The Bar Towel

Publican and Bartowellers

For those interested, I'll attempt an un-ranted take on the distribution systems in this province and the issues domestic producers face. My bias is a product of 12 years as a local prodducer selling into both channels and a few years as chairman of the Ontario Samll Brewers Association. Import agents and imported products both have my respect and I understand their importance to the overall market. Please understand though, they (as well as some products of big brewers) represent our most direct competition. If not on a volume basis, then certanly when scrapping for shelf space which is often more important.

This will take a while, but I will split up the analysis by cost, listing policy and marketing.

Publican, the simple math is that for every 6 pack a small Ontario brewer sells: we pay The Beer Store around $.72 per six pack or to the LCBO $1.32. Yes, it costs a small brewer almost double to sell beer through the provincially funded LCBO versus the privately owned Beer Store. This is why up until 7 years ago, Creemore was only in The Beer Store. If you are avoiding The Beer Store, you are actually hurting small Ontario Brewers. It is really the Beer Store through its Cost of Service and listing policy that provided the infrastructure and market for any existing Ontario small brewer to survive and grow. Some very small brewers in the province and some beer writers will debate this, they are simply wrong and responding more to the fact the Beer Store is owned by our Giant competitors. To the LCBO's credit, they have used their retailing capacity to increase share for the premium beer market and probably have created new customers for premium beer products. So even though it costs us significantly more in the LCBO, it isn't a zero sum game.

Listing policies also have a ring of irony. The Beer Store has to list at least one package size of every brand of every brewery selling in the province. For this they charge about $25,000 per brand. Sounds like a lot but it is one time and small potatoes in the overall scheme. The LCBO (again owned by you and me), is not at all compelled to list small domestic producers. If you get a listing, though, there is no cost (but also no guarantees). The LCBO's core branding strategy is flawed and they know it. For beer, the biggest problem is that the core brands are based on revenue per unit. The wrinkle is that imported brands pay their production taxes though the LCBO and so that 'tax' is recorded as revenue. Domestic producers pay their tax directly to the government and so their is a revenue bias for imported products. This is not insignificant. On a 6 pack, the difference is over $1.00! So even though Creemore's price is higher than some imports, we attract less notional revenue and are passed over for the core list. I believe that the LCBO is in the process of fixing this. I am also not sure what it means. Even though we are not on the core list, we have never lost a listing and sell about 30% of our bottled beer through the LCBO. It probably hurts new breweries or smaller regional ones. For you import fans, it has been a bonanza since there are over 30 imports on the core list and no Ontario Small brewers. Weird no?

Marketing efforts is probably my largest frustration in the 2 systems. For their monopoly of beer sales, the Beer Store is supposed to remain brand/marketing neutral. This policy has been bastardized over the years, and as they increase the pitch of beer battle with the LCBO, the Beer Store has all but abandoned any pretense of brand neutrality with all new stores dominated by extra marketing opportunities for the 3 owners (Molsons, Labatts & Sleemans). It is hard to blame them since the overall beer market has declined by 10% in the last ten years. Still, it aint right. Even more frustrating though is the irresponsible work of the LCBO marketing gurus regarding beer. Through a program of subsidized editorial and marketing support, they have helped author the premium market's capitulation away from domestic producers in favor of imports. Admittedly, Creemore (with the single serve 500ml format) probably benfited from this. The real winners though have been Heineken, Corona, Becks, Stella and Keiths. All products now marketed by either Labbatts or Molsons. The sales of these products even in the Beer Store have been impressive. The real rub, is that even though the marketing subsidies for imports are gross, the price tag to access the LCBO marketing machine is still out of reach for most small domestic producers. Then you get Steve Beaumont penning a 'Classic Beers' promotion for the LCBO and not a single Ontario beer (or Canadian beer) is included yet somehow Pilsner Urquell, Bass, Kilkenny, Guiness, Hoegaarden and New Castle make the grade. In a blind taste test, any of you would know of at least 2 Canadian made beers of these styles that would kick butt. As with the revenue bias, I am also confident that the LCBO is more sensitive to this issue and will be working with the small brewer community to increase our regional presence and marketing exposure in their stores.

Publications like Food & Drink can help or hurt you. Creemore ocassionaly gets a mention but the overall impression is one of self congratulation and gratuitous editorial support of a specific brands. Looks to me like they are pandering to the parlour crowd. Why are tax payers funding this? No more beer or booze is sold as a result of it, but it likely (and unfairly) influences the sales of specific products that catch Jody's eye...or that can afford the outrageous advertising rates.

