ECONOMIC IMPACT STUDY OF THE PRIVATE WINE AND SPECIALTY STORE PROGRAM

Transcription

1 ECONOMIC IMPACT STUDY OF THE PRIVATE WINE AND SPECIALTY STORE PROGRAM NSLC TENDER NO: SR-16-I-06 Submitted to: Nova Scotia Liquor Corporation Submitted by: Consulting Economists Ltd April, 2007

2 TABLE OF CONTENTS Page Executive Summary...i I. Study Context Study Background Study Objective Study Reqiurements... 1 II. Methodology Review of Available Data and alternative Models Interviews with Key Stakeholders Preparation of Direct Expenditure Profiles Determine and Interpret Economic Impact Estimates... 4 III. Private wine and speciality store Program Overview PWSS Program Background PWSS Program Design Program Management/Operation... 6 IV. Economic Impact of PWSS Program Assumptions Economic Impacts of Private Wine Stores Incrementality V. Review of Alternative Models Alberta s Private Wine Store Model British Columbia Ontario Quebec Manitoba and Sasketchewan Australia New Zealand United Kingdom VI. Analysis of NSLC PWSS Model Impacts of Current Supply Chain NSLC Pricing Model Benefits/Costs for Food and Hospitality Sector Impact on Local Wineries Expanding the PWSS Lessons Learned VII. Recommendations Continuation of the PWSS Program Changes to the PWSS Stocking Model Changes to the NSLC Pricing Model Expanding the PWSS Program... 50

3 Executive Summary STUDY BACKGROUND The Nova Scotia Liquor Corporation (NSLC) is Canada s fourth largest retailer of beverage alcohol with more than 100 retail stores, 23 agencies and 2,200 licensees. The NSLC implemented a Private Wine and Specialty Store (PWSS) Program in 2003 in response to direction from government. Four PWSS operations began operation in the HRM area in 2003 as part of a program designed to offer the consumer enhanced service and choice. As the end of the initial 5-year term of the operating agreements is approaching, the Province of Nova Scotia requires recommendations from the NSLC as to whether the program should be expanded, remain the same, or be terminated. STUDY OBJECTIVE The key objective of the study is to determine the economic impacts arising from the PWSS Program, and identification of the potential impacts resulting from public policy measures to either expand or terminate the program. This study conducts an Economic Impact Analysis (EIA), using the Nova Scotia Input/Output (I/O) Model, to determine the economic impacts of the PWSS Program based on the economic results to date. In addition, this study also examines the impacts resulting from limited expansion of the PWSS Program, based on likely markets where such outlets may be feasible, as well as the possibility of termination of the program. Recommendations on the optimal future of the PWSS Program are presented based on this analysis. STUDY REQUIREMENTS This study examines the economic impacts within the Province of Nova Scotia as a whole, given that the PWSS Program, while concentrated in the HRM area, has the potential to spread to other areas of the province should a decision be taken to expand the program. The following issues are examined to the extent that data and economic modeling tools allow: Impact of the use of the NSLC supply chain on the program; Impacts of changes to the PWSS pricing model in enhancing the success of the program; Potential benefits and costs to NS wine industry; Potential impact of each scenario upon the existing PWSS operators; Barriers, risks, and opportunities arising from each scenario; Potential benefits and costs to the retail sector; and Potential benefits and costs to the food and hospitality industry; METHODOLOGY Review of Data and Alternative Models This study conducted a review of all relevant documentation obtained from NSLC related to the PWSS as well as documentation obtained in our literature review. Collection of qualitative and quantitative data includes an extensive review of PWSS Program documentation, including the 2002 Request for Proposals, proposals submitted by each of the four successful proponents, the PWSS Operating Agreement, the PWSS Operating Manual, and subsequent reports and studies conducted. In addition, the review of relevant literature on pricing and supply models used within Canada and elsewhere has served to guide the review of alternative approaches for the PWSS Program in the future. Interviews With Key Stakeholders Stakeholder interviews were conducted with private wine store owners/operators, agents, licencees, Nova Scotia wineries, and union representatives. Interviews were conducted with key stakeholders identified by the NSLC and on suggestion from the operators. Information provided through this interview process, along with the review of current pricing and supply models were essential in developing an appropriate approach to measure economic impacts and in developing recommendations for the general direction for the PWSS Program. The interviews also provided specific data and information required for the appropriate measurement of direct expenditures used to estimate economic impacts, as well as developing the profile of direct expenditure patterns associated with the PWSS Program. Determine Economic Impact Estimates Economic impacts are determined by analyzing the direct linkages within the Halifax and Nova Scotia economy and assigning direct expenditures to appropriate industry sectors. Total direct, indirect and induced GDP, employment and tax impacts are estimated based i

4 ii Economic Impact Assessment of PWSS Program on the direct expenditures of the PWSS Program. The results include direct, indirect and induced economic impacts. The economic impact results are derived from the Nova Scotia I-O Model and presented in a series of summary tables ECONOMIC IMPACT OF PWSS PROGRAM The economic impacts of the PWSS Program are based on the capital investment, direct employment, annual operations, and direct expenditures of the four private wine stores in Nova Scotia. These numbers were formatted into the Nova Scotia I-O Model and the I-O simulations were run by the Economics and Statistics Division of the Nova Scotia Department of Finance. Economic Impacts of Private Wine Stores The direct expenditures of the four private wine stores include capital investment, and annual operations and expenditures. The total employment impacts of the four private wine stores range from 35 person years in 2003 to 52 person years in The total employment impacts are comprised of the total direct employment impacts (ranging from 15 person years in 2003 to 34 person years in 2006) and total spin-off employment impacts (ranging from 20 person years in 2003 to 18 person years in 2006). The total household income impacts of the four private wine stores range from $1.18 million in 2003 to $1.4 million in The total household income impacts are comprised of the total direct household income impacts (ranging from $0.5 million in 2003 to $0.7 million in 2006) and total spin-off household income impacts (ranging from $0.7 million in 2003 to $0.8 million in 2005). Total tax revenue impacts of the four private wine stores range from $109 thousand in 2003 to $140 thousand in Tax revenue impacts are comprised of total direct provincial government revenue impacts (ranging from $38 thousand in 2003 to $53 thousand in 2006) and spin-off tax revenue impacts ($71 thousand in 2003 to $87 thousand in 2005 and $76 thousand in 2006). Incrementality The magnitude of the economic impacts resulting from the private wine store operations in Nova Scotia depends on the extent to which the expenditures made by these operations would have happened in their absence. One of the key drivers in the incrementality issue is whether consumer expenditures on wine from the private wine stores is incremental to that which would have occurred otherwise. Studies have shown that the consumption of wine increases with increased variety and privatization of wine sales. The effect of availability change in wine consumption has been extensively investigated in a number of cases of privatization, and it has consistently found that privatization is followed by a substantial increase in the consumption of the beverage privatized. Most studies examining changes in the level of privatization in wine sales have shown increased consumption, with some as high as 95 percent. Current data shows per capita wine consumption in Nova Scotia has increased since the establishment of the Nova Scotia private wine stores, both in dollar terms and in volume. The growth in per capita wine consumption in Nova Scotia has been larger than the overall increase in Canadian per capita wine consumption over this period. However, while there has been an increase in consumer awareness and consumption of wines in Nova Scotia, it is difficult to definitively measure the percent increase in consumer consumption of wines directly attributable to the establishment of the PWSS Program within the confines of this study. The issue of incrementality becomes further complicated when one considers that the true economic impacts associated with the PWSS Program would include, not only incremental wine purchases made at the private wine stores themselves, but incremental wine purchases made at restaurants, bars and events, as well as through the NSLC outlets, due to an increased knowledge, awareness and appreciation of wines in general, attributable to both the products and services offered by the private wine stores as well as the increased emphasis being placed on this product category by the NSLC. A more detailed analysis is required to identify a precise determinant of the incremental economic impacts resulting from the PWSS Program. RECOMMENDATIONS 1. Continuation of The PWSS Program The analysis undertaken in this study suggests that the PWSS Program has been successful in achieving the objectives laid out in its original mandate in generating increased consumer

5 Economic Impact Assessment of NSLC PWSS Program iii awareness and consumption of wines. Consumers have been exposed to a broader selection of products, increased staff knowledge and training in wines, increased selection of wines through restaurants and other licencees, as well as an increased exposure through on-site wine tasting, and this has served to increase consumer awareness and knowledge of wines. Recommendation #1: The PWSS Program has addressed the market need for increased selection of wines identified in previous studies and should be continued in Nova Scotia. The analysis conducted in this study indicates a substantial increase in per capita wine consumption in Nova Scotia. While it is not possible to determine with certainty what proportion of this increase is attributable to the PWSS Program, the economic impact analysis carried out in this report suggests that this increase is at least due in part to the establishment of the PWSS Program. 2. Changes To The PWSS Stocking Model Time lags associated with consolidation of shipments for the (relatively small) Nova Scotia market result in the private wine stores engaging in inventory warehousing to cover their individual share of market demand. As a result, inventory levels for the private wine stores are many times what would be required if products were available on a more frequent shipment basis. In addition, this makes it difficult for the private wine stores to take a chance on introducing new products to the market. Developing a viable inventory management program for the Nova Scotia PWSS Program would go a long way in allowing the PWSS to operate successfully and would eliminate a significant barrier to success for the private wine stores. Recommendation #2: Consideration should be given to developing a viable inventory management program for the Nova Scotia PWSS Program With the streamlining NSLC s business processes, an alternative process for fulfilling PWSS requirements is being explored by NSLC. Partial sales order stock not be used to fulfill other orders would be warehoused. Warehousing free of charge represents a cost to NSLC. The PWSS should expect that the NSLC would charge inventory storage in the future. However, it should also be expected that NSLC would develop and maintain an improved inventory management system for the PWSS Program and that inventory storage charges reflect reasonable charges (average industry charges) for this service. Another option that could alleviate the problem of high inventory levels is the development of a third party regional warehousing depot (third party warehousing depot for the three Maritime provinces or four Atlantic provinces.) in a central location. The advantage of a regional warehousing depot is the gain in economies of scale and the reduction in the shipment time lags associated with consolidated shipping due to a larger market being serviced. Moving to a regional warehousing depot would also result in improvements in scheduling forecasts for shipments and monitoring order flows. Recommendation #3: Consideration should be given to a third party regional warehousing depot to gain economies of scale associated with servicing a larger market, thereby reducing costs for NSLC. There may be gains to NSLC in achieving greater potential reduced costs due to economies of scale associated with larger shipment orders. The private wine store operations could also benefit from a third party regional warehousing depot due to the cost savings associated with more frequent shipments, greater efficiencies in shipping and transportation, greater inventory turns, ease of scheduling to meet forecasted demand, potentially requiring smaller investment requirements in inventory warehousing. Further research is required to determine whether a third party distribution depot would provide cost savings for NSLC as well as private wine store operation 3. The NSLC Pricing Model The results of the consultations with private wine store operators, agents and NSLC indicates that the time and resources spent checking invoicing for errors is costly and introduces inefficiencies for both for the private wine stores and NSLC. In many cases, corrections in invoicing are required due to errors both on the part of the private wine stores and the NSLC. Our analysis of the current NSLC pricing model indicated that there is room for improvement. Recommendation #4: Consideration should given to a flat-tax pricing model (lump sum dollar amount per litre regardless of country of origin) implemented for the PWSS Program.

