Dear LCBO, Monopolies are so last century! It’s time to dismantle the LCBO.

By Jan Wong | Photograph by Daniel Neuhaus

On a recent Sunday afternoon, I stopped by the LCBO’s flagship Summerhill store.
A glorious 35,000 square feet of creamy Italian porcelain floors and sparkling lights, the refurbished Canadian Pacific Railway station is adjacent to a cluster of gourmet shops that affluent shoppers call “The Five Thieves.” Here you pay dearly for ready-to-heat osso buco or a square of chocolate cake sprinkled with edible gold leaf. Despite its prime location, this outlet, the LCBO’s largest, is no pricier than any other location in the province. You pay the same fixed $12.60 for a 2009 Louis Bernard Côtes du Rhône here as you would at Scarborough’s lowly Cedarbrae Mall.

Nice, huh? But wait—you and I are paying for those pot lights, the Martha Stewart–style test kitchen (used for cooking demos and wine appreciation classes) and the standalone tasting bar, not to mention the lease on this prime piece of real estate. We all pay—whether we’re teetotalers or boozehounds—because higher overhead reduces the annual dividend the LCBO remits to the province. That in turn means less money for everything from social services to infrastructure.

According to a recent report by Ontario’s Auditor General, Jim McCarter, the liquor monopoly is also minimizing profits by failing to use its enormous clout to negotiate the lowest possible wholesale prices from suppliers. Instead, the LCBO does something unique among retailers. It decides on the retail price it wants to charge for a product, and then asks suppliers to raise or lower their wholesale costs accordingly. Why? The LCBO claims it’s merely fulfilling its duty to be socially responsible—that by keeping prices high, it’s trying to discourage consumption. And yet, as McCarter reported, alcohol sales have gone up 67 per cent in the last decade.

LCBO. It rolls off the tongue like an unoaked chardonnay, lulling us into overlooking what the initials actually stand for: Liquor Control Board of Ontario. The LCBO’s motto might as well be, Drink lots! But not too much! To understand its conflicted ethos, you have to go back to 1927, the year Ontario emerged from Prohibition. Still fretting that unfettered liquor sales and low-priced alcohol would lead to alcoholism, crime and general chaos, Queen’s Park primly established a state monopoly with a
mandate: temperance.

Today, the LCBO downplays the control aspect while struggling to satisfy its dual mandate of turning a profit without turning people into drunkards. The subliminal message of Food and Drink, the LCBO’s free magazine, remains paternalistic: don’t drink on an empty stomach. The hypocrisy is astounding. The LCBO goes further than most stores in trying to persuade you to buy its product for every social occasion short of a toddler’s birthday party. What other retailer has dreamed up 300 styles of gift bags, boxes and bottle-friendly containers in the past five years? Chris Layton, an LCBO spokesman, says the gift bags earn $3.5 million a year—although consumer interest is now shifting to gift cards

According to Layton, Food and Drink is the LCBO’s single most popular marketing initiative. Six times a year, the LCBO prints 500,000 English copies and 20,000 French copies on glossy 60-pound stock. It turns a comfortable annual profit of $350,000 to $400,000 after expenses. Here’s one of the secrets to its success: wineries must submit marketing plans—including how much they will spend on advertising in Food and Drink—before they can obtain coveted shelf space at the LCBO. Food and Drink competes for scarce advertising dollars against private-sector magazines that aren’t bankrolled by government monopolies.

Truth be told, Torontonians would buy alcohol without any encouragement from fancy stores or glossy magazines. If we could save money, I’m fairly certain we’d shop at a no-frills warehouse with fluorescent lights. To get an idea of how monolithic the LCBO is, I checked out another monolithic retailer, but one that offers the warehouse shopping experience: Costco. First, consider that Ontario’s population is a tiny fraction of that of the U.S.—4.1 per cent. Then note that while Costco is one of the biggest wine retailers in the U.S., it must compete with thousands of private liquor stores. Now check out these numbers: last year Costco grossed $1.3 billion (U.S.) in wine sales; the LCBO’s wine sales grossed $1.58 billion, according to its most recent annual report. Despite its much smaller territory and consumer base, the LCBO actually eclipses that other monolith to the south, Costco.

In fiscal 2010–2011, the monopoly paid a dividend of $1.55 billion to the Ontario government. It was the 17th consecutive record annual dividend, and it does not include the various taxes levied (a total of $749 million). The annual report also lays bare the secret behind the LCBO’s profit margins: we’re paying double. At Costco, a bottle of Woodbridge sauvignon blanc costs $6.99; at the LCBO it’s $11.95. Costco sells Veuve Clicquot for $38.99 a bottle; the LCBO charges $66.30. When I asked for pricing examples for table wine, some markups were 137 per cent. For a wine that retails for $10.45 (the LCBO didn’t provide actual product names), it pays wholesalers $3.77 if it’s a U.S. or non-Ontario Canadian wine; $3.72 if it’s another imported wine; and $4.10 if it’s Ontario wine. And these wholesale prices may be inflated.

This is the LCBO’s 85th year in existence. Most Torontonians alive have only known a government monopoly, so it’s hard to imagine freedom. But we can look to Alberta, which dismantled its provincial monopoly 19 years ago. Pillaging and mayhem did not ensue. Instead, privatization led to greater consumer choice—eight times the number of products and double the number of retailers. Revenue collected by the province includes a government markup, which varies depending on the product type and alcohol percentage. In 2011, Alberta’s liquor revenue totalled $683.5 million.

Monopolies are so last century. To understand the absurdity of state-controlled liquor sales, imagine if Queen’s Park decided obesity was the number one health risk and established an Obesity Control Board of Ontario. It shuts down McDonald’s, Burger King and Wendy’s. Only the OCBO can supply burgers because, you know, children might eat them. Without competition, the price of a meal deal soon doubles, then triples. With these—forgive me—fat profit margins, the OCBO begins decorating its burger outlets with crystal chandeliers. It publishes a glossy fast-food magazine. And everyone lives happily ever after because the province is raking in millions of dollars in dividends.

Profligate spending is how a monopoly behaves when it isn’t permitted to keep all the lucre for itself. And this at a time when the Ontario government is desperately trying to find ways to save money. In his recent report, the former TD Bank economist Don Drummond recommended selling the LCBO’s headquarters overlooking Lake Ontario. That would be but a drop in the wine bucket. In the coming fiscal year, the LCBO will open 37 new or relocated stores, bringing the total number of outlets to 636. Konrad Ejbich, a wine writer and expert, calls our state-run liquor monopoly “the last vestige of communism in Ontario.” It’s been 85 years since Prohibition ended and a quarter-century since the fall of the Berlin Wall. It’s time to dismantle the LCBO.

http://www.torontolife.com/daily/informer/from-print-edition-informer/2012/05/14/jan-wong-control-freaks/