AMERICAN ASSOCIATION OF WINE ECONOMISTS AAWE WORKING PAPER No. 222 Business CONCENTRATED OR COMPETITIVE? AN OVERVIEW OF THE WINE INDUSTRY IN BRITISH COLUMBIA, 2011-2015 Katarzyna Pankowska Dec 2017 www.wine-economics.org AAWE Working Papers are circulated for discussion and comment purposes. They have not been subject to a peer review process. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the American Association of Wine Economists AAWE. © 2017 by the author(s). All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Concentrated or Competitive? An Overview of the Wine Industry in British Columbia, 2011-20151 Katarzyna (Kate) Pankowska Faculty of Land and Food Systems Food and Resource Economics Group The University of British Columbia 2357 Main Mall, Vancouver, BC V6T 1Z4 Email: [email protected] Phone: +1 604.440.4548 1. Introduction The fact that Canada domestically grows Vitis vinifera and produces various types of table wines may still come to some as a surprise, yet it is true. The geographic location and common association of Canada with a cold climate, the relatively small size of the Canadian wine industry (especially in comparison to wine giants like France or the United States (US), for example) are the main reasons why the industry still lacks international exposure. Because of that, to the average wine consumer in the world, Canada still is not known as being able to grow vinifera and supply domestically made table wines. If anybody in the world happens to know that Canada produces wines, it is usually because of ice wines. Canadian ice wines remain the most frequently recognized in the world as being Canadian-made and associated with Canada (Canadian Vintners Association Website statistics accessed on December 5, 2016: http://www.canadianvintners.com/info-centre/wine-statistics/). Regardless of this still rather low level of world recognition for Canada-made wines, the Canadian wine industry shows a dynamic growth. The most recent, comprehensive wine industry economic study, "The economic impact of the wine and grape industry in Canada, 2015" prepared by A Frank, Rimerman + Co. LLP and published in March 2017, estimated the full economic impact of the wine and grape industry in Canada in the 1 Special thanks go to Sumeet Gulati (LFS/UBC) and James Vercammen (LFS/UBC), my two dedicated Ph.D. co-supervisors. They provided me with many useful comments and guidance. 1 year 2015 to be about CAD 9.04 billion. The report shows that the full economic impact of the wine and grape industry in Ontario, the biggest wine-producing Canadian province, was at the level of about CAD 4.4 billion. In the same year, in BC the economic impact reached about CAD 2.8 billion (Frank, Rimerman + Co. LLP, 2017). In comparison to total world wine production, the production volume of Canadian wines remains insignificant, and Canada is considered a small wine producer, with total production volume accounting for about 0.5% of all world wine production of about 28.2 billion litres. Regarding exports to the global marketplace, in 2015 Canada exported about 72.9 million litres of wine valued at about CAD 73.9 million, with premium wine (non-bulk) maintaining about 1.8 million litres of the total volume, valued at CAD 32.8 million. This was a significant increase in the volume of wine exports from past years, with a 237% increase between 2011 and 2015, as well as in the value of exports, which increased by 101% over the same period. Regardless of this growth in wine exports, Canada is still only ranked as the 27th biggest wine exporter in the world (by value of wine exports) (Canadian Vintners Association Website accessed on December 5, 2016: http://www.canadianvintners.com/info-centre/wine-statistics/). Six Canadian provinces produce wine: Ontario, British Columbia, Quebec, Nova Scotia, New Brunswick and Prince Edward Island. Traditionally the highest volumes are generated in Ontario. British Columbia is Canada's second biggest wine-producing region. Currently, Canadian winemaking provinces show no specialization in any specific wine or grape variety. This lack of specialization and the practice of producing comparatively low volumes of numerous wine types make Canadian wine production dispersed, negatively influencing international recognition of Canada as a wine- producing country.2 2 Canada remains a wine-producing country with no specialization in specific wines based on grape type like Malbec, for example, that is a crown grape/wine type associated with Mendoza in Argentina. The Canadian wine production approach is frequently called a “fruit salad” approach, where many different wineries produce many different wine types. The Canadian wine regions do not specialize in the cultivation of any particular grape variety. This fact negatively influences recognition