6 iv Economic Impact Assessment of PWSS Program One key advantage of a flat-tax pricing model is that it is fully transparent and simple to administer. A flat tax would eliminate separate markups on shipping, exchange, cost of service, and product. The flat-tax pricing model could be designed with four to eight price categories with varied flat rate mark-ups. NSLC would collect a fee as goods are shipped from their warehouse. A flat mark-up also means that any supplier price increase or decrease is passed on to the private wine store operators. Whether this is passed on to consumers for all products, however, depends on the private wine store operators. As experienced in the case of Alberta, as a result of a flat-fee pricing system, there were small increases in prices for some economy wines, however, there were substantial decreases in premium and super premium wines at the other end of the spectrum. The flat-tax pricing would give higher priced products an advantage, with lower prices being passed on to the consumer, which is the product area that the PWSS Program was designed to address. Further analysis of the flat-tax model must be undertaken to fully understand how it would likely work in the Nova Scotia market and whether it should be implemented. 4. Expanding The PWSS Program Our analysis of per capita wine consumption, population, and average incomes by region and municipality within Nova Scotia suggests that potential exists for expanding the PWSS Program. Recommendation #5: The PWSS Program should be expanded to include other regions of the province to address consumer demand The analysis of per capita wine consumption and the location of current NSLC outlets and private wine stores within HRM conducted in this study also suggests, while there may be limited scope for further expansion of NSLC outlets within the HRM, this market may be close to saturated for privately owned wine stores. Evidence indicating the scope for expansion of the PWSS Program outside HRM is based on a comparative analysis of per capita wine consumption across regions and municipalities (based on data available). This comparative analysis provides evidence of large increases in the growth of per capita wine consumption rates in selected municipalities. Further, a comparison of relative average household incomes and age compositions across municipalities also highlights municipalities that may present opportunities for private wine store operations. Successful expansion of the PWSS Program outside of HRM will not only depend on a careful selection of store location (market served) and a strong business model, but also on the capacity of the entrepreneur to invest in inventory warehousing and to develop a solid understanding of industry best business practices. Recommendation #6: Expansion of the PWSS model should include the possibility for both a stand-alone model as well as the current model using the NSLC supply chain. One option for the NSLC to address the costs associated with inventory warehousing and partial sales order stock is to allow the private wine stores to opt for a stand-alone model, sourcing their own wine, cutting their own purchase order, arranging and paying for their own shipping and warehousing, with the NSLC still remaining the importer of record. Private wine stores would need considerable sales volume under this model to maintain quantities required to obtain shipping efficiencies. While the stand-alone model could take advantage of economies of scale, it should not be the only viable option for expansion of the PWSS Program. It is also clear that not every private wine store and boutique operation choose to take on this type of large-scale operation, even in cases where the capital investment required to take advantage of this type of model is in place. Expansion of the PWSS Program offers scope for the development of both a stand-alone private wine store model as well as a small-scale independent model using the NSLC supply chain. A detailed comparative analysis of per capita wine consumption, age composition and average household income, across communities, as well as a financial analysis of operating revenues and expenses of existing PWSS, indicates scope for small independent boutiquestyle wine stores to operate with well-designed business models and supportive customer base. In summary, while there is no one-size-fits-all successful business model for private wine store operations, the successful operation must have a clear understanding of the industry, the customer base, market location, the retail and wholesale environment, the financial requirements for financial success, and an optimal business model designed to meet changing customer needs.

7 I STUDY CONTEXT 1. STUDY BACKGROUND The Nova Scotia Liquor Corporation (NSLC) is Canada s fourth largest retailer of beverage alcohol through the operation of more than 100 retail stores, 23 agencies and 2,200 licensees throughout the province. In 2003 the NSLC implemented a Private Wine and Specialty Store (PWSS) Program in response to direction from government. Four PWSS operations began work in 2003 in the HRM area as part of a program designed to offer the consumer enhanced service and choice. The PWSS stores offer products not normally carried by the NSLC with an emphasis on wine and specialty liquors. The PWSS stores operate under a contract between themselves and the NSLC, with an arrangement for a 5-year initial term and an option for an additional 5-year term. As the end of the initial 5-year term of the operating agreements is currently approaching, the Province of Nova Scotia requires recommendations from the NSLC as to whether the program should be expanded, remain the same, or be terminated. The PWSS operations achieved a range of success, and both PWSS operators and the NSLC encountered a number of issues, particularly in the early stages of the program. Aside from operating issues, the key issue to be determined is whether the PWSS Program has had significant economic impacts, either positive or negative, on the Nova Scotia economy, as well as the extent of the impacts. In that context, it is critical to conduct an Economic Impact Analysis (EIA) to determine the effect of the PWSS Program based on the economic results to date. 2. STUDY OBJECTIVE Specifically, the objective of the study is to determine the economic impact arising from the PWSS Program, and identification of the potential impacts resulting from public policy measures to either expand or terminate the program. It should be noted that the purpose of the study is not to determine economic impacts from an overall privatization of the NSLC, but rather, it is to determine the impacts resulting from the PWSS Program as it currently exists. In addition, this study also examines the impacts resulting from limited expansion of the PWSS Program given likely markets where such outlets may be feasible. This study also examines the possibility of termination of the program and makes recommendations on the optimal future of the PWSS Program. This analysis includes consideration of the resulting impacts, either positive or negative, upon the NSLC as well as the provincial economy as a whole. 3. STUDY REQUIREMENTS This study provides both quantitative and qualitative data to assess the impact of the PWSS Program in the Nova Scotia economy by examining direct, indirect and induced economic impacts for each of the three scenarios considered. This analysis is based on an assessment of the job or payroll creation, economic spin-off, and overall benefit to the provincial economy. 1

8 2 Economic Impact Assessment of PWSS Program This study examines the economic impacts within the Province of Nova Scotia as a whole, given that the PWSS Program, while concentrated in the HRM area, has the potential to be rolled out to other areas of the province should a decision be taken to expand the program. The following issues are examined to the extent that data and economic modeling tools will allow: Potential benefits and costs to the retail sector; Potential benefits and costs to the food and hospitality industry; Impact of use of the NSLC supply chain on the program; Impacts that changes to the PWSS pricing model (or to other aspects of the operational model) might have on enhancing the success of the program; Potential benefits and costs to the Nova Scotia wine industry; Potential impact of each scenario upon the existing PWSS operators and; Barriers, risks, and opportunities arising from each scenario. This study utilizes the Nova Scotia Input/Output (I/O) Model to conduct the EIA. 1 1 A description of the Nova Scotia Economic Impact Model is contained in Appendix A.

9 II. METHODOLOGY 1. REVIEW OF AVAILABLE DATA AND ALTERNATIVE MODELS Following our initial meeting with the Project Steering Committee (PSC), we conducted a review of all relevant documentation obtained from NSLC related to the PWSS as well as documentation obtained in our literature review. An extensive review of these documents was conducted to develop a preliminary assessment of the economic impacts related to the PWSS Program as well as the terms of the agreements between the private wine stores, and other relevant PWSS Program information applicable for this study. Collection of qualitative and quantitative data includes a review of PWSS Program documentation, including the 2002 Request for Proposals, proposals submitted by each of the four successful proponents, the standard PWSS Operating Agreement, the PWSS Operating Manual, and subsequent reports and studies conducted. In addition, the review of relevant literature on pricing and supply models used within Canada and elsewhere has served to guide the review of alternative approaches for the PWSS Program in the future. This review was also required to develop the appropriate discussion guides and survey instruments for the private wine stores, agents, and licencees and in estimating impacts and developing recommendations for future of the PWSS Program. 2. INTERVIEWS WITH KEY STAKEHOLDERS Stakeholder interviews were conducted with private wine store owners/operators, agents, and licencees. One-on-one interviews were conducted with key stakeholders identified by the NSLC and on suggestion from the operators. A total of 25 separate interviews were conducted with PWSS operators, NSLC representatives, liquor agents, union representatives, local wine producers, and licensees. The information provided through this interview process, along with the review of current pricing and supply models were essential steps in developing an appropriate approach to measure economic impacts and in developing recommendations for the general direction for the PWSS Program. The key informant interviews also provided specific data and information required for the appropriate measurement of direct expenditures used to estimate economic impacts, as well as developing the profile of direct expenditure patterns associated with the PWSS Program. 3. PREPARATION OF DIRECT EXPENDITURE PROFILES Following the key informant consultation, tailored follow-up information requests were sent to the private wine stores to collect data on the amount and categories of direct expenditures made and employment generated by the private wine stores. Once this data was received, we the direct expenditure and employment profiles are prepared as input into the Nova Scotia economic impact model. Total direct expenditures are allocated to the appropriate industry sectors to tailor the economic impact estimation in the Nova Scotia Input-Output Model. 3

10 4 Economic Impact Assessment of NSLC PWSS Program 4. DETERMINE AND INTERPRET ECONOMIC IMPACT ESTIMATES Economic impacts are determined by analyzing the direct linkages within the Halifax and the Nova Scotia economies and assigning the direct expenditures to appropriate industry sectors within the Nova Scotia economy. Total direct, indirect and induced GDP, and employment and tax impacts are estimated based on the direct expenditures of the PWSS Program. The economic impact results include direct, indirect and induced economic impacts: Direct impacts are directly attributed to the incremental direct expenditures in the economy; Indirect impacts relate to determining the value that the PWSS Program businesses generate economically for the Nova Scotia economy; Induced impacts are derived from the purchases of employees from the PWSS Program and adjunct industries. The economic impact results are derived from the Nova Scotia I-O Model and presented in a series of summary tables.

