly beside a BC Liquor Store, Private Wine Shop (ie. Everything Wine) or a Duty Free store if the municipality approves of it.

The one thing that BC Liquor Stores are not supposed to do is to have available products that are called specs. These are products that have been deemed by BCLDB buyers as not for retail sales in BC Liquor Stores. However when a BC Liquor Store does make it available for sale in their stores, even when notified of the infraction stores, are not held accountable to remove the product from their shelves.

If your are a supplier to the BCLDB and you want a display of your products in BC Liquor Stores it is strongly suggested by BCLDB buyers that you buy advertising in Taste magazine which is published by the BC LDB. Thus the BCLDB is demanding a financial inducement to promote specific products. It is illegal (BC Liquor Act) for private liquor stores to have any financial relationship for any reason with suppliers. A private store having a financial relationship could face a stiff fine at best and at worst complete closure of their business.

Hours of Operation. Private Stores can be open from 9 am through 11pm 7 days per week 52 weeks a year. BC Liquor Stores can not open before 9:30 and most are not open past 9pm or on Sundays. That means, notwithstanding BCLDB Signature stores, private stores can be open 32 hours per week more than public stores. In the case of BC Signature Stores, private stores can be open 21 hours more than BC Signature Stores.

As a matter of policy BC Liquor Stores have not offered cold product or chilling facilities, whereas all private stores offer refrigerated product.

As a matter of policy BC Liquor Stores have restricted their advertising to Taste Magazine, BCLiquorStores.com and their mobile app, yet they are allowed to charge suppliers for advertising their products. Private stores can advertise on any medium but can not ask for, or receive payment, whole or in part, from suppliers for advertising their product.

As a matter of policy all promotions developed and executed by private liquor stores are supposed to be approved by BC LDB promotions first. Promotions planned by BC Liquor Stores do not need approval of private liquor stores before being executed.

Okay here is the one you have all been waiting for… Public Safety. We could also call this social accountability.

Underage drinking and bootlegging is a problem in private and public liquor stores, however public liquor stores are not held to the same level of accountability for these infractions. Private liquor stores could suffer fines or closure for any number of infractions as determined by the LCLB, whereas public stores will not be closed for such infractions. Furthermore fining a public store means money going from the government to the government and thus is not a real punishment. Only recently have LCLB inspectors been allowed to enter BC Liquor Stores as per BCGEU guidelines.

At the end of the day there are two indisputable facts about liquor distribution and retailing in BC.

1) the BC Government, whether NDP, Liberal, Social Credit, Green or Conservative Party, would collect taxes from the sale of liquor in BC whether or or not distribution and retailing are operated by the government through the BCLDB.

2) It is not a level playing field between public and private liquor retail in BC.

I don’t believe in ideological or broadcast solutions. I believe that retailing is about meeting the needs of your customers and community. If BC Liquor Stores can cover their costs by doing so then they should stay open. If they can not I fail to see why they should remain open. Nevertheless the playing field should be equal and let the best and most responsible operator win.

The thoughts and conclusions expressed above are my own and should be attributed otherwise.

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