Social Policy in Ontario

The Beer Store’s secret sweetheart deal with LCBO revealed

Posted on December 9, 2014 in Policy Context

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TheStar.com – News/Queen’s Park – Thanks to a whistleblower, the Star now has the secret details of how Ontarians are being hosed by The Beer Store with the wilful involvement of elected officials.
Dec 09 2014.   By: Martin Regg Cohn, Provincial Politics

Thanks to a whistleblower, we now have the secret details of how Ontarians are being hosed by The Beer Store with the wilful involvement of elected officials.

Before stocking up for the holidays, you can read why the province remains captive of a private quasi-monopoly in beer retailing that bankrolls the richest, toughest political lobby in the province.

A still-confidential operating agreement lays bare the foundations of an inglorious cash grab that the big foreign-owned brewers who run The Beer Store don’t want you to know about. And what the government-owned LCBO is too embarrassed to show you.

The Beer Store and the LCBO have repeatedly refused my requests to disclose their mutual non-aggression pact, and it’s easy to see why. Dated June 1, 2000, the document confirms the folly of our Crown-owned LCBO acting on the orders of the Progressive Conservative government of the day (and the Liberal government of today, which is no less guilty).

The 10-page document, authenticated by an LCBO source, details an arrangement that constrains growth in the LCBO’s beer sales to protect the effective retail monopoly of the ever unpopular — but forever profitable — Beer Store.

No wonder the former head of the LCBO, Andy Brandt, is still furious about the cosy deal. In a revealing interview, he blames his former Tory masters for imposing it from on high because “the government of the day intended to protect The Beer Store.” (More on his candid, damning comments below.)

The document does all this while relying on Orwellian, lawyerly language. The doublespeak demands a double Scotch:

“Working together in the spirit of this framework, the Ontario beer consumer will benefit,” it proclaims, improbably.

The title seems unintentionally ironic: “Serving Ontario Beer Consumers — Framework for Improved Co-operation and Planning Between the LCBO and BRI (Brewers Retail, Inc., The Beer Store’s formal corporate name).”

Its bureaucratic wording spells out precisely how beer drinkers shall be gouged. The core of the scheme comes in the section that sharply delineates “Beer Selling Roles” for the two rival distributors — one government-owned and the other privately run — to sharply limit any competition between them.

“Consistent with historical practice, LCBO will not sell beer . . . in packages containing more than 6 containers,” the document declares.
Why would the LCBO agree to tie its hands in such a way? Why give up the right to sell more affordable 12-packs or two-fours (cases of 24) that make up the largest volume of beer buying in Ontario?

And why would the publicly owned LCBO further agree that it “will not promote beer at price points greater than 6 containers?” The effect, of course, is to deny drinkers the cost savings of a 12-pack or two-four available at the privately-run Beer Store, forcing them to pay the higher tab for each individual six-pack.

Another clause spells out the architecture of noncompetition: The LCBO will not sell to restaurants and bars any of the major brands not carried in its regular stores, thus giving the big brewers unchallenged power to gouge the food and beverage industry with their market muscle (which they do by setting prices, and profit margins, unconscionably higher than in most other provinces or in regular Beer Store outlets).

Sales territories are also sharply circumscribed: If The Beer Store decides to move into growing communities, the LCBO will retreat to make way: “Existing LCBO store is to revert to a … 6-pack store and will carry package sizes no greater than 6 containers.”

Oh, and if The Beer Store disagrees with the LCBO on key points, they will operate by “consensus on all issues,” and a joint committee’s decisions “shall be consensus (sic).”

The brewers say jump, and the government asks how high.

Why would our elected public officials give private profiteers a veto? Why hamstring the LCBO’s future growth by binding it to past “historical practice?”

To understand why the LCBO would abide by such a self-defeating agreement, I put the question to its former CEO and chair, Andy Brandt: Why go along with the document 14 years ago?

Brandt tells me he did it under direct orders of the Tory government of then-premier Mike Harris in mid-2000. A former Tory cabinet minister himself from the Bill Davis era, Brandt had been appointed to the influential LCBO post in 1991 by then-NDP premier Bob Rae.

Brandt believes the Harris Tories acquiesced to intense pressure from the privately-owned Brewers Retail, which was plainly spooked about the erosion of its longtime monopoly position. The LCBO had been stocking more beer in its newly renovated outlets, stealing market share from the shabby stores in the Brewers Retail chain.

Despite outdated facilities stuck in the 1950s, the document uses laughably ironic language to advance the fiction that Brewers Retail was investing to “modernize” its storefronts. In reality, it was falling far behind the LCBO, as Brandt points out — and as any unfortunate Beer Store customer can attest.

In yet more fulsome language, the agreement’s covering letter proclaims, “We are confident that by working together in the spirit of this framework, the Ontario beer consumer will benefit.”

Nothing could be further from the truth — then or today. Just ask Brandt, who still grumbles that the government imposed the deal on him.
“That was a government decision, that was not my decision — that was not an LCBO decision,” he tells me on the phone from Sarnia.