11 III. PRIVATE WINE AND SPECIALITY STORE PROGRAM OVERVIEW 1. PWSS PROGRAM BACKGROUND In July 2002 the NSLC launched the PWSS Program with the release of a Request for Proposals that clarified its intent to move forward with the PWSS Program as a means of: Increasing and improving the selection of wine products available to consumers; Creating entrepreneurial opportunities for small business; Defining the business opportunity and high-level program parameters; Inviting proposals from qualified proponents to enter into an Operating Agreement with the NSLC to operate a PWSS within the parameters of the Liquor Control Act and Regulations and the policy and procedural requirements of the NSLC; At the time of the release of the RFP, the NSLC was a young corporation whose direction and vision of its future was not fully defined. As a background to the PWSS Program, in the fall of the year 2000, the government of Nova Scotia articulated a series of decisions including the following: The Liquor Commission would become a Crown Corporation, accountable to a board of directors; Privately operated agency liquor stores would open; Other private stores offering rare wines and more specialty products would be permitted to operate; and New liquor stores could be operated privately or by the Liquor Corporation, depending on individual business case analysis. The passing of Bill 20 in June 2001 effectively revised the Liquor Control Act to establish the new NSLC and enable the implementation of the broader reform package. 2. PWSS PROGRAM DESIGN The PWSS Program was conceived in response to decisions flowing from the review of the NSLC in the year 2000 and as a small part of a much broader reform process intended to revitalize the NSLC. The reform process involved the adoption of a new more flexible, customeroriented approach to managing the liquor business in Nova Scotia under which increased private sector involvement would be permitted and the liquor commission itself would be recreated as a crown corporation with a clear mandate to become a more service-oriented commercial operation. 5

12 6 Economic Impact Assessment of NSLC PWSS Program The primary purpose of the PWSS is to improve customer service by increasing and improving the selection of wine available in the province. The adoption of the PWSS Program reflects a strategy to be responsive to government s year 2000 decisions and to achieve the following broader public policy objectives related to economic development: To permit greater private sector participation in the liquor business; and To create entrepreneurial opportunities for small business. These objectives are implicit in the parameters of the PWSS Program defined in the following documents: The PWSS Request for Proposal released in July, 2002; The standard components of the Private Wine & Specialty Store Operating Agreement; and, The Private Wine & Specialty Store Operating Guidelines. The key components of the PWSS Program are designed to achieve the program objectives by: Establishing private wine and specialty stores; Limiting the products available through the private wine stores to those that would not generally be made available through the NSLC s traditional distribution channels; and Targeting small business/entrepreneurs by explicitly excluding large retailers from participation. The PWSS Program was implicitly designed to manage/limit the proliferation of private stores by limiting the number of private wine stores in the province to a maximum of four and limiting the number of private wine stores that could be operated by any one proponent to one. 3. PROGRAM MANAGEMENT/OPERATION Under the auspices of the program, private operators enter into a five year renewable Operating Agreement with the NSLC under which they pay an annual fee in consideration of which they are permitted to operate a private wine and specialty store to sell an agreed upon product mix consisting of: Unlisted wine products; A limited number of Port of Wines (POW) listed products; and Non-Liquor items. In keeping with the regulatory regime in place to manage the sale of liquor in the province, operators are required to operate in a manner that is consistent with the NSLC s policy and regulation. In addition, the Operating Agreement explicitly requires them to: Locate, maintain and insure their respective properties to meet agreed upon specifications; Purchase all of their beverage alcohol product by case and from the NSLC at an agreed upon discount price; Maintain and securely store their inventory at their sole risk and expense; Sell POW listed products at a price equal to or higher than is available at the POWs; Maintain minimum and maximum hours of operation; Manage their operation within the parameters of NSLC operating guidelines/manual including those specific provisions with respect to social responsibility (social reference pricing, advertising restrictions and sales to minors); and,

13 Economic Impact Assessment of NSLC PWSS Program 7 Submit financial and other reports as required by the NSLC. In the interests of providing private operators with a degree of protection / assurance and flexibility to manage, the Operating Agreement contains provisions to: Prohibit the establishment of another private wine store within a two kilometer radius; Provide NSLC s guarantee; Provide two years exclusivity from the date of application for unlisted product carried by any or all private stores prior to listing that product in an NSLC retail stores; List the product at the highest price charged by a private store for a period of at least two months; Allow private stores to continue to carry and price the product without the restrictions that would otherwise apply to listed products; Permit private operators to negotiate directly with suppliers and agents; and Offer a choice to operators to use NSLC and/or their own inbound freight provided that the product is delivered to the NSLC. With respect to the NSLC, the PWSS Program was clearly designed to service a niche in which the NSLC was traditionally inactive and therefore was under serviced, and to ensure that the NSLC s flexibility to manage the program itself and its broader business interests in the wine market is not restricted in any way either by the program and/or by its relationship with the private wine stores. To that end, the Operating Agreement contains provisions that explicitly: Limit the participation of private operators to areas in which the NSLC was not interested/involved at the time; Reject the notion that operators are agents, legal representatives, partners, subsidiaries, joint ventures, or employees of the NSLC and by extension seeks to protect the NSLC from any real or perceived obligations/liabilities generally associated with such relationships; and Reserve the NSLC s right to: Modify its selling price for listed and unlisted products at its sole discretion provided notice is given; List any previously unlisted product provided notice is given; Review and/or audit all financial and other information it deems necessary; Amend regulations and/or operating guidelines by which the program is governed as it determines appropriate; Locate its retail operations without consideration for proximity to private wine stores; Terminate the Operating Agreement at any time provided notice is given. The program and the Operating Agreement structures position the operators as independent niche businesses and the NSLC as their regulator, wholesaler, and potential competitor. Four successful proponents were identified in The first of the three standard Operating Agreements were signed in January 2003 and the remaining Operating Agreement was signed in March All four private wine stores are currently operating in the Halifax Regional Municipality: Vin Art, Halifax West; Crystall & Luckett Wine Merchants, Bedford; Bishop s Cellar, Halifax Peninsula; and Premier Wine and Spirits Boutique, Halifax Peninsula.

14 8 Economic Impact Assessment of NSLC PWSS Program The operators submit quarterly reports to the NSLC and joint meetings are held periodically at which operators and the NSLC identify and attempt to resolve issues, largely related to administrative and logistic issues that arose through the initial implementation phase. Originally, under the terms of the RFP, operators were to be given regular access to an estimated 250 unlisted products through an Agent Stocking Program under which agents would supply products, which would be held at the NSLC for the use of the NSLC and/or the private operators. Under this program, the NSLC will, in cooperation with the PWSS Operators, manage and provide stocking capacity for inventories ordered on their behalf by the NSLC. In the years since the release of the RFP, revisions have been made to the original operating agreement, including the following: The Agent Stocking Program fell into disuse largely due to a lack of agent participation; The freight component of the pricing model has been marked up; The parameters of the program and the terms of the Agreement have been revised in an effort to offset costs driven by the absence of a viable Agent Stocking Program and the mark up in the freight component of the pricing model. For example the NSLC has: Extended the time that the PWSS stores had to pay for and pick up orders received at the NSLC distribution center from 48 hours to 30 days and has assigned a point person to manage private stores purchase orders and distribution to reduce confusion and costs; Increased the Operating Agreement discount on prices charged by the NSLC by 5 percent; Offered freight rebates to the PWSS; and NSLC, in cooperation with the PWSS operators, manages and provides stocking capacity for inventories ordered on behalf of the PWSS operators by the NSLC.

15 IV. ECONOMIC IMPACT OF PWSS PROGRAM This section presents the results of the economic impact analysis of the Nova Scotia Liquor Corporation PWSS Program since its inception. The economic impacts of the PWSS Program are based on the capital investment, direct employment and annual operations and direct expenditures of the four private wine stores in Nova Scotia. These numbers were formatted into the Nova Scotia I-O Model and the I-O simulations were run by the Economics and Statistics Division of the Nova Scotia Department of Finance. The economic impacts are examined through direct, indirect and induced economic impacts: Direct impacts: are directly attributed to the incremental direct expenditures in the economy and is comprised of income earned (measured as contribution to GDP), direct employment, and incremental tax revenues generated. Indirect impacts: relate to determining the value that the PWSS Program businesses generate economically for the Nova Scotia economy. Revenues that adjunct industries, such as food and related beverage businesses, etc., add to the economy. Induced impacts: are derived from the purchases of employees from the PWSS Program and adjunct industries. These purchases lead to more employment, wages, revenues, and taxes in the Nova Scotia economy. 1. ASSUMPTIONS The following assumptions are made in formatting the data to Nova Scotia I-O Model specifications: Data is presented in current dollar terms for each of the years examined; All direct expenditure estimates are assumed to be in purchaser prices (with margins and taxes included); All Output values are in producer prices (margins and taxes excluded); The average spin-off wage is the Nova Scotia average industrial aggregate wage for 2003, 2004 and 2005 sourced from Statistics Canada average weekly earnings data (Cansim Table ). The 2006 average spin-off wage in Nova Scotia has not been released as of this date and the 2005 wage is used as a proxy. Table 1 The average yearly spin-off wages for Year Weekly Industrial Aggregate Wage Number of weeks Supplementary Labour Income Rate Nova Scotia Spin-off Wage Rate , , , ,442 9

