Craft brewers turn to LCBO, pubs to get their beer in glasses

Craft breweries often look to pubs instead of government retailers. to get their beer to consumers. THE CANADIAN PRESS IMAGES/Francis Vachon

Jeffrey Dornan dove into the world of craft brewing in July 2014 when he and his brother Eric opened Underdogs Brewhouse in Oshawa, Ont.

Dornan, like many small craft brewers, is an underdog in the beer industry – up against other craft brewers opening by the day, limited shelf space in government retailers, and the difficulty of getting into Ontario’s Beer Store.

Craft brewers, like the boxers featured on the Underdogs case, are beginning to punch above their weight. But depending on what part of the country they’re in, the battle differs.

Craft beer in North America

A hundred years ago, craft or micro-breweries made up the beer market and many small communities had their own brewery. Prohibition, however, crippled smaller breweries and many died out.

Craft brewing made a comeback in the United States in the 1990s – and it continues to grow, with 409 new breweries opening in 2012 alone.

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Meanwhile, the Canadian market limped behind. Arguably Canada’s first craft brewery, Horseshoe Bay Brewing opened in Vancouver in 1982. Since then, British Columbia has led the Canadian industry. Sales from craft breweries in the province more than doubled from 2009 to 2013.

Despite craft brewing’s success in recent years it’s still more niche than mainstream. B.C.’s 81 craft breweries account for 19 per cent of sales – meanwhile, six large brewers account for the remaining 81 per cent.

“Who’s mainstream? Come on. We’ve got a long way to go before craft would be considered mainstream in my mind,” said Tim Barnes vice president of marketing and sales for B.C.’s Central City Brewing.

B.C. leads the charge

Barnes says part of craft’s growth in the province is the proximity to Portland and Washington where craft brewing is hugely popular.

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The province also uses a hybrid system where both government and private retailers sell beer.

“You still have a very powerful buyer, because they [British Columbia’s Liquor Distribution Branch] can decide whether or not it goes on the shelf in the B.C. liquor stores or not,” Barnes said.

“But they don’t make a decision on whether your product is registered, meaning you can sell it to the private channel all day long in B.C. and be successful doing that.”

Central City Brewing started as a brewpub in Surrey in 2003 and expanded quickly.

“We quickly realized that our beer was more popular than our pub,” he said.

Central City started packaging their products, like Red Racer IPA, and selling it in liquor stores across the province.

There are 197 government-run liquor stores in B.C. and 741 private stores which, in terms of volume, split beer sales in the province. Ideally, brewers want to be in both; the more eyeballs on their product, the more opportunities for it to sell. But it’s not necessary to be in the government stores to find success, Barnes said, because of the sheer number of private outlets.

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READ MORE: NDP says the price of craft beer in B.C. is going up

“Breweries like Mill Street for example, who are very successful in Ontario have not really been successful in the B.C. liquor store listing… but they are selling a lot of beer in the private channel and they’re being quite successful doing it,” Barnes said.

Ontario: ‘By definition, the market structure limits the growth’

As Barnes’ company grew, he began looking for new markets, including Ontario – Canada’s most populous province and thus biggest market for new customers.

But, “the Ontario market and the B.C. market are very different,” he said.

It’s more difficult for craft brewers to compete against larger brands in Ontario; the larger brands own The Beer Store where most beer is sold and give their brands more shelf space.

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The Liquor Control Board of Ontario (LCBO) has been saddled with the job of selling craft beer because of the monopolistic nature of The Beer Store and the hesitation from craft brewers to pay their competitors.

“For Ontario, everything goes through the LCBO, unless you want to write a big, fat cheque to [The Beer Store].”

“Philosophically, I got to tell you, it hurt to write that cheque, because we know where that cheque’s going, that cheque is going to InBev, Molson-Coors and Sleeman,” Barnes said.

“It’s a very closed market, meaning you really have the LCBO – one buyer – and the head of beer and spirits really making the decision on whether or not your beer is coming in.”

The LCBO has been successful but is limited by shelf space.

“To be fair to the LCBO, they can’t afford to bring in a lot more products, they just don’t have room on their shelves,” Barnes said. “So by definition, the market structure limits the growth the way it’s set up right now.”

Getting into The Beer Store

The Beer Store study finds prices of beer will increase if they are sold in corner stores. The Canadian Press

Ontario’s Beer Store is owned by three large, multinational brewing corporations and has exclusive rights to almost all of the beer sales in the province.

