Is a price hike looming at the LCBO?

| 2 Comments

Last week, I heard a rumour about an impending price increase at the LCBO. My first reaction was typical of the embittered Ontario consumer: a sigh and a resigned muttering: "First coffee, then hydro and now they're going after my whiskey..."


A quick search online yielded a description of the increase in the LCBO's minimum pricing structure and as outlined by the CBC "About 10 per cent of spirits sold by the LCBO and three to four per cent of beers will see their prices go up. A 24-bottle case of the cheapest beer will go up by 55 cents, from $28.80 to $29.35. A 750 mL bottle of a mainstream spirit will go up by 50 cents to $23.90."


"Meh. What's so bad about that?" I can hear you thinking. Small change right?


Well, maybe not...  

A 2010 regulation governing the LCBO's minimum retail pricing structure virtually guarantees yearly price increases as the retail price of alcohol is chained to the Consumer Price Index of Ontario as determined by Stats Can. But, this "guaranteed" annual increase is just one of the ways the Crown corporation is able to raise retail prices as part of its commitment to social responsibility.


The recent Auditor General of Ontario's report revealed a number of issues with the LCBO and chief among them was the corporation's pricing process. Although it's common practice for businesses, including the LCBO, to adjust their prices in order to keep pace with inflation, offset fixed operating costs, incorporate new taxes etc...it's hard to see in the LCBO's mark-up rates what's being added for the sake of keeping operating, distribution costs in check and what's being added on to save us from ourselves.


Yoked to the cart of social responsibility, the LCBO's purchasing process differs from those used by private-sector retailers.


As most of us learned in grade school, the market works on a very basic premise: buy goods products at the lowest possible cost and then sell those goods at a higher price in order to profit from the exchange.


Not so at the LCBO, according the report:


"Suppliers submit a retail price within an established retail price range set out in the LCBO's call for products and then work backwards, applying the LCBO's fixed-pricing structure to determine the wholesale cost they will charge the LCBO. If a supplier's cost quote results in an amount that does not match the agreed-upon retail price, the LCBO will ask it to raise or lower the wholesale cost of the product."


In addition to the yearly "annual adjustment", the LCBO routinely allows its suppliers to submit higher quotes via the LCBO Trade Resources Online website. The Schedule of Quote Increases for suppliers provides 6 possible dates for increases within the first 5 months of 2012.


As Auditor General Jim McCarter pointed out after releasing the report, this isn't the way the real business world works:


"A Wal-Mart would certainly go back to their supplier and say: 'Would you sell it to us cheaper?' We think a lot of suppliers would sell it to us cheaper, basically to get that LCBO listing."


Astonishingly, the LCBO does not negotiate discounts for high-volume purchases to reduce its costs. In fact, the fixed-pricing structure gives the LCBO "no incentive to negotiate lower wholesale cost as doing so would result in lower retail prices and, in turn, lower profits, which the LCBO indicated would be contrary to its mandate of generating profits for the province and encouraging responsible consumption."


However, the LCBO requires its suppliers to provide their "best price" (excluding taxes, duties, and freight) which must not be "higher than the price at which the Product is being sold by the Supplier to any other government Liquor board or government Liquor purchasing body or like entity in Canada." One wonders if this strategy is geared more toward preserving the LCBO's monopoly and the monopolies of other jurisdictions' Liquor Boards and Commissions and discouraging cross-border booze shopping than it is ensuring the best price for the consumer...


Within the report, the LCBO defends its practices claiming that other Canadian jurisdictions also use the fixed mark-up model and that it provides a balance between "generating revenue, promoting social responsibility and providing customers with selection and value at all price points." The report also concedes that the LCBO has been "successful in consistently generating increased profits for the province year after year."


That's quite a feat when you're the only player in the market and you're continually asking your suppliers if they'd like to sell you the product for a little bit more than last time...


But, there's one more arrow in the LCBO pricing administration's quiver: the snob appeal of "premiumization."


In keeping with its mandate to encourage responsible drinking, "premiumization" aims to generate more revenue without increasing the amount of alcohol consumed in the province by encouraging consumers to buy more premium-priced products and by increasing the number and variety of products offered at higher prices. Working with its suppliers in the name of social responsibility to keep prices artificially high while showcasing products through the glossy and seductive Food & Drink magazine and the decidedly "insider" angle of the Vintages Magazine; the LCBO has effectively given suppliers a free pass to "upscale" their brand at the expense of the consumer. As suppliers have more control over pricing than consumers, the market reacts the only way it can: by hoarding product.


In short, the Ontario consumer is over a barrel. If consumers refuse to buy a product in protest of its price there are few avenues for them to obtain it due to the LCBO's monopoly on alcohol sales. Their options are to travel directly to the manufacturer and purchase a bottle (which may only be feasible if the producer is Canadian and within the province), order it through the LCBO in which case they are subject to minimum orders and additional fees, arrange a clandestine import and risk imprisonment, or simply go without.


Moreover, if a product is successful at its current price range consumers are rewarded for their purchases with a pricing structure that guarantees that the price will creep ever higher thanks to the LCBO's guaranteed annual adjustment in the minimum retail price, the "backward" pricing scheme and the "premiumization" strategy.


While this latest increase appears to be "peanuts" who knows what other fees, adjustments, and taxes we'll be forced to pay for alcohol under the banner of social responsibility?

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Thanks to Jeremiah Lapointe for his assistance in re-purposing this image obtained from Wikimedia Commons which is reproduced here in a modified form and is free from copyright restrictions.

2 Comments

Well written. I'm surprised more people aren't up in arms about the LCBO's absurd pricing, particularly on Scotch Single Malt whiskies and fine rums. Many products were marked up by more than $30 overnight for no good reason, while the cheaper brands that college students use to get drunk were hardly touched. If the LCBO simply raised the price of all top-selling low cost spirits (i.e Bacardi, Jim Beam, Absolut, etc) by a few dollars, they would generate even more revenue than they do by massively marking up single malts which most people drink responsibly. The current model rewards binge drinkers and frowns on hobbyists who truly enjoy drinking high quality whiskies, rums and tequila's in responsible quantities.

I completely agree with you, Noah. Even the lower end Single Malt Scotches have gone up an incredible amount (A bottle of Glenfiddich 12 YO used to be $42 about 2 years ago, it's now $53. That said, the 15 and 18 YO has also gone up about $10 in the same timeframe). Their profit margins would be a lot wider if they targeted the cheap liquor that appeals to binge drinking for their continual price hiking instead of the premium liquors with already premium prices.

Really makes you wonder how much they care about the social responsibility aspect that's said to be part of the reason for the price increases(though it should be quite obvious that the government isn't interested in efficiently turning a profit).

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