16 10 Economic Impact Assessment of NSLC PWSS Program The Nova Scotia Department of Finance taxation template estimates provincial government revenue (income and spending taxes) on household income only and uses a household consisting of a single wage earner, one dependant and two children. Tax templates for 2003, 2004, 2005, and 2006 are used to analyze the tax impacts for each of these tax years, respectively; The analysis of employment impacts of the private wine stores consists of both full-time and part-time employees. All part-time employment is converted to Full Time Equivalent (FTEs) and all employment impacts reported are presented in FTEs. Taxes are calculated at different rates for the full-time and part-time employees and are presented as the aggregate of the two; Total employee fringe benefits are presented in the data set provided but are only assumed to apply to full-time employees. 2. ECONOMIC IMPACTS OF PRIVATE WINE STORES The economic impacts of the PWSS Program are based on the direct expenditures and direct employment of the four private wine stores in Nova Scotia. These expenditures include capital investment and annual operations and expenditures. The total direct expenditures and direct employment of the four private wine stores are shown in Table 2. Table 2 Total Private Wine Store Direct Expenditures on Employment and Other Expenditures ( ) Year Wage and salary bill All Other Expenditures* Total 2003 $495,089 $ 965,696 $1,460, ,537 1,031,715 1,900, ,452 1,026,768 1,870, , ,582 1,597,664 *Note: All other expenditures represent only the portion of expenditures made in the Nova Scotia economy. All import components to direct expenditures for good and services have been stripped out. Table 3 presents the employment impacts associated with private wine stores economic activity in the Nova Scotia economy for the period The employment impacts are measured as Full Time Equivalent Person Years. Employment (PYs) Table 3 Employment Impacts of Private Wine Stores Activity on the Nova Scotia Economy, Direct Spin-off Total The total employment impacts of the four private wine stores range from 35 person years in 2003 to 52 person years in The total employment impacts are comprised of the total direct employment impacts (ranging from 15 person years in 2003 to 34 person years in 2006) and total spin-off employment impacts (ranging from 20 person years in 2003 to 18 person years in 2006).

17 Economic Impact Assessment of NSLC PWSS Program 11 Table 4 presents the total household income impacts associated with private wine stores economic activity in the Nova Scotia economy for the period The total household income impacts of the four private wine stores range from $1.18 million in 2003 to $1.4 million in The total household income impacts are comprised of the total direct household income impacts (ranging from $0.5 million in 2003 to $0.7 million in 2006) and total spin-off household income impacts (ranging from $0.7 million in 2003 to $0.8 million in 2005). Table 4 Household Income Impacts* of Private Wine Stores Activity Direct Spin-off Total Household Income ($ 000) ,180 1,650 1,618 1,398 *Note: All income impacts are based only on direct expenditures made by the private wine stores that remain in the local Nova Scotia economy. Any expenditures made for goods and services which originated outside of Nova Scotia (import component to direct expenditures) have been stripped out, and the resulting impacts are based only on direct expenditures that remain in the nova Scotia economy. Table 5 presents the total provincial government revenue impacts (tax revenue impacts) associated with private wine stores economic activity in the Nova Scotia economy over the period The total tax revenue impacts of the four private wine stores range from $109 thousand in 2003 to $140 thousand in The total tax revenue impacts are comprised of the total direct provincial government revenue impacts (ranging from $38 thousand in 2003 to $53 thousand in 2006) and total spin-off tax revenue impacts (ranging from $71 thousand in 2003 to $87 thousand in 2005 and $76 thousand in 2006). Table 5 Provincial Government Revenue Impacts of Private Wine Stores Activity Direct Spin-off Total Prov. Gov t Revenue ($ 000) INCREMENTALITY The economic impact results presented in the above tables have not been adjusted to address the incrementality of the economic impacts of the private wine stores in the Nova Scotia economy. These tables present the economic impact results associated with direct expenditures and employment without non-incremental diminution. The magnitude of the economic impacts resulting from the private wine store operations in Nova Scotia depends on the extent to which the expenditures made by these operations would have happened in their absence. Given that the largest percentage of direct expenditures by the private wine store operators in the Nova Scotia economy is related to providing product and service to

18 12 Economic Impact Assessment of NSLC PWSS Program the customer, one of the key drivers in the incrementality issue is whether consumer expenditures on wine from the private wine stores is incremental to that which would have occurred otherwise. While it is difficult to assess the issue of incrementality with precision, studies have shown that the consumption of wine increases with increased variety and privatization of wine sales. Most studies examining changes in the level of privatization in wine sales have shown increased consumption, with some as high as 95 percent. 2 In 1970, several US states and the Province of Quebec eliminated public monopolies on the sale of wine. It was found that wine privatization in Idaho, Maine, Virginia, and Washington increased wine consumption in 3 of the 4 states. Mugford & Fitzgerald (1988) studied Iowa privatization using before and after survey data and average alcohol sales. Their findings indicated a statistically significant increase in selfreported (last 30 days) purchases of wine. Wagenaar & Holder (1995) examined the effects of privatization of the retail sale of wine in five other states (Alabama, Idaho, Maine, Montana, and New Hampshire) and found that all five states experienced a statistically significant increase in wine sales after privatization. Specifically; 13 percent increase in wine sales in New Hampshire, 42 percent in Alabama, 137 percent in Maine, 75 percent in Montana, and 150 percent in Idaho. MacDonald (1986) examined the de-monopolization of four states and found that wine consumption following privatization was significantly greater in 3 of the 4 states. The introduction of private wine stores in Iowa in 1985 and in West Virginia in 1981 resulted in increases in wine consumption. Wagenaar & Holder (1991) also studied the Iowa experience and that of West Virginia and they found statistically significant increase in wine consumption following privatization of wine retail sales, up by 93 percent in Iowa and 48.2 percent in West Virginia. In 1969 Finland permitted the sale of medium beer in all food stores and cafes. Sales of medium beers more than tripled, and overall beer sales increased 100%. Recorded overall per capita alcohol consumption increased by 50 percent in a single year (Her, M et al). In two counties in Sweden in 1967, strong beer (above 3.6 percent by weight) began to be sold in grocery stores and bars. Total alcohol consumption in Sweden was 15 percent higher when medium-strength beer was available in grocery stores that it was before the experiment. (Her, M. et al). In Iceland in 1989 at the end of the prohibition of beer, total alcohol consumption increased by 23%. The Alberta experience has showed an increase in consumption in the short term following privatization. Alcohol consumption in Alberta fell by 4.1 percent between 1991 and It rose by 3.9 percent in 1993, the year of privatization, and fell by 2.7 percent in 1994 then rose again by 1.1 percent in The largest increase is evident the year that privatization occurred. It is also important to note that in the year of privatization, Alberta s consumption per adult rose while consumption in Canada as a whole was falling. In Quebec, a study by Adrian, Ferguson & Her (1996) found that in the post-intervention period wine consumption continued along a rising trend established in the pre-intervention period, and that the increase in wine consumption was the highest in the period following privatization. In 2 Impacts of privatization: what do we know and where should we go?. Giesbrecht, N., Minghao H., Room, R., and Rehm, 1999.

19 Economic Impact Assessment of NSLC PWSS Program 13 general their results demonstrated that consumer behaviour responded to increased availability and increased variety. The effect of availability change in wine consumption has been extensively investigated in a number of cases of privatization, and it has consistently found that privatization was followed by a substantial increase in the consumption of the beverage privatized. (Her, M et al.,1999), 3. In the case of Nova Scotia, the PWSS Program has brought hundreds of new wines to market. As a result consumers have been exposed to a wider selection of product. Consultations with the four private wine store operators, licencees, and agents in Halifax Regional municipality (HRM) indicate that the PWSS Program has generated an increased consumer awareness and knowledge of wines at both the retail and licensee level. There has also been an increase in staff knowledge and training in wines, and this is passed on to the consumer. In addition, there has also been an increase in wine tasting as a result of the private wine store operations, and this has also contributed to an increase in consumer awareness. The private wine stores have indicated that there has been an increase in both the demand for greater variety in wine selection as well as increased demand for wine for collecting purposes. Source: NSLC, 2007 Based on current data, per capita wine consumption in Nova Scotia has increased since the establishment of the Nova Scotia private wine stores both in dollar terms and in volume. 4 As can be seen in Figure 1, per capita wine consumption in Nova Scotia has experienced a substantial increase in 2005 over the previous 10-year average. It is interesting to note that this growth in per 3 See M. Her et al. s discussion of the impacts of privatization on wine consumption evidence and implications in Impacts of privatization: what do we know and where should we go?. Giesbrecht, N., Minghao H., Room, R., and Rehm, 1999, (1999). 4 Data on per capita wine consumption was obtained from NSLC, 2007.

20 14 Economic Impact Assessment of NSLC PWSS Program capita wine consumption in Nova Scotia in 2005 is larger than the overall increase in Canadian per capita wine consumption and greater than most provinces with the exception of Quebec and British Columbia. See Section VI of this report for a more detailed comparative analysis of provincial per capita wine consumption in Canada over this period. While there has been an increase in consumer awareness and increased consumption of wines in Nova Scotia, it is not possible to measure the percent increase in consumer consumption of wines directly attributable to the establishment of the PWSS Program within the confines of this study. This would require a detailed survey of consumer purchasing patterns to determine if: i) their wine purchases have increased and if so, ii) the extent to which increased wine purchases are due to the existence of the private wine stores and the services they provide. The issue of incrementality becomes further complicated when one considers that the true economic impacts associated with the PWSS Program would include not only incremental wine purchases made at the private wine stores themselves but incremental wine purchases made at restaurants, bars and events, as well as through the NSLC outlets, due to an increased knowledge, awareness and appreciation of wines in general, attributable to both the products and services offered by the private wine stores as well as the increased emphasis being placed on this product category by the NSLC. The extent of this detailed analysis is beyond the scope of this study. However, current data indicates a substantial increase in per capita wine consumption in Nova Scotia in 2005 over the previous 10-year average. In addition, private wine store sales indicate that some portion of this increase in aggregate per capita wine consumption in Nova Scotia is at least partially attributable to the PWSS Program. A more detailed analysis is required to determine a precise determinant of the incremental economic impacts resulting from the PWSS Program.