of Canadian wines and the Canadian wine regions in export markets. Nevertheless, some BC wine industry members claim that such an approach is better for the BC wine industry in mitigating risks associated with the specialization that 2 2. Liquor policies in Canada Canadian liquor laws are multidimensional and complex. Because of the Canadian national organization, with federal and provincial governments that jointly govern in each province or territory, Canadian liquor policies are geographically heterogeneous. While each of the Canadian provinces or territories is left with autonomy for the organization of its internal management of liquor distribution and development of regionally specific alcohol policies, at the national level, federal laws bind all Canadian regions. Regarding jurisdiction that overlooks all alcohol related issues like liquor control, distribution and sales, each of the 13 Canadian provinces and territories have a liquor board or commission. The regional differences in Canadian liquor laws can be profound and significantly influence the level of board or commission's engagement in alcohol management within each province. Alberta, for example, has a fully privatized liquor industry and the sole role of the AGLC is to regulate the manufacture, importation, sale, purchase, possession, storage, transportation, and consumption of liquor in the province, oversee the industry and collect markup from alcohol sales. In Alberta, privately owned retail stores and licensed premises are in charge of all retail alcohol sales. British Columbia in turn, has a mixed private-public liquor distribution model with the BCLDB being a sole purchaser of alcohol within BC and from outside the province, by the federal Importation of Intoxicating Liquors Act (BCLDB Website accessed on April 1, 2017: http://www.bcldb.com/about/who-we-are) 2.1. Liquor policies in British Columbia All alcohol produced and sold in the province of BC must comply with numerous federal and BC specific policies. At the national level, the Importation of Intoxicating Liquors Act contains the primary liquor rules.3 Other federal laws concerning wine include the could negatively influence the survival rate of wineries in situations when there is a drop in prices for a particular wine type, for example. 3Source: https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-3/latest/rsc-1985-c-i-3.html accessed on December 5, 2016. 3 Canada Agricultural Products Act,4 Consumer Packaging and Labelling Act,5 Food and Drugs Act (Food and Drugs Regulations Part B-Alcoholic Beverages).6 The BC Liquor Distribution Act additionally enforces federal liquor laws. This act, together with the Importation of Intoxicating Liquors Act, outlines the BCLDB's mandate. The BC Liquor Distribution Act gives the BCLDB an exclusive right to purchase liquor for resale and reuse in the province of BC. This fact makes the BCLDB one of the biggest alcohol purchasers in the world. Besides being the sole buyer and reseller of all liquor in BC, the BCLDB also runs its own liquor stores, BC Liquor Stores (as of April 2017, there were 198 stores in the province).7 Therefore, the BCLDB also remains one of the biggest liquor retailers in BC. The BCLDB is responsible for reporting all liquor sales in the province. All alcohol producers and sellers, including all wine producers are required by law to report their direct sales information to the BCLDB.8 2.2. Liquor wholesale pricing in BC up to April 1, 2015 Before April 2015 wine wholesale prices in BC were based on a formula where the retail price of wine, as seen in the government run liquor stores constituted a basis for the wholesale price formation. The official BCLDB markup method at that time included a 117% of markup on the first CAD 10.25 of the wholesale cost of wine plus 51% of markup on the remaining value. From that wine price, various retailers received different levels of discounts. In British Columbia, five classes of wine retailers were getting the following discounts off the government-run liquor stores’ retail price: 1. Independent wine stores: 30% discount off the LDB display price, 2. Private liquor stores: 16 % discount off the LDB display price, 3. Rural agency stores: 10 % discount off the LDB display price, 4. VQA wine stores: 30% discount off the LDB display price, 4Source: http://laws-lois.justice.gc.ca/eng/acts/C-0.4/), accessed on 5, December 2016. 5Source: http://laws-lois.justice.gc.ca/eng/acts/C-38/index.html), accessed on 5, December 2016. 6 Source:http://laws-lois.justice.gc.ca/eng/regulations/C.R.C.,_c._870/page-160.html#s-B.16.100), accessed on December 5, 2016. 7Source: http://m.bcliquorstores.com/m/stores), accessed on 5, December 2016. 8Since 2013, the Direct Sales Web-Reporting (DSWR) –Internet based reporting is being used.