BC Wine & Liquor Law Conference
Albert J. Hudec and Mark Hicken update attendees on grocery store sales.
Make no mistake, buying a bottle or two of wine in a supermarket in BC is a big deal, to both consumers and producer. After decades of inertia, wine and liquor laws. regulations and licensing structures are undergoing changes that are transforming many aspects of BC’s wine industry. At the seventh annual conference on BC Wine & Liquor Law, held this past February in Vancouver, co-chairs Mark Hicken of Vintage Law Group and Christopher Wilson of Bull Housser and Tupper, and leading experts from a variety of perspectives and disciplines, provided an update on the ongoing changes to BC’s liquor laws.
Top of mind is the appearance of wine in Overwaitea Food Group stores selling VQA wine in selected BC locations. For consumers at Save On Foods at Orchard Plaza in Kelowna, which opened in March, finding upwards of 1,000 VQA wines to choose from on grocery store shelves must be a pleasant shock.
Many of the original 21 non-grocery VQA stores (including now closed Discover Wines in Orchard Plaza, Kelowna) are selling their licences to the Overwaitea Food Group. Doing so “provides an opportunity for owners of marginally profitable VQA stores to exit the business and realize the value of their licenses,” says Albert J. Hudec of Farris, Vaughan, Wills and Murphy. Most significantly, the transfer of these licenses to high volume food stores is a boon for both consumers and producers, in particular small and medium sized wineries. As well, they provide consumers with more convenience and greater access to BC wines. According to December 2015 sales figures, average grocery store sales of VQA wines was an impressive 57% higher than those of non-grocery VQA stores. BCWI objectives, such as fair and equitable access, are designed to protect member wineries continue in the grocery model.
Dormant Licences
Another 18 dormant, grandfathered, Bill 22 licenses to sell 100% BC wine will be auctioned off in the near future, according to the Liquor Licensing Branch. These licenses will also include non-VQA wineries, as well as makers of mead, sake, cider and other fruit wines, but details have yet to be announced. The possibility of independent wine stores (LRS, VQA, Agency) relocating in grocery stores is also on offer for a limited time on the condition that they sell exclusively 100% BC wines.
Private, Retail and Government Licences
Private retail (IWS) and government liquor store licenses which cover both domestic and imported liquor, can also move to grocery stores as well. But they are restricted to locating as a caged area, “store within a store” model. In addition, these licenses are subject to the provincial 1 km rule (separating LRS’s and government liquor stores). So far, one LRS (liquor retail store) licence has transferred to Sobeys to use with a Thrifty Foods store in Victoria.
All of this boosts the availability of BC wines, in particular those of small and medium-sized produces with VQA affiliation. On the other hand, it is feared that grocery stores will dominate retail distribution, at the expense of LRS and government liquor stores, as well as VQA stores that opt to continue operating under independent (non-grocery) ownership.
International experience shows that where wine is allowed in grocery (in an unrestricted market), these stores capture 65-70% of the market. Invariably, they restrict the number of specialty fine wines, instead focusing on high volume, lower-priced wines and house brands. There are exceptions with a presence of higher end brands such as Marks & Spencer, Waitrose, Whole Foods and Costco.
In other words, can the concept of up to 1,000 distinctive BC wines of origin from over 150 VQA wineries continue for the foreseeable future in the supermarket milieu, where the focus is on fewer brands and higher volume?
Trade Laws
Trade law violations are another issue. Limiting the number of grocery store venues which exclusively sell BC wine to no more than 60 reduces the risk of a formal complaint from CETA (Comprehensive Canada and EU Economic and Trade Agreement), as does the claim that they are legitimately “grandfathered.” Such a case could also challenge “direct delivery” preferences. Given the unimaginable cost, what is the practical likelihood of such a claim under CETA and/or NAFTA? The answer is not clear-cut, given the number of informal complaints. Once the wine in grocery store bandwagon gets going, stopping or slowing its march to market domination will be difficult. If we discriminate against foreign wines in these circumstances, they will likely file and win.
Barrier Free
Looking at the US experience is sobering. Most states are barrier-free, offering wine in grocery stores in an unrestricted market. Capturing up to 70% of the market, wine sales in grocery stores gravitate to high volume/low margin, mass-produced wines, to the exclusion of estate produced and smaller producers.