21 V. REVIEW OF ALTERNATIVE MODELS 1. ALBERTA S PRIVATE WINE STORE MODEL Alberta is the first province to provide the most fully privatized wholesale and retail distribution of liquor model. The Alberta government implemented a big bang approach in its switch away from the government-owned liquor distribution model. Alberta announced on September 2, 1993 that it was privatizing its system; six months later, on March 5, 1994, the last of 205 government liquor stores in the province were closed. The privatization model in Alberta was based on a changed philosophy that there was no longer a valid reason for government to be involved in the liquor distribution business since the control of liquor sales and tax revenues can still be maintained without managing or owning the distribution system. Today there are over 14,000 wines listed in the wholesale system with about 7,000 wines in stock and available to any of the just over 1,000 retailers in Alberta. Under the new Alberta liquor retailing model the: Private sector provides all retailing, warehousing, and distribution functions in Alberta; Alberta Gaming and Liquor Commission (AGLC, and formerly ALCB) regulates the industry under the Gaming and Liquor Act, the Gaming and Liquor Regulation and the policies of the Board of the AGLC; Government of Alberta remains the importer of record for all products coming into Alberta; AGLC collects all revenue from the sale of adult beverage products at the wholesale level prior to the goods being released to the retailer. A key to the successful move to a privatized retailing network in Alberta appears to be the swiftness with which the Alberta government acted. The legislative changes, implementation plan, application process and criteria for opening a new private liquor store were developed and communicated within 5 weeks following the privatization announcement. Alberta implemented new tax measures that underpin how much consumers pay for alcohol beverages at private liquor stores. Alberta agreed to cap its net tax revenues from alcohol beverages at approximately $450 million per year, to be reviewed yearly. 5 As retail sales increased in the 1990s, the Alberta government s tax revenues also increased. In order to meet its revenue cap commitment the Alberta government reduced its tax rate on alcohol beverages three times between 1994 and The second tax measure was to change the way taxes on liquor are calculated. Alberta went from using the ad valorem system to a simplified flat tax system where wine and alcohol beverages are taxed based on alcohol content. (The flat-tax pricing model is discussed in more detail in Section VI of this report). Warehousing Operations A privately-owned distributor, Connect Logistics Services (CLS), provides third-party liquor warehousing and liquor distribution services in Western Canada with province-wide equal delivery charges. The company is the agent solely responsible for the warehousing and 5 6 This was designed to keep the province s net tax revenues at the same level as government-owned liquor stores. Review of Liquor Mark-Up Structure and Related Policies, AGLC, P- 67, February

22 16 Economic Impact Assessment of NSLC PWSS Program distribution of spirits, wine, coolers, and imported beer in Alberta for the Alberta Gaming and Liquor Commission, Inc. Connect Logistics Services receives product on behalf of about 230 agents representing 2,000 Suppliers (from over 70 countries) worldwide. The company utilizes the services of 12 contracted carriers who deliver to 21 delivery zones throughout Alberta with an on-time delivery record of over 98%. Connect Logistics also offers 24-hour delivery to any customer in the province who requires it. Product storage is based on stock movement with faster-moving products stored for easier picking and shipping. A voicedirected picking system, barcode-based product verification, and radio frequency scanning are all used to ensure rapid, accurate order fulfillment. All licensees pay the wholesale price directly to the AGLC for products ordered from the Connect Logistics facility prior to those products being shipped by Connect Logistics. The AGLC has also regulated that all products must be sold at the same price to every licensee eliminating volume discounting, and it ensures that small retailers are afforded equal access to the products at the same price as the largest urban store. Prior to privatization, there were 202 ALCB liquor stores and 102 privately operated liquor retailing outlets including 23 private wine stores, 49 agency stores, and the balance consisting of hotel beer retailing outlets. Today there are over 1,000 retail liquor stores and general merchandise stores operated by the private sector in Alberta including approximately 925 freestanding retail liquor stores held by the private sector. Privatization of liquor retailing and distribution has been a small business creation story for Alberta. Moving to a privatized model more than offset the loss of the 1,300 jobs at the ALCB. Most former employees of the ALCB found new careers in the new industry in Alberta and some are owners of their own liquor retailing outlets. With 925 new retail stores created, few failures, and close to four times the number of agencies in operation, privatizing has created 5,000 new direct jobs in the adult beverage industry with a full compliment of spin off jobs generated including beer cooler / refrigeration units, renovation and new construction, computer hardware and software and insurance. In addition to the full- and part-time jobs these stores have created, these new businesses are now operating in double the number of Alberta communities previously served by the ALCB. The government was able to eliminate the cost of their store and warehouse operations and realize savings through the switch to consignment inventory while significantly reducing head office operations and their associated costs. 2. BRITISH COLUMBIA In British Columbia, two branches of government are responsible for regulating and monitoring the liquor industry: the Liquor Control and Licensing Branch (LCLB) and the Liquor Distribution Branch (LDB). The LCLB issues licences for making and selling liquor and supervises the service of liquor in licensed establishments. The LDB, under the authority of the Liquor Distribution Act, has the sole right to purchase beverage alcohol both in and out of British Columbia. The LDB is responsible for the importation, distribution and retailing of beverage alcohol in British Columbia and operates government liquor stores and distribution centres in the province. The LDB is also responsible for the appointment of private retail agency stores. In July 2002, the British Columbia government announced that, over time, the Liquor Distribution Branch s role would shift from the operation of warehouses and retail stores to the regulation of private-sector warehouses and retail stores. The Branch continues to be the importer and wholesaler of record and is responsible for collecting liquor tax revenues. In February 2003, the Branch released its three-year plan targeting a minimum of 40 to 50 government liquor stores

23 Economic Impact Assessment of NSLC PWSS Program 17 to be closed in each of the next three years. The Branch s intention is to gradually sell off its 250 liquor stores run by the British Columbia Liquor Distribution Branch (BCLDB) and privatize beverage wine and alcohol retail. Under the British Columbia government s privatization plan, a number of key criteria are applied: Only existing beer and wine licensees are permitted to establish new private liquor stores and these stores must be attached to/on the same property as an existing licensed facility; No grocery stores or corner stores will be permitted to sell liquor, wine or beer; No government-owned liquor store will be closed until new private stores are in place to service a community; Each new licensee must seek approval under local community zoning and any other municipal bylaws that may apply. In order to provide beverage alcohol products and service throughout the province, the LDB enters into contracts that authorize terms and conditions with the private sector for the operation of private retail outlets, such as licensee retail stores, rural agency stores, B.C. beverage alcohol manufacturer stores, independent wine stores and duty-free stores. As of November 1, 2006, private sector retail establishments included: 609 LRSs (private liquor stores licensed to sell all liquor products); 230 RASs (general merchandise stores in rural communities authorized to sell all liquor products); 144 on-site manufacturer stores (stores at wineries, breweries and distilleries that sell products manufactured on-site); 29 off-site manufacturer stores (stores operated by the BC wine industry that sell BC winery products); 12 independent wine stores (private wine stores authorized to sell all types of wine); and 11 duty-free stores. With a workforce of approximately 3,500 full- and part-time employees, the LDB operates two distribution centres: one in Vancouver and one in Kamloops, a head office facility in Vancouver, and over 200 government liquor stores throughout the province. In BC there are more than 100 agents for alcoholic beverages. All warehousing and distribution is controlled by the BC Liquor Distribution Branch (LDB). The provincial tax on wine is approximately 110 percent markup. An additional provincial sales tax of 10 percent plus 7 percent GST (VAT) is applied at retail. BC has a local wine industry that represents percent of total provincial wine sales. Vancouver is well known for its many excellent restaurants and wine and food events. Whistler, located 1.5 hours North of Vancouver, attracts a high-end clientele to its more than 50 restaurants and bars. In 2001, BC hosted 5 million international tourists that spent $5.2 billion in restaurants and generated $1.5 billion in hotel room revenue ONTARIO Liquor Control Board of Ontario (LCBO) The Liquor Control Board of Ontario (LCBO), established in 1927, is a self-financing operational enterprise of the Province of Ontario maintaining a full government operation system for distribution and sale of alcoholic beverages. The LCBO operates 598 corporate stores across Ontario. In addition, the LCBO authorizes 196 agency stores located within existing private retail 7 Source: BC Tourism in Review 2001

24 18 Economic Impact Assessment of NSLC PWSS Program outlets, typically in remote and rural areas too small to support a corporate store. Alongside its retail operations, the LCBO is also first receiver of all liquor commercially imported into Ontario and enforces uniform and minimum prices. Retailing is carried out by a mix of public and private operators; the Liquor Control Board of Ontario sells all types of alcohol products, while the privately-owned Brewers Retail Inc. owns and operates The Beer Store outlets and sells domestic and imported beer products, and privately owned winery retail stores sell only their own products. The LCBO is the sole importer of liquor products and operates five warehouses. The Brewers Retail Inc. operates five distribution sites. Licensing of private companies occurs for warehousing and distribution of domestic beer products, and for retailing of all beer products and domestic wine only. Ontario currently has 1,674 retail points of sale, which translates into one store for every 7,431 people (a relatively low number of access points). The Liquor Control Board of Ontario (LCBO) has been steadily increasing its contribution to provincial revenues. Improved supply-chain management policies are delivering better financial results. Some of this increase has come as a result of steadily reducing the number of products available in the mass-market stores, centralizing inventory management and opening revamped emporiums. However, consumers in the province have experienced increasing difficulty in finding the wines they want. In 2003/04, the LCBO's net sales (not including PST and GST) were $3.3 billion, generating a dividend to government of $1.04 billion. The LCBO's gross sales were $3.9 billion. Wine retail stores Ontario has 395 wine retail stores that are owned by the province's licensed wineries. The stores are allowed to sell only the products of the winery that owns them. On-site stores (i.e. located at the winery) number 105; the remaining 290 off-site locations are either stand-alone outlets or housed within a larger retailer. Two wineries, Vincor International Inc. and Andrés Wines Ltd., operate the majority of the off-site stores. Free trade agreements meant that after 1987 no new off-site wine retail stores could be authorized. Wine retail stores account for approximately 36 per cent of Ontario-produced wine sales and 15 per cent of total wine sales in the province. For 2003/04 this translated into gross sales of $182 million. There are examples of privately run web-based shopping sites for Ontario wines. The Toronto Star launched where mixed cases of a few specially selected VQA wines can be delivered to consumers via Canada Post. Most are not listed with LCBO and can only be bought otherwise from single on-site winery stores. In addition, an entrepreneur has started a web site that now lists some 300 wines from about 16 Ontario producers which are not listed with the LCBO ( The privately run web-based wine shopping sites provide a shopping solution, deliver a service to wineries with economies of scale by covering many producers, and are profitable to both parties. Web-based shopping is designed to sell only Canadian product. There are plans to operate on behalf of BC wineries in the future, supplying across provincial boundaries from winery to consumer. There is no other private involvement in the wine distribution business other than a few agency stores in remote rural regions and the Ontario winery stores.

