The Ford government is expecting the LCBO to lose hundreds of millions of dollars in the short term after a turbulent strike over the summer and its decision to increase the number of private alcohol retailers but hopes an overhaul to its wholesale and delivery network to lead to higher revenues eventually.
Earlier in the year, the province announced it was earmarking $225 million for The Beer Store to break its exclusive retail contract early and move alcohol into convenience, grocery and big box stores in 2024. The move meant as many as 8,500 new alcohol retailers across Ontario.
The province for months remained tight-lipped on how much the LCBO could stand to lose from the deal, a number that opposition parties speculated could be hundreds of millions.
New figures revealed in the fall economic statement on Wednesday show the short-term costs will be painful for the LCBO. A shakeup of how booze is sold to wholesalers, however, that will give the LCBO an effective monopoly is slated to make up for those losses soon.
“The Ontario government is delivering on its commitment to expand the province’s beverage alcohol marketplace to increase choice and convenience for shoppers earlier than planned,” the government wrote in its fall economic statement.
Cost of the strike and liberalization
The government’s decision to move alcohol into corner stores, as the LCBO was in the midst of a tense negotiation with its unionized workers, sparked a long strike at the beginning of the summer.
Workers at LCBO stores walked off the job in early July, claiming that allowing convenience stores to sell ready-to-drink beverages would lead to store closures and ultimately job losses.
The strike lasted more than two weeks and resulted in a promise from the LCBO to keep all stores open, even if revenues flatlined.
The government’s figures released Wednesday show that having provincial alcohol stores closed for so long had a significant impact on its revenues. Over the period of the strike, the LCBO lost a total of $102 million, with the resulting agreement for higher wages having knock-on effects in future years.
The government also said the cost of retail expansion — a definition it didn’t offer a breakdown of — will be $99 million this year and $80 million next year. That retail expansion, which includes new roles for the LCBO in delivery, will result in increased revenue of $267 million the year after.
The government’s “baseline” projection has been revised down for this year and the two that follow as well. It is set to be $86 million lower this year, $175 million lower next year and $171 million the year that follows.
Overall, the Crown corporation is expecting $2.16 billion in net income this year — down $286 million from its original expectation; it will see $2.32 billion in revenue next year — a drop of $254 million; and is expecting to net $2.65 billion the year after — up by $96 million on previous projections.
Officials with the Ministry of Finance could not say how much they expect the LCBO’s physical retail stores to lose as a result of the convenience store changes.
An expansion opportunity
The expansion of private alcohol sales in Ontario has led to a shift in strategy at the LCBO, moving to operate an even wider network of alcohol delivery services as it shifts to becoming the exclusive wholesaler for the entire province.
That move, the government currently projects, will see the LCBO overcome the short-term pain of losing retail traffic to its stores from the expansion of private sales and thrive as the ultimate point of sale for all booze.
By 2027, the province expects revenue from the LCBO to sit at $8.5 billion — $800 million higher than the government was projecting before, even with lower consumption.
“This increase is primarily driven by the LCBO’s expanded role as a wholesaler in the new alcohol marketplace, in addition to its continued role as a retailer, partly offset by the impacts of consumption trends,” the fall economic statement explained.
“It is anticipated that the government’s approach to enhance choice and convenience through alcohol marketplace expansion will continue to strengthen the LCBO’s future in the expanded marketplace.”
The LCBO is currently responsible for 51.2 per cent of alcohol sold in Ontario by litre — with the Beer Store at 41.1 per cent, according to the province.
With the expanded wholesale plan, by 2027, the government is projecting the LCBO will be responsible in some way for 77.1 per cent of the market and the Beer Store 15 per cent. In both scenarios, “other producers” are responsible for just under eight per cent.
The expansion to the LCBO’s network, however, has caused frustration for one alcohol delivery company that is currently suing the Crown agency over a separate concern about a private warehouse plan and has accused it of creating a monopoly.
A lawyer representing Phyxiat, an Ontario courier, previously told Global News the convenience and grocery store program and move for the LCBO to become the exclusive wholesaler for bars and restaurants have made it impossible for couriers not picked by the Crown corporation to compete.
The original system meant that wineries or breweries could send their products to convenience stores or other locations using a courier of their choice, someone they would also rely on to deliver to restaurants. Over the summer, producers were apparently told they would have to rely on the LCBO and the Beer Store to ship their products, not a courier they selected.
Damien Buntsma, a lawyer working for Phyxiat, alleged the change was about reducing the number of couriers in Ontario’s alcohol ecosystem.
“What has happened is the LCBO has communicated directly with their clients and third parties that they must enter into essentially agreements directly with the LCBO which will then cut Phyxiat right out of the system — they will no longer be able to operate,” he said.
The LCBO previously told Global News that “several supplying sources” deliver products for the LCBO and convenience stores. It did not directly address questions about changes to the delivery rules.
“If products are supplied by the LCBO, products are delivered using one of our contracted delivery partners, which have been selected through a competitive and transparent procurement process,” the LCBO said.
Finance Minister Peter Bethlenfalvy declined to comment, citing parts of the disagreement that remain before the courts.