Ontario is considering changes to how alcohol can be sold in the province. But for all the questioning of who wins and loses — Supermarkets? Convenience stores? Corporate producers? Craft producers? — I don’t see mention of restaurants. And, yet, if we’re talking about needed reforms to booze sales in Ontario, wholesale pricing has long been top priority for the hospitality industry.
Businesses are supposed to benefit from economies of scale. The more a restaurant buys of its key goods (whether that’s beef, bananas, barley, or butter) the better a price it can negotiate. Except when it comes to alcohol.
The price you and I pay for a bottle of rum at the LCBO is the same price that restaurants pay.
When pandemic conditions threatened to extinguish bars and restaurants, Ontario (like many jurisdictions) loosened up regulations to help businesses survive. Restaurants, for example, were allowed to sell drinks to go and wineries to deliver to homes. At the start of 2022, LCBO offered a 10 per cent discount for bars and restaurants. Something is better than nothing. But the discount is merely a price 10 per cent lower than the retail prices set by the LCBO —not enough to move the needle of profitability.
The LCBO is a monopoly. It controls importation, distribution, and retail in Ontario. Any product from outside the province goes through the LCBO pricing calculator, as if it were on its shelves, with the LCBO taking a cut. Domestically, whether or not it has product listed at the LCBO, if an Ontario winery sells directly to a restaurant, it still has to give the LCBO a portion of the sale.
In the United States, there is a three-tiered system of importers, distributors/wholesalers, and retailers. The public can buy only from retailers. And retailers cannot be distributors. Businesses like bars and restaurants buy from distributors. Thad Vogler, a restaurateur and spirits consultant, says that, while plenty of distributors try to pad in more profit, 15 per cent is a typical, and competitive, markup. Hearing the Ontario system described, he calls it “ghastly.”
One Ontario wine and spirit merchant tells me that the LCBO typically marks up supplier prices by 71 per cent on wines and 137.9 per cent on spirits. The specificity of those numbers is from a calculator tool provided by the LCBO, that enables agencies to predict costs while exploring the importation of products.
Prices that steep are why shady deals get made. Though restaurants can’t get better prices from the LCBO or buy directly from producers, big distributors will offer rebates — such as a free bottle for each case of 12 — in exchange for courtesies such as placement on the menu, exclusivity, and brand displays. This practice, according to industry insiders I spoke with, is standard. Although kickbacks are not allowed under the LCBO’s Supplier Code of Business Conduct, restaurateurs tell me they are able to invoice for these rebates under other terms, like “marketing.”
Even this doesn’t add up to much in terms of savings. Business that take advantage of the free-bottle-per-case deal, common in the industry, still see only something like an 8.3 per cent discount.
What I’d like to see is a price reduction for hospitality businesses in the range of 25 per cent to 35 per cent.
If that seems too generous, consider the profit margins of Ontario’s importer/distributor/retailer. Last year, the LCBO netted $2.5 billion in profit from $7.4 billion in sales. That’s 33.7 per cent profit. By comparison, Ontario’s food and accommodation sector grossed 14.3 billion, with profit margins in the restaurant industry averaging 4 per cent. And that’s pre-pandemic, when Restaurants Canada estimated that 12 per cent of restaurants were losing money. Now the number is more than half.
The defence of the LCBO’s stranglehold on alcohol retailing is that revenue collected by the province goes to build roads, schools, and hospitals (though its origins are rooted more in puritanical concern about consumption). But I don’t see that justifying its inflated pricing.
And there’s a return on investment for giving up those higher sales. An increased restaurant profit margin means a higher net income for the government to tax. With better pricing on one of a restaurant’s primary costs, there could actually be enough profit margin in the industry to pay workers fairly. But the biggest, most obvious benefit is enabling businesses to not just survive, but thrive.
As long as Ontario is willing to open up discussions of how alcohol is sold, let’s talk about what would make the biggest impact on an industry that generates 1.7 per cent of Ontario’s GDP, yet employs 11.2 per cent of the workforce. Making this sector more resilient would have a knock-on benefit on so many lives.
Everyone gets a price break when buying in bulk. Why won’t Ontario give one to restaurants?
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