25 Economic Impact Assessment of NSLC PWSS Program QUEBEC In Quebec, the government-operated SAQ operation extends through all levels in the system for spirits and wine products. Domestic breweries carry out activities related to the importation, warehousing, wholesaling and distribution of most beer products. Only a limited selection of imported beer products is sold through the government store network. All other beer is available for sale through grocery stores and corner stores. Grocery stores and corner stores also sell a limited selection of wine products (80 percent of wine is sold through Government-owned and operated liquor stores). Wine has been available for sale in grocery stores since 1978, whereas beer has been available for sale in grocery stores since The inclusion of grocery and corner store sales increases Quebec s total points of access to approximately 10,000 (one stores for every 754 people in the province). Per capita consumption of wine in Quebec ranks relatively high in North America. A recent comparison of consumption rates (litres per person, total population of 15 years +) among sixteen jurisdictions suggests that the highest per capita consumption of wine is in Australia a license state where government s role in all three tiers is limited to licensing. 8 The next highest consumption rates for wine is in England and Wales both license states where retail sales are privatized. Quebec has the fourth highest consumption rates for wine and beer among all jurisdictions reviewed while consumption rates for spirits (where there is greater government control over retail sales) ranks fourteenth out of sixteen jurisdictions reviewed. Figure 2: Per-Capita Consumption of Wine, Beer, and Spirits: Cross-Jurisdictional Comparison Consumption of wine is lower in Alberta than in Ontario and British Columbia. Wine consumption appears to be higher in jurisdictions with mature wine industries, including Australia (highest), New Zealand (third highest) and California (fifth highest), with Quebec s 8 These results are taken from a recent Ontario study comparing the distribution system for wine, beer and spirits among sixteen jurisdictions, including Nova Scotia, Ontario, Alberta, Quebec, British Columbia, Australia, New Zealand, United Kingdom, California, Washington, Oregon, Iowa, West Virginia, New York, Pennsylvania, and Michigan.

26 20 Economic Impact Assessment of NSLC PWSS Program fourth place position possibly related to changes introduced by the Government-owned Société des alcools du Québec (SAQ) that allowed for wider access to quality imported products. The lowest consumption of wine was found in West Virginia a partial government operation state where the retail sales of beverage alcohol is licensed. The consumption rate for spirits in Nova Scotia a full government operation system with the lowest number of access points of all jurisdictions - is amongst the highest of all jurisdictions. Recently the SAQ set about rapidly expanding the size of the operation, opening new stores and listing many new products. Supermarket-style promotions increased sales rapidly but at much lower margins. The SAQ delivery system, however, was not geared up for this change, and as a result, costs rose exponentially. Inventory levels had to be held high since just-in-time inventory was not implemented. 5. MANITOBA AND SASKATCHEWAN Saskatchewan maintains a 100 percent government retail, warehousing and distribution operation. The provincial tax on wine is approximately $3.50 per bottle and private retailers normally markup between 20 to 33 percent. Saskatchewan has a population of 1 million with small urban centers leading to less premium restaurants and less premium wine sales. Manitoba operates a roughly 90 percent government retail system with a total of ten private retail wine boutiques. Warehousing and distribution are mostly government-controlled, but private retailers are heavily involved in distribution to restaurants and hotels. Manitoba issued private retail wine licenses quite recently. The first phase was four licenses in 1995 with the second phase with six licenses in In Manitoba a total of nine private wine stores are currently in operation alongside the province's own stores. The private stores' prices are controlled since they buy through the MLCC. Under this model, the first million dollars of annual purchases are made at a 30 percent discount on MLCC retail prices; the next million dollars of purchases are at a 15 percent and the remainder at 7.5%. This has the effect of keeping the stores small since as you expand the price-window in which you can make a profit diminishes. Six of the private stores have taken the government to court for alleged anticompetitive practices of the MLCC. The licenses to operate private wine stores were only given for ten years and are renewed annually thereafter. The private wine stores have proven very popular with consumers and restaurants as the selection of wines has increased dramatically. 6. AUSTRALIA Some variations exist among the Australian states in terms of the type of licenses that are required, however, none of the states leave any aspect of the system under full government control. In 1997, a High Court ruling disallowed the collection of state alcohol taxes. Currently, state governments collect fees from licensing permits, while the national government collects tax (GST), the wine equalization tax (WET) and excise tax/duties. Prior to 1999, it was common to include a needs test prior to issuing a license (e.g. a private retailer wanting a license to open a store would have to develop a business case that demonstrated a need for an additional store in the local area). This practice was found to be unconstitutional because it limited competition. All states other than South Australia have moved away from this practice. Per capita consumption rates for spirits, wine and beer are high in Australia (based on 2002/03 data from Statistics

27 Economic Impact Assessment of NSLC PWSS Program 21 Australia). Although points of sale (1,396 people for each point of access) are relatively low, the overall rates of alcohol use are consistent with the high consumption rates. The national government plays a policy role in terms of developing national strategies related to health and harm reduction including a National Alcohol Strategy that was released in 2001, the establishment of an Alcohol Education and Rehabilitation Foundation to fund and support community-based education and rehabilitation projects, and the Australian Alcohol Guidelines that set levels for low risk and high risk alcohol consumption. Two states reviewed (New South Wales and Western Australia) have recently launched reviews of their licensing practices and related policies. 7. NEW ZEALAND New Zealand has a licensing system with respect to importing and distributing alcoholic beverages. Licensed agents carry out activities related to importation of beverage alcohol. No license is required to produce spirits or beer products unless the producer sells directly to the public. Domestic wine makers are required to be licensed to protect the integrity and reputation of the industry. The Government charges a levy on all liquor that is imported into or manufactured in the country and uses the revenue to fund the New Zealand Alcohol Advisory Council which is responsible for encouraging and promoting responsible use. Retailing licenses are administered by local authorities. Currently there are 3,333 retail points of sale in the state, which translates into one store for every 1,227 people representing a relatively high rate of access points. Frequency of use statistics are comparable to Australia and are lower than the United Kingdom. The per capita consumption for wine is relatively high (see chart above). 8. UNITED KINGDOM England and Wales operate under a licensing system, including a licensing requirement for all retailing activities to the general public, including manufacturers or wholesalers who sell directly to the public. No licenses are required for production and sale to wholesalers, or for wholesaling to retail outlets, unless sales will be made directly to the public. Local authorities (municipalities) are responsible for licensing and collecting associated revenues. Police have responsibilities for enforcement of licensing laws. Currently there are 46,582 retail points of sale in the state, which translates into one store for every 1,133 people. Per capita consumption for wine and beer is relatively high (see chart above). Frequency of use statistics are higher than Australia and New Zealand slightly more than 25 percent of the population drink above the recommended weekly guidelines and more than 6 million people drink above the recommended daily guidelines. In March 2004, the Prime Minister launched a public consultation exercise that has resulted in an Alcohol Harm Reduction Strategy.

28 22 Economic Impact Assessment of NSLC PWSS Program

29 VI. ANALYSIS OF NSLC PWSS MODEL 1. IMPACTS OF CURRENT SUPPLY CHAIN NSLC s supply chain, which manages the warehousing and distribution of products, had a successful fiscal The new Warehouse Management System (WMS) implemented by the NSLC in has shown improvement in warehouse inventory turns and fill rates to the stores. This system allows the supply chain to increase domestic inventory turns in the Distribution Centre to 21.9 times per year and decreased inventory by $4.5 million. Evidence of increased efficiencies can also be seen in the retail support system with overall fill rates to stores improved to 98.5 percent and accuracy on these store orders improved to percent. 10 NSLC has also implemented improved tracking and inventory management. Based on a year-end inventory of $13 million, there was only a loss of or unaccountability for $1,200 representing less than.01 percent of the total costs of managing the supply chain. This study examines the issue of whether the current NSLC supply chain serves to meet the needs of the private wine store operations. Consultation with private wine store operators indicates that private they are satisfied in general with improvements that have been made in the NSLC supply chain and service levels. These improvements in warehouse inventory turns and fill rates have been reflected in improved service to the private wine stores. Our analysis also indicates that there are still aspects of the system that represent areas for further improvement. One supply-chain related cost cited by both the private wine stores and NSLC representatives is the cost associated with time spent checking for invoicing errors on shipments. In cases where the cost of the product is incorrectly calculated (either higher or lower than expected) this has typically been due to discrepancies in the supplier invoice price, resulting in time spent by both the private wine stores and by NSLC employees to review and confirm pricing on each shipment. Our analysis indicates that the additional time and other resources spent checking and validating invoices has resulted in incremental costs, not only to the private wine stores, but to the NSLC as well. In some cases, corrections in invoicing are required due to errors both on the part of the private wine stores and the NSLC tying up resources for both the private wine stores and the NSLC. The costs associated with time spent checking invoices on shipments may be resolved to some extent with the graduated integration of NSLC s Enterprise Resource Planning (ERP) business process IT management system. With the implementation of the early planning and research of the ERP platform and the integration of SAP technology (the enabling system), the sales order will be tied to the original purchase order (locked in at time of purchase) indicating the correct supplier invoice price for the private wine stores product orders. The new system will provide one view for all levels of the business operation, beginning with the purchase order, and will reduce the opportunity for invoicing errors. The integration of supply chain management systems is an effort to further develop the NSLC as a more cohesive unit and allow NSLC to increase overall efficiency See: NSLC s 2005/06 Annual Report Increased efficiency rates reported in NSLC s 2005/06 Annual Report. 23