Well, I hope nobody dragged themselves through this whole missive and I apologize to Cass for abusing the priviledge. If you have, and are wondering what to do to support Ontario Small brewers, here is my top 5 list:

1) When possible buy your Ontario beer at the Beer Store.
2) Forward comments to the LCBO,MPP's etc. about the lack of Ontario (versus imports) on their shelves. Support
initiatives they have for small Ontario
Brewers (once they fix their fee
structure).
3) Suggest to the above that the LCBO fix its revenue bias and Cost of service fees.
4) Complain to the Beer store about aggressive
marketing of the top 10 brands.
5) Suggest to your MPP to support Small Brewer
initiatives for different tax treatment
given the reality of the distribution
system we sell into that is geared for
large volume producers.

P.S. Cass, can you repost that list of lesser known breweries and brands in Quebec and I will be on the look out next week.

Howard

Thank you Howard. Your frustrations are well noted and your observations are right on the money. One other thing, because The Beer Store is owned by Molson, Labatt and Sleeman, ever bottle/case of beer you sell in the Beer Store makes them money. Isn't it ironic?

Quite interesting, Howard. Personally, I don't think you are abusing your priviledges. I found your piece very informative.

Here's my questions. What is the law regarding the sale of beer in the province? Why is a private company allowed to operate a semi-monopoly, their only competion being the LCBO? If private interests can own one beer distribution network why can't another? Could the micro-brewers of Ontario open their own store? (Whether they would want to or not is a different story)

Secondly, would NAFTA come into play here? Could a beer retailer or brewer from the States argue that they are legally entitled to sell their beer in Canada at the retail level even if the monopolies didn't want to carry them? Or, is beer completely exempt in the this agreement?

Joe



<font size=-1>[ This Message was edited by: jcappadocia on 2003-01-08 19:56 ]</font>

Finally, a small brewer with an well-composed, legitimate complaint. I've had my fill of small brewers and out-of-province distributors moaning and crying and making excuses for all manner of things (I'll be getting into this in a future Oakes Weekly, as I received yesterday from an Ontario micro an email so laughably idiotic I can't help but spread the word about the kind of D-grade individuals these people are).

Howard, on the other hand, is informing the consumers of the realities of doing business in Ontario. It isn't easy. Big businesses have an easier time dealing with other big business. Likewise small businesses deal best with one another, which is why guys like Joe Sacco and Bill Rea work well with the craft beer community in this province whereas BRI and the LCBO don't.

While nothing I learn about the business around here really surprises me, it is always good to get the real scoop from those who know. Thank you, Howard for sharing this, and if anyone else in the business wants to share this kind of information, I think the people who read the Bartowel are always willing to read it. (The December issue of Toronto Life is a good read as well).

Joe and Josh,

Joe, the rules governing the beer store were developed shortly after prohibition. I have dug through the regulations on a few policy points, but I am no scholar. Simply put, the thinking at the time was that breweries of the day (of which there were quite a few) could co-op to retail and distribute beer. The LCBO similarily spirits and wine. Both chaneels were to be a locked down 'consumers distributing' affair and not really a shopping experience. Somewhere in the evolution, it was decided that the Brewers Retail could protect market share by having exclusivity on 12 packs and 24's. The LCBO would only be able to sell 6's. The extension of this, is that beer could be cheaper at the Beer Store because of preferential pricing on 12's and 24's. Around the same time, Molsons and Labatts started aquiring all breweries and became defacto owners of the Beer store...outside of Sleeman's nifty end run buying the few points held by Northern.

This all hummed merrily along and the US imports were kept a bay largely through floor pricing policies and a 'domestic only' listing policy at the Beer Store. NAFTA changed many things. The result of NAFTA was Beer War 1 and Beer War 2. Both were trade disputes that threatened to go to the tribunal (they may have, I can't remember). The results were interesting. The US contended that Canada had a positive trade imbalance (to the tune of $110 million in 1995-96) and this was due to the restrictive nature of the retailing system in the biggest market...Ontario. The US won. Ontario's response was to allow import products into the Beer store system, but effectively eliminate cans by imposing a non-returnable container tax on anything that wasn't a re-usable glass bottle. (I am intimate with this because little Creemore got caught too. Back then, we crushed our returned bottles and sold the cullet. Since then we have installed a washer and re-use our glass). Anyway, since most of the US imports were in cans, and non-refillable, the 10 cents per unit tax proved to be an effective trade barrier. The domestic producers simply abandoned any focus on can packages in Ontario. In hindsight, it was unecessary. What all the chickens failed to realize is that our domestic mainstream brands are simply better than the US mainstream brands and so we maintain a positive trade imbalance by the strength of better domestic production (and a export friendly dollar!). So yes, imported products have the same listing rights at the Beer Store, they do not, however, enjoy some of the tax incentives that small Ontario producers are afforded.

