BC Liquor Model Pushes Prices Higher

Worth A Look, Role of Government, Frontier Centre

It shouldn’t surprise anyone that prices for some alcoholic beverages will be higher in private liquor stores than in government-owned B.C. liquor stores. The provincial government’s half-hearted and ultimately counterproductive approach to competition in 2002 botched the chance for wide-open retail rivalries and thus for lower prices.

The model it went with — keep the government stores, limit the new private entrants, forget allowing grocery stores in, regulate prices — guaranteed the present situation.

Just as bad, the two-headed beast the government helped solidify in 2002 means consumers now face two sectors, and neither one has an incentive to compete. For example, the recent increase in the number of private liquor stores results from a brief window. From 2002 until 2004, new store applications were accepted by the province. But that breath of fresh air was closed and won’t open again until at least 2008.

Normally, more stores should equal more competition. One reason that has not happened yet is because of the province’s regulation that forbids private stores from selling for less than their wholesale costs (13 per cent below retail price in government stores).

It would be tough for them to beat the government’s retail prices with that margin, but even if a private store wants to lose money and cut prices to move old product or introduce a loss-leader, the government’s message is: Forget it. Also, without that regulation, consumers might obtain lower prices at, say, a winery store with its own product.

Another reason there is no downward competition on price is because neither the government stores nor private ones have any incentive to compete seriously. In fact, the incentives all run in the other direction. B.C.’s model actually prevents competition on all the factors that help lower prices.

There are about 1,200 liquor outlets in B.C. Just over 200 of those are government stores. Government liquor stores are staffed by public-sector unions fiercely opposed to privatization. Put another way, they don’t want pressure put on their “profit margin,” i.e., wages.

Similarly, existing private liquor stores don’t want cuts in their profit margins. That’s why private liquor is utterly opposed to new market entrants — some new store down the block or some big-box outlet selling cheap beer.

The province’s policies have created a private-sector cartel where stores compete to gain customers but lobby politicians to keep out new competitors.

Then there’s the government cartel that captures 62.5 per cent of the cash rung up for over-the-counter liquor sales and has its own self-preserving lobby – a public-sector union. (Side note: If one chain in any industry in the private sector captured 62.5 per cent of all sales, governments would break up that quasi-monopoly in a heartbeat.)

In contrast, in Alberta, more than 1,100 private stores constantly compete with each other, the biggest chains (which possess only several dozen stores), and new market entrants.

Price competition in Alberta is helped by grocery stores such as B.C.-owned Save-On-Foods and Calgary-based Superstore, which also run liquor-store chains.

Alberta’s government allows the food giants to sell wine, beer and spirits provided the liquor store is completely separate from the main store. That regulation prevents full efficiencies on use of floor space and staff but it beats B.C.’s two-headed cartel model. In another example, in Washington state, stores simply put the beer, wine and spirits on the shelf. That’s also superior to British Columbia’s non-competition version.

There’s plenty of myth-making about full privatization, such as how governments would lose tax revenues. Wrong. Alberta privatized all liquor outlets in 1993 and has since reaped $5.7 billion in revenues. The Alberta government still applies its liquor mark-ups and other taxes; it just does not run retail stores.

It’s not difficult to achieve a fully competitive market in British Columbia.

First, the government should close its own stores or offer to sell them to existing government employees to ease the transition.

Second, would-be liquor store operators should be allowed into the market providing they meet basic regulatory requirements. But there should be no limit on the number of new stores. Let consumers decide which ones will survive. It’s not government’s job to pick retail favorites. Governments don’t decide who makes it in the grocery or video store sector by preventing new competition.

Third, cut liquor taxes. In a fully competitive private market — i.e., where there is downward pressure on price — that move guarantees consumers save money. It will also blunt the predictable complaints from existing private liquor stores.

It would put more money in the pockets of consumers and businesses alike. And for everyone except those who like a cartel, that’s positive.