30 24 Economic Impact Assessment of NSLC PWSS Program Another cost identified by the private wine stores is related to the additional cost associated with the time lag between orders due to the infrequency of shipments representing a relatively large investment in inventory to compensate for shipping time lags. Private wine store operators indicated that this time lag makes it difficult to take a chance on ordering new products. If the private wine stores are correct with their judgment of a successful new product, they sell out quickly and must wait for the next shipment to replenish stocks and if they are wrong, they are in a position of overstock of unproductive inventory with no turns and a delay in finding suitable replacements. However, while it is recognized that there is a heavy inventory investment required for the PWSS operations, it should also be recognized that correct forecasting of inventory requirements is an integral part of the business planning required for private wine store operators given the nature of the market. Successful operation of a private wine store requires a sound knowledge of not only wines but also a knowledge of the market, fluctuations in consumer demand, forecasted shipments, and therefore careful inventory planning is required. To the extent that there is a time lag between shipments, largely because the Nova Scotia market is comparatively small, the issue of inventory planning, forecasting and warehousing to accommodate for the timing of shipments becomes an inherent challenge facing all private wine store operators. Private wine store operations must plan to build-in safety stock to accommodate delays in shipping, poor forecast supplier issues, unexpected events, and similar to many companies, shelf life of product. However, it is also recognized that these investments in product supply represent a substantially larger investment in inventory supply costs than was initially envisioned by the private wine store operators. While the private wine stores reported that the vast majority of shipments are received as ordered, another issue cited is the cost of shipments received in poor condition. This causes the private wine stores additional effort when receiving goods. However, both the PWS operators and NSLC representatives indicate that there have been substantial improvements in this regard. Does the current NSLC supply chain of the PWSS impose any barriers to increased competition for the PWSS? One aspect of the supply chain consistently cited by the private wine stores as a potential barrier to increased competition is their inability to carry generally listed product which prevents PWSSs from competing on the same items. This in and of itself is not a concern for private wine stores that source their products independently of the NSLC s catalogue. Consultation with both agents and private wine stores indicates that the lack of access to the NSLC general listing has put suppliers and their agents in a difficult position. Broadly speaking, suppliers and their agents prefer to focus on the NSLC since the NSLC chain of 100 plus stores is a much more lucrative opportunity than a sale to a PWSS, and choose not to supply the PWSS channel. Often agents refuse to offer wines to the private wine stores, pending a decision by the NSLC on a listing application. Because of the two-year exclusivity arrangement, offering a new product to the PWSS means agents cannot offer this product to the Port of Wines listing for two years after it is approved for the PWSS. When they do offer private wine stores products, they are typically those products that have either been turned down by the NSLC or recently de-listed by them. However, our assessment of the original Terms of Reference for the PWSS Program indicates that the PWSS Program is designed to introduce new product and this is inconsistent with broad access to the General List. Therefore, access to the NSLC general listing is inconsistent with the purpose and mandate of the PWSS Program, as it was originally conceived. The primary purpose and goal of the PWSS Program is to improve customer service by increasing and improving the selection of wine available in Nova Scotia. As such, setting up the private wine stores such that

31 Economic Impact Assessment of NSLC PWSS Program 25 they have access to the NSLC General List is not consistent with the promotion and introduction of new product to increase the selection of wine. 11 Another aspect of the NSLC supply chain that private wine store operators cite as a potential barrier to increased competition is the absence of a viable agents stocking program (ASP) which has forced the private wine stores to source product directly. Inventory levels for the private wine stores are larger than what would be required had products been available through the ASP. As a result, sourcing product has become a complex aspect of the business operation for the private wine stores. Private wine stores able to make large investments up front in carrying inventory for new product have an advantage over those private wines stores that are not able to make this investment. However, our analysis of the supply chain system indicates that the NSLC is currently providing a stocking program for the PWSS operators in allowing them to warehouse product beyond thirty days without charge and without payment of the product while in warehouse storage until they take possession. This practice essentially provides warehousing services free of charge to the PWSS of inventory that has been shipped but not picked up by the PWSS operators. The practice of allowing the PWSS stores to collect partial lots of their order (pick up their order by the case) represents a cost to the NSLC, and this cost cannot be sustained indefinitely. As such, the private wine stores currently have access to the NSLC warehousing services, and to the extent that they do not collect their entire order within thirty days, this warehousing service is being provided free of charge. 12 Potential risks for the licencee sector arise largely if the private wine stores have a stock-out situation that takes too long to resolve requiring the licensees to change their menus. The results of the consultation with the licencees however, indicated that the potential costs to the licencees may be lowered due to greater competition for licencee business as result of the introduction of the private wine store operations in the market. 2. NSLC PRICING MODEL One key advantage of the current pricing model cited by both private wine store operators and agents was the transparency of the pricing model. The current bottom-up pricing model is designed to cover costs of services provided along the supply chain. Private wine store operators and agents can identify and separate costs of shipping and handling product with some calculation. Although the current pricing model is transparent in that prices can be calculated, consultations with both private wine store operators and NSLC representatives indicated however, that the current pricing model provides ample room for errors in invoicing. As indicated above, there is a cost associated with time spent by both the private wine stores and by NSLC employees checking invoices and confirming pricing on each shipment. Based on the discussion and consultation with agents, private wine store operators, and NSLC undertaken for this study, it was suggested that there would be a cost advantage to simplifying the current pricing model using a flat-tax or flat-fee pricing model. One of the primary advantages cited for a flat-tax pricing model (a lump dollar sum per litre regardless of country of origin) by both private wine store operators and NSLC representatives is that it is very simple to administer. No formula is required to establish the NSLC retail price with a discount calculated from this price. The NSLC would collect a fee as goods are shipped from their warehouse In addition, the private wine stores already do have access to a percentage of the POW listing. See section VII below for recommendation regarding change in the structure and fees charged for warehousing services.

32 26 Economic Impact Assessment of NSLC PWSS Program The primary advantages cited of adopting a flat-tax pricing model are that it: is very simple to administer; is a fully transparent pricing model; would create a level playing field for retailers; and that it would allow private wine stores to price their products according to market conditions. A flat-tax pricing model would eliminate a separate markup on shipping, exchange, cost of service, and on product. In addition, a flat-tax pricing model could be designed with four to eight price levels with varied flat rate percentage mark-ups. More work would be required to identify an optimal configuration of a flat-fee pricing model tailored to the NSLC supply chain model. Flat-tax Pricing Model: Lessons Learned From Alberta In order to understand the benefits of moving to a flat-tax pricing model, it is important to identify lessons learned from a flat-fee pricing model adopted elsewhere. After reviewing several alternate pricing models, (including minimum/maximum profit per litre, mark-up tiers, advalorem, and flat mark-up pricing model), the Alberta Liquor Commission Board (ALCB) determined that the flat mark-up pricing model would be the most effective means of maintaining government revenues at pre-privatization levels. In addition, it was also determined that the flattax mark-up is the easiest to calculate out of the alternate pricing models considered. Simplifying the calculations was of benefit to the industry (less time spend in preparing and checking invoices) and it also made forecasting of revenue for ALCB that much easier. 13 The flat mark-up eliminated all costs of service differentials (real or perceived) leveling the playing field for both domestic and imported products, and thereby avoiding the potential for trade disputes. With a flat-tax mark-up pricing model, the Liquor Board is less affected by supplier price changes or shifts in consumer demand among brands, since the key variable affecting government revenue is volume. In setting retail mark-up rates, private sector retailers concern themselves more with inventory turnover rate and less with the country of origin. A flat-fee mark-up also avoids the compounding effect of an ad-valorem mark-up on premium brands, making it easier to compare rates applied to different product types. In addition, with a flat-fee mark-up pricing system, any supplier price increases or decreases are passed on to private retailers. Whether the private retail operators, in turn, passed these increases or decreases on to their customers is their own business decision. However, this decision is influenced by market forces. Once retailers have purchased product, they are free to set their own liquor retail prices. Prices vary from store to store, based on competitive market forces and consumers are free to shop for alcoholic beverage products in the same fashion they shop for any other commodity. In the case of Alberta, as a result of adopting the flat-tax pricing system, small increases in prices for some economy priced wines did result. However, at the other end of the spectrum there were substantial decreases in the prices of premium and super premium brands. While many economy brands went up slightly in price, premium products such as high-end wines and champagnes dropped by as much as 50 percent in retail prices on many brands as compared to preprivatization price levels (and as compared to retail prices in neighbouring jurisdictions). The ALCB set in place a series of mark-up transition rules, and combined with supplier price 13 The ALCB also determined that the flat mark-up also eliminated any financial incentive to misrepresent the true value of goods to which any other mark-up was being applied.

33 Economic Impact Assessment of NSLC PWSS Program 27 adjustments, consumers did not see dramatic price fluctuations as the new policy came into affect. 14 Total government revenue from the sale of adult beverage products in 1993 (at the time the Alberta government moved to privatization), was approximately $420 million, remaining relatively constant since that time, reflecting their policy of revenue neutrality. 15 For the 2005/06 fiscal year, the government revenue from adult beverages is approximately $560 million. The revenue-neutrality as well as the cost advantage (simplifying calculations and ease of forecasting revenue) associated with the flat-tax pricing system both represent significant benefits for the ALCB of implementing the flat-fee pricing system. 3. BENEFITS/COSTS FOR FOOD AND HOSPITALITY SECTOR Consultations with representatives from the food and hospitality sector, agents, and the private wine store operators indicated that the PWSS Program has resulted in positive benefits for the food and hospitality sector. Benefits to this sector are largely related to the increased wine selection available due to the PWSS Program. Specifically, these benefits include: Greater variety of wines available for customers; Enhanced service to Licensees (delivery, wine tasting, menu prints); Greater training support for licencee staff; Partnering or marketing; promotion; and Greater capacity to provide service after government hours. Increased consumer awareness The PWSS Program has brought a large number of new wines to the Nova Scotia market. Private wine store operators indicate that there has been a substantial increase in consumer awareness and knowledge of wines over time based on consumer knowledge of wines at the outset of the PWSS Program as compared to the current knowledge of consumers, and that this has been due at least in part, to the PWSS Program. Professional sales staff at private wine store operations have made a positive difference in increasing the awareness of the public about wine. More specifically, salespeople in the private wine stores are trained to up-sell on a quality basis, and consumers have been exposed to a much broader selection of wines from around the world at affordable price through the private wine stores. This exposure has increased awareness of wines at, not only the retail level, but at the licensee level as well. As a result of the PWSS Program, there has been an increase in wine tasting, food and wine pairing, increased staff knowledge and training in wines and this knowledge has been passed on to the consumer. Increased consumption of wines Based on current data, per capita wine consumption in Nova Scotia has increased since the establishment of the Nova Scotia PWSS Program. There has been both an increase in the demand for greater variety in wine selection as well as increased demand for wine for collecting purposes. Provincial comparisons of per capita wine consumption is shown in Table 6 below. As can be seen in Table 6, per capita wine consumption has grown steadily over the period since the PWSS The establishment of the flat fee mark-up system allowed the government of Alberta to remove all subsidies put in place at the outset of privatization to establish the free market system for liquor retailing and distribution. By not having subsidies in place, the government was able to maintain its existing revenue targets. When revenue targets were exceeded, the flat mark-up was adjusted downward to maintain revenue targets.