Similar to the US scenario, a few BC wineries dominate retail sales. In BC liquor stores, for example, 94% of sales of BC producers are incredibly concentrated in the big 3 (domestic and blended) and 99% in the 13 producers. With BC home to 270 licensed wineries, a lot of smaller scale producers are fighting for a minute share of the market. It is debatable whether wine in grocery stores is the solution to their challenges, or just a stopgap.
Direct to Consumer
Enter DTC, winery direct to consumer sales, or internet sales. The market share for this method has increased by 4.3% over the last 3 years, the fastest growing retail channel. In 2014, private retail channels comprised 78% of VQA product sales, made up of 30% private retail stores (LRS, VQA, IWS and other), 19% hospitality (bars, restaurants and hotels). 28% winery direct (and 1% other).
In the U.S., embattled small scale producers have found a degree of salvation by converting to the DTC model. Astoundingly, growth of DTC in the US is 15% a year with the average price of a bottle of wine at $38!
Future Approaches and Advantages
Looking into the uncertain future, several other approaches and advantages, in addition to DTC, hold significant promise for smaller BC wineries:
Hospitality – As of February 1, for non GLS-listed products, land-based wineries can now negotiate a “free price” for wholesale to licensees. This is a significant change and allows wineries to tailor wholesale prices to take into account such matters as quantities ordered. Pressure within the retail sector to increase margins is likely to cause inducement /incentive issues down the line as well as a reduction in wine selection.
Private retail stores will remain a bastion for sales of genuine, locally grown and produced BC wines of distinction. Terroir BC, a new, non-profit organization representing over 50 BC small and medium sized wineries producing 100% homegrown wines, has struck and agreement with the BC Private Liquor Stores Association (190 stores), to showcase genuine BC wines from Terroir BC members. Under a marketing plan, Terroir BC members will be able to supply their wines to BCPLSA stores through a central database, constantly updated with the latest information from the wineries.
Secondary tasting rooms (off-site) is one of 15 recommendations for liquor policy reform which is still in process. Based on examples in Walla Walla and Woodinvale in Washington State, this reform holds great potential for BC wineries.
Wine clubs have been established by many BC wineries and are a proven, customer loyalty program for selling wines online and promoting a winery’s distinctive products, events, news and features,
Social media, used properly, provides wineries with a variety of internet pathways for meeting specific goals. These support a winery’s DTC sales program, drive customers to tasting rooms, ensure repeat visits, develop and maintain winery brands, and make customers feel like they are learning from or participating in the process. Effective social media channels include Instagram, Facebook, Twitter, YouTube, Linked In, Tumblr, and Reddit.
The falling dollar provides a significant price advantage for the domestic wine industry (which is multiplied by the application of LDB mark-up).
Virtual wineries and custom crush is a driver for emerging wine regions and adds an exciting, innovative alternative for new and small wine producers. In other jurisdictions like New Zealand, custom crush is an essential fixture of a successful wine industry. In BC, custom crush is allowed. But bringing the strict rules into alignment with other west coast jurisdictions would be a step in the right direction. Also suggested by Christine Coletta of Okanagan Crush Pad: eliminating land-based (2 acres of vines and 100% BC grapes) and commercial winery categories and establishing a craft designation for wineries producing wine from 100% BC grapes along the lines of craft brewers and distillers. This measure would take pressure off new and smaller wine producers and still support 100% BC wine.
Interprovincial Trade
The Canadian saga of restricting interprovincial sales of homegrown wines, which dates from the end of prohibition in 1928, may finally be coming to an end.
Ontario lawyers (Ian Blue of Gardiner Roberts and Arnold Schwisberg) are convinced the Canadian constitution under Section 121 prohibits all legislative barriers to free interprovincial trade. They explain that a faulty decision by the Supreme Court of Canada back in 1920 (Gold Seal Case) was tainted by judicial and ministerial misconduct. Not appreciated until 2010, the lawyers think it is doubtful that a court would follow the earlier precedent and allow legislative barriers to free interprovincial trade which the constitution clearly prohibits under section 121.
Provincial liquor boards are reluctant to challenge a contemporary interpretation of section 121. But a current case in which Gerard Comeau is accused of transporting 14 cases of beer and 2 bottles of liquor he had purchased in Quebec across the border into New Brunswick, has NB Liquor arguing that its profits would be at risk if the provincial law restricting interprovincial liquor is struck down. The case in Newfoundland and Labrador against FedEx for transporting “contraband” wine from BC to Torbay, NFLD, was dismissed when the Crown selected to call no evidence. Finally, some great news for BC producers and Canadian buyers of Canada’s most sought after wine.