“I never quite understood why the government always wanted to protect the (big) beer industry,” Brandt fumes.

But he has his suspicions: “The government had some kind of a deal with Brewers Retail.”

A former interim leader of the Progressive Conservatives before Harris, Brandt believes — as many others do — that election campaign contributions by the big brewers motivated the government’s decision: “That obviously has some influence.”

Bob Runciman, who at the time was minister of consumer and commercial relations responsible for the LCBO, confirms that he wanted the deal done. But he dismisses the allegations about coming under undue influence by the beer lobby.

“I don’t remember that, if it happened,” Runciman said about the Beer Store perhaps getting its way by buying its way. “I doubt it happened, but they do donate to both parties . . . I don’t really believe it was a significant factor.”

Now a senator, Runciman says he always acted in the best interests of consumers to ensure orderly sales.
Unsurprisingly, that’s what The Beer Store says, too.

Apparently, the secret deal was drafted “to facilitate the orderly modernization of Ontario’s beverage alcohol retailing system,” according to a statement sent to me by Jeff Newton, head of Canada’s National Brewers, the industry lobby group that represents The Beer Store in media dealings.

He argues that the LCBO was constraining the growth of Brewers Retail, not the other way around. But doesn’t it look like collusion, I ask Newton, to sign a deal that benefits The Beer Store by preventing the LCBO from selling beer in higher volumes at lower prices?

Newton’s emailed statement doesn’t respond to the collusion question, countering instead: “Clearly Ontario’s alcohol retailing system and the Framework Agreement are working.”

However, a law firm representing The Beer Store contacted the Star the next day to comment on the collusion question that Newton had left unaddressed: “This is an inaccurate and inappropriate characterization, to which my client objects.”

Brandt doesn’t buy what Newton is selling. He chafed at the price and volume restrictions imposed on the LCBO, which conferred an unfair advantage on Brewers Retail.

If not for those constraints, “We would have knocked the sales of The Beer Store significantly,” Brandt says, but what rankled him most was a misallocation of revenues:

Rising LCBO profits went straight to the government treasury to fund hospitals, schools and infrastructure. By contrast, The Beer Store’s profits go straight into the coffers of its private (no, not government) owners, whose corporate parents are now based abroad (Labatts, which is owned by AB Inbev of Belgium, plus U.S.-owned Molson-Coors and Japanese-owned Sleeman).

For years, The Beer Store has maintained close to 80 per cent market share because of its control over volume sales of major brands in its chain. The LCBO has been held back to just over 20 per cent, but insiders believe it would make major inroads without the protectionist pact that benefits the big brewers.

At long last, the sweetheart deal is facing more publicity and scrutiny. Earlier this year, the Liberal government asked former TD Bank CEO Ed Clark to maximize the value of major government assets, including the LCBO. He responded by examining its interlocking relationship with The Beer Store, and recommended allowing the LCBO to sell 12-packs for the first time — but not the high-volume cases of 24 that generate handsome profits for The Beer Store.

“We don’t want to undermine its economics by allowing the LCBO to sell cases of 24 — the bulk of Beer Store sales,” Clark noted inexplicably in a speech last fall. He also proposed a franchise fee to retain its monopoly clout (sources tell me the annual take would be less than $100 million).

Package sizes are a big deal, because they are big money.

Ripping up the deal to let the LCBO sell both 12-packs and cases of 24 would “provide the government with a new revenue stream” estimated at $515 million a year, according to Restaurants Canada, which represents the food and beverage industry.

In a submission to Clark’s task force last summer, it questioned why the government still lets the private brewers siphon off massive profits by charging its members much higher prices than retail consumers pay. Its brief argued that another $500 million could accrue to government if the LCBO were allowed to sell all brands of beer in cases of 24 directly to bars and restaurants.

That adds up to total of $1 billion in foregone revenue that could flow to the LCBO but is now captured by the private brewers thanks to their protected position.

Why would the government agree to act as an enabler and enricher of the private profiteers who run The Beer Store — perpetuating its oppressively Stalinist architecture, Soviet-style service, and ossified corporate design? What’s keeping today’s Liberal government from undoing the bad deal cooked up by the Tories in 2000?

Sadly, it’s simple. Both political parties profit shamelessly from generous campaign donations, and both are easily seduced by powerful lobbyists. The brewers have snapped up virtually every big name influencer in town, many of them former Liberal party operatives.

While the Liberal government ponders a few half measures, the prominent Tories who first constrained the LCBO 14 years ago now believe their protectionist pact is outdated: “I think it should be looked at,” Runciman says today. “Loosening it up would be welcome by most people.”

Remarkably, The Beer Store’s sweet deal has been kept secret all this time. Now, with the holiday party season upon us, we can read it and weep.

< http://www.thestar.com/news/queenspark/2014/12/09/the_beer_stores_secret_sweetheart_deal_with_lcbo_revealed_cohn.html >

Tags: budget, globalization, ideology, privatization, standard of living

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