There are no current regulations that allow for a 'micro co-op' retailing system. I am sceptical that it is even feasible. Creemore already distributes 99% of our own beer. I doubt that there is enough mico volume to absorb the overhead of a parallel distribution channel that provided decent customer service, variety and geographic coverage.

Josh, thanks for the nice nod. I think I can guess who sent you the e-mail. Josh makes a good point that I missed in my first post. We deal very well with every Beer Store and LCBO store that sells our beer. Their managers and staff are great. My complaints are never with them and frankly they go out of their way to provide us (as suppliers) with conscientious and professional service. At the head office, both organizations have also been interested and (I believe) recently working towards, success for all brewers regardless of size. The changes we want (or demand) often take longer than expected so sparks fly. If I have learned one thing in this biz, it is the two virtues often absent in micro-brewers are patience and humilty. That makes dealing with large slower organizations (or government departments) sometimes a challenge. Josh saw through that one.

By the way Josh, I visted your web site. When I retire, can I work for you?

Gotta go flood the rink out back. Sorry for any typos or warts.

Howard

By the way, today I tried a Mill St. Organic (at the brewery), Steam Whistle right out of the bright tank, Michael Hancock's Wheat and Helles and a Black Sheep Ale from Yorkshire. All very good.

True, individual stores probably aren't the biggest problem. In my line of work, we are in a similar situation to small brewers. We work one on one with our clients and we can service their needs immediately. But we also are part of a much larger organization, and any time we have to involve head office things tend to bog right down. We, too, get frustrated with that. Imagine the headaches small brewers in the UK have to go through in dealing with pubcos. Ugh.

One thing I was wondering, what kind of organization do the small brewers of Ontario have? Seems very loose, if any. Getting together on issues of mutual concern, and maybe even category marketing, might help give you guys a little more critical mass in dealing with these large corporations. Just a thought - I'm sure it's come up before but it sounds good on paper.

A very interesting read, thanks Howard.

Not sure which beer list you're referring to. I did, however, find some older threads about Quebec:

http://www.bartowel.com/board/viewtopic ... 01&forum=7

http://www.bartowel.com/board/viewtopic ... 96&forum=7

Hope this helps.

Thanks to howardt for his take on the beer distribution system in Ontario. I found the information useful, and suggestions 2 through 5 are certainly in line with what I and a lot of other LCBO employees have been trying to do. His very first suggestion, though, that we buy Ontario beer only at the Beer Store, has given me, as a person who does the beer ordering for one LCBO store, Queens Quay, considerable pause for thought.

I should explain that I'm a latecomer to the business of selling beer. As a retired educator, I looked for a part-time job in line with my avocation -- the appreciation of good beer. I have been a amateur brewer for some years, winning over 20 CABA medals, and I am a recognized BJCP beer judge. So I went to work for the LCBO with the intention of improving what they did with beer. I think I have made some difference, at least a one store. Even Ian Bowering wrote approvingly of the changes I made at Queen's Quay. Natuarlly, then, I'm all in favour of system changes that will not only reduce inequities, but promote high quality local beer. Every manager who is posted to Queen's Quay gets a bellyful of my opinions, as do the people in Beer and Special Markets. But it is, of course, the buying public who will cause policy change at the LCBO by demanding change and backing up that demand with their purchasing power.

So why buy Ontario beer only at the Beer Store? If Ontario beer is only available at the Beer Store, only those brewers for whom $25,000 is 'small potatoes' -- Molson, Labatt, Sleeman, and, yes, Creemore, will benefit. The usual argument I get when I'm fighting for shelf space for Micros is that 'they don't sell.' If you reduce Ontario beer sales at the LCBO, you'll get less shelf space for all Micros. I don't suppose that is a threat to Creemore, which, at least at Queen's Quay, outsells most mass market products; but I'm thinking of the rest of the Micros who do produce premium beer but can't afford a partnership in the Beer Store. Cheers.