Uncorking a Strange Brew: The Need for More Competition in Ontario's Alcoholic Beverage Retailing System

Abstract

The lack of competition in Ontario’s system for alcoholic beverage retailing causes higher prices for consumers and foregone government revenue. A major component of the lack of competition is the disadvantage faced by small Ontario wineries and breweries relative to the larger producers. Three large brewers own The Beer Store, which dominates retailing of beer, while two large wineries enjoy the right to sell their wines in major off-winery stores: the Wine Shop and the Wine Rack.

We find that freeing up alcoholic beverage retailing would result in increased government revenue, lower prices, and more convenience. Other factors being equal, Western Canadian provinces with more competition had 7 percent more per capita provincial alcohol profits than provinces with government-run monopolies.

To compare Ontario’s beer prices relative to those in Quebec, a province with considerably more retail competition, we collected data on prices of comparable domestic and international brands sold in both provinces. We find modest price differences for domestic beer brands, but much higher prices in Ontario for international brands relative to Quebec. We also find that retailing costs are lower in Ontario because The Beer Store enjoys significant economies of scale. These factors combined allow brewers to earn what we estimate to be $450 to $630 million in additional profits compared to what would have occurred in a competitive retail market similar to that in Quebec. Within Ontario, we find very high prices for restaurant customers relative to retail customers.

The wine industry in Ontario also has little retail competition. The LCBO and two chains of off-winery stores dominate sales. Other wineries have a hard time finding shelf space for their brands at the LCBO and (with a few exceptions) do not have access to off-winery stores. That slows their expansion and limits their economies of scale. Opening up wine retailing to free competition would reduce the advantage held by a few large producers and help create a healthier wine industry in Ontario.

We recommend that the Ontario government create a more competitive system for alcoholic beverage marketing through a gradual process of liberalization. In particular, it should:

• Allow sales of wine and beer in grocery and convenience stores, as in Quebec; • Further open up beer retailing by licensing other retail outlets; • Free up wine retailing by granting licences for off-winery stores to other wineries and also to new wine retailers.

These changes would increase the choices available and reduce prices for Ontario consumers, as well as improve the competitiveness of Ontario’s smaller wineries and breweries and generate more revenue for the government.

Keywords: Economic Growth and Innovation, Alcohol, Ontario

JEL Classification: L81