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Until a few months ago, it had been willing to list any product almost immediately for a fee that was estimated to be more than $50,000 per product in 2013. Now, in the wake of the Ed Clark report on modernizing beer retail in Ontario, The Beer Store is offering a number of listings to Ontario craft brewers for free — partially opening up the market to its competitors.

Jeff Newton, president and CEO of the Brewers Association of Canada which operates The Beer Store, refused to be interviewed for this story. But he did send a lengthy statement touting some of the changes the retailer has made in recent months to open up the store to small brewers.

READ MORE: Ontario craft brewers skeptical about new deal with the Beer Store

The changes include: allowing small brewers to become shareholders, appointing four independent board members, and creating an ombudsman within the retailer. The Beer Store will also dedicate 20 per cent of its shelf space to craft breweries and waive the listing cost for two products at five locations close to the brewery.

While the changes could help the province’s craft brewers, the co-founder of one of Ontario’s oldest craft breweries describes them as a “plastic olive branch.”

“We’re cautiously optimistic that we’ll see some positive change there, but at the end of the day it’s still a system that’s controlled by three foreign breweries,” said Gary McMullen, co-founder of Muskoka Brewery.

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Muskoka Brewery is one of Ontario’s oldest and most successful craft breweries. It opened in 1996 but didn’t enter into The Beer Store until 2000.

“Quite honestly, we couldn’t afford the listing fees in the [Beer Store]. So in the first three years of business we didn’t sell in The Beer Store at all,” said McMullen.

He said some of the changes – like free listing at a handful of local stores – will help small breweries but won’t make it easier for those trying to expand further.

“For a really small company yeah that will be helpful, it’ll save you a few thousand dollars, but if you want to list your products in a few hundred stores, and really want to hit critical mass, you’re still going to be into $60,000 or $70,000 per stock keeping unit.”

Underdogs Brewery is one of dozens of new breweries to open in recent years. James Armstrong / Global News

Dornan and his Underdogs Brewery, however, are taking advantage of the changes at The Beer Store.

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“For a small brewer like us, it really helps us get some access without having to pay some of the fees that, you know, could hold people back,” Dornan said.

“The Beer Store sells something like between 70 and 80 per cent of all beer in the province of Ontario, so if the majority of the beer sold there, you want to be there to see what happens.”

Dornan’s beers will be found in nine stores at first – in Toronto’s Distillery District and Liberty Village, six in the Durham region, two in Ajax, and one in Pickering, Brooklyn, and Bowmanville.

The stores are all self-serve and that was a conscious decision for Dornan. Beer for years had traditionally been kept in the backroom of Ontario Beer Stores, effectively keeping product hidden from customers.

“We wanted to look at their stores that are what we call self-serve, so those are the stores that you can see all the beers, versus the store where there’s a wall. We don’t buy any stores where there’s a wall,” he said.

“Because if you don’t know the name of my beer, you’re not going to walk in and potentially stumble upon it.”

The importance of the pub

For Central City Brewing in B.C., tapping into the taps at restaurants led to an “almost overnight” increase in retail sales.

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“As soon as we introduce draught, our retail numbers went up,” Barnes said.

“It was amazing, it was almost overnight.”

According to the Ontario Craft Brewers Association, craft beer accounted for $250 million in sales in 2013. A “substantial amount” of that come from smaller licensees like independent bars and pubs.

The B.C.-based brewery recently hired a salesman to get their beer on tap across Toronto – not only for the increase in retail sales, but for what it does to brand awareness as well.

“That’s where beer started and it’s still the roots of beer. So you go to the pub, you enjoy a nice, tall glass of draught. That experience, I still think, is the best way to enjoy beer. And I think a lot of people do feel that way.”

“The majority of our business is in package, there’s no question, we sell a lot more beer in package then we do on draught, in terms of volume and profit and all that stuff. But in terms of what it does for the brand and for people to actually experience it, I think it’s really, really important.”

But, Barnes knows selling beer in pubs alone won’t help his business thrive, which is why he wanted to expand into The Beer Store and the LCBO.

“It’s one of those things where because we didn’t have retail presence, people didn’t necessarily know about us. And then, it’s chicken and egg, you’re not at retail, people don’t know about you, but if you’re not at the bar, people don’t know about you.”

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Correction: This story was updated on June 18, 2015 to correct the listed SKU price at the Beer Store, which is actually closer to $50,000. 

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