34 28 Economic Impact Assessment of NSLC PWSS Program Program was introduced (2003 to 2005). Per capita wine consumption in Nova Scotia was 8.0 litres in 2003 rising to 9.0 litres in However, as can be seen in Table 6, per capita wine consumption also increased over the same period for all provinces. Therefore it is useful to compare the growth in per capita wine consumption in Nova Scotia that that in other provinces over the same time period. Over the period, Nova Scotia ranks 6 th in a provincial comparison of the 10-year average per capita wine consumption, and below the national average wine consumption (11.3 litres) with an average per capita wine consumption of 6.9 litres. However, when examining the period since the introduction of the PWSS Program for which the data is available (2003 to 2005), Nova Scotia ranks 4 th in Canada in terms of the relative percent growth in per capita wine consumption. Furthermore, the percent growth in per capita wine consumption in Nova Scotia is larger than the overall increase in per capita wine consumption in Canada over the 2003 to 2005 period and greater than the growth of most provinces, with the exception of Alberta, Saskatchewan and Newfoundland and Labrador. Table 6 Provincial Comparison of Per Capita Wine Consumption Canada, (Litres) Per Capita (LDA) Wine Consumption 10yr av. ( ) % Change % Change % Change NS % 41.0% 71.6% NFLD % 43.1% 68.2% NB Per % 38.4% 58.1% PEI Per % 45.0% 68.9% QUEBEC % 41.1% 52.2% ONTARIO % 15.8% 29.5% MANITOBA % 19.1% 30.5% SASKATCHEWAN % 11.2% 30.4% ALBERTA % 16.8% 36.1% BC % 7.3% 25.0% CANADIAN AV % 23.5% 37.9% Source: Provincial per capita wine consumption statistics provided by NSLC, April 2007 It is also interesting to note that while Nova Scotia experienced the largest growth per capita wine consumption in Canada in percentage terms (71.6 %) over the period, the largest relative growth occurred in the period since the introduction of the PWSS Program (2003 to 2005). When examining the 10-year period 1995 to 2005, the average annual percent change in per capita wine consumption in Nova Scotia was 3.7 percent as compared to 4.1 percent in the period following the introduction of the PWSS Program ( ). This table also highlights the percent growth in per capita wine consumption in Nova Scotia in the period following the introduction of the PWSS Program relative to other provinces in Canada. The average annual percent growth in per capita wine consumption in Nova Scotia over this period is the third highest in Canada, followed by Newfoundland and Labrador and Prince Edward Island. Not only is wine consumption in Nova Scotia, and Canada as a whole, growing, as illustrated above, but private wine store operators have indicated that the demand for variety in wine is increasing and many wine drinkers are driven by selection. This trend cuts across most age groups and, increasingly, income levels. The private wine stores engage in product sampling and tasting, both of which increase customers comfort levels with regard to new wine and serves to increase customer awareness when selecting wines. Some of the new wines now coming in to the

35 Economic Impact Assessment of NSLC PWSS Program 29 province have reflected the trend in changing product dynamics, including increasing blends in grape varieties. Table 7 Provincial Comparison of Average Annual Per Capita Wine Consumption Canada, , (Litres) Average Annual Percent Change ( ) Average Annual Percent Change ( ) Per Capita Wine Consumption (LDA) NS 4.1% 3.7% NFLD 5.0% 3.9% NB 3.7% 3.5% PEI 4.3% 4.1% QUEBEC 1.4% 3.7% ONTARIO 3.0% 1.4% MANITOBA 2.8% 1.7% SASKATCHEWAN 5.0% 1.0% ALBERTA 4.7% 1.5% BC 3.4% 0.7% CANADIAN AV 2.7% 2.1% Source: Provincial per capita wine consumption statistics provided by NSLC, April 2007 While the province s population has remained relatively constant during the past few years, the wine sales of the private wine stores have steadily increased since they began operation as have the NSLC's, resulting in increased per capita wine consumption. However, as discussed above, it is difficult to determine the extent to which this is a result of increased demand for wine in general or an increase in awareness and demand due to the PWSS Program. Projected Wine Consumption in Canada Over the past three years, the increase in wine sales in Canada is twice as high as in the rest of the world. According to the 5th study on the Current Trends in the International Wine and Spirits Market and Outlook to 2010, Canada will show a rapid increase in its retail wine sales over the next three years, assuring it an enviable position in the world's wine industry. 16. Canada ranked 9th worldwide in 2005 in terms of still wine sales (versus sparkling) in value. Canadians consumed 396 million bottles in 2006, representing an increase of percent over the period. By 2010, growth in consumption in Canada should continue to reach million hectolitres, the equivalent of 465 million bottles. Over the next 10 years, wine consumption in Canada will have increased by an average of 4.5 percent per year. 17 The wine market is a growing industry both in Canada and worldwide. Over the next three years, global wine consumption is expected to continue to rise and will show a growth of million hectolitres, representing an average of million bottles a year. 18 The global wine market will 16 See the 2006 study on the Current Trends in the International Wine and Spirits Market and Outlook to 2010, by the British firm IWSR for Vinexpo. For the fifth year, British firm IWSR was mandated by Vinexpo to produce a detailed report on global consumption, production and international exchanges in the wine and spirit industry, with the outlook to The study was conducted in 28 wine-producing countries and on 114 wine and spirit consumer markets. The analysis period extends from 2001 to Since 1971, the IWSR database provides the most detailed and precise information on the global alcoholic beverage market. 17 Projections given in the 2006 study on the Current Trends in the International Wine and Spirits Market and Outlook to 2010, by the British firm IWSR for Vinexpo. 18 Ibid.

36 30 Economic Impact Assessment of NSLC PWSS Program represent $117 billion, an increase of 9.4 percent between 2005 and This global sales figure is equivalent to that made by the global cosmetic industry, or three times that of the global recording industry. The sales figure derived from retail sales in Canada will be proportionate to the rise in consumption. Sales figures are expected to increase by percent between 2005 and 2010 to reach $2.435 billion. Between 2005 and 2010, the total average growth of retail sales expected worldwide is 9.62%. 19 Combined, the United States and Canada are the number one market when it comes to the increase in imported still wine consumption, both are on the top 10 list of consumer countries of imported still wines. In Canada, imported wines represent percent of the products available on the market and 2.02 million hectolitres of imported wines were consumed in They should see an increase of percent between 2005 and 2010 to reach million hectolitres consumed or percent of the volumes consumed. France remains the leading supplier on the Canadian market despite a decrease in volume of 5.78 percent between 2001 and 2005, followed by Italy and Australia, the latter showing an increase of percent over the same period. By 2010, it is expected that Canadians will give Canadian wines their due, and consumption should rise by 11.19%, representing 993,000 hectolitres or the equivalent of million bottles. Canadians prefer quality red wine. Although Canada is considered to be predominantly a beerdrinking country, statistics show that the consumption of beer per capita is decreasing with per capita consumption of wine increasing. 21 In 2005, consumption per capita of Canadian still and sparkling wines showed an increase of percent and should continue to reach a growth of percent between 2005 and Factors that explain why Canadians are choosing wine more often include: Baby boomers' increasing interest for wine products; Commercial vitality of the different private retailers and liquor boards across the country; A broader diversity of wines available permitting more effective targeting of new consumers; Arrival of New World wines marketing in Canada with consumer friendly varietal labeling (ex: merlot, chardonnay); Research studies showing the beneficial effects of wine on health; and Consumer sophistication for this type of product. Wines marketed at less than $8 a bottle are quickly disappearing in Canada while those between $8 and $20 are seeing strong growth in their sales. It is estimated that between 2001 and 2010, volumes marketed between $8 and $20 per bottle will more than double and will represent, at this time, 82 percent of still wine sales. Wines marketed at more than $20 should see a marketing growth of percent during this period. 22 In 2001, consumption of red wine represented 56 percent of Canadian consumption. Between 2001 and 2005 red wine consumption increased by percent and is expected to continue to grow between 2005 and In 2006, roughly 63.5 percent of still wine consumption in Canada is composed of red wine Ibid. Ibid. In 2005, Consumption of beer per capita was litres, compared to litres in 2001 (source: 2005 Annual Statistical Bulletin Brewers Association of Canada). All dollar figures are converted to 2007 Canadian dollars.

37 Economic Impact Assessment of NSLC PWSS Program 31 The following figure provides a projection of per capita wine consumption in Nova Scotia to the year 2010 prepared by the Association of Canadian Distillers (ACD). This projection is based on provincial per capita consumption statistics, assuming current trends continue. Figure 3 Source: Association of Canadian Distillers (ACD), 2007 As can be seen in Figure 3, the trend in per capita wine consumption in Nova Scotia shows that the gap in per capita wine consumption between Nova Scotia and the rest of Canada is narrowing. The per capita wine consumption in Nova Scotia in 2003 (when the PWSS Program was introduced) was 8.03 litres versus the Canadian average per capita wine consumption of litres per year. However, by 2006, the per capita wine consumption in Nova Scotia is 9.49 litres (a 69.1 percent increase over 2003) versus the Canadian average per capita wine consumption of (an 18 percent increase over 2003). By 2010, the per capita wine consumption in Nova Scotia is projected to be litres (a 75.2 percent increase over 2006) versus the Canadian average per capita wine consumption of litres (representing a 21.8 percent increase over 2006 consumption). The closing of the gap in per capita wine consumption between Nova Scotia and the Canadian average can also be seen in Table 8 below. In 2003, the per capita wine consumption in Nova Scotia was 65 percent of the Canadian average per capita consumption. By 2006, however, the Nova Scotia per capita wine consumption was 69 percent of the Canadian average and by 2010 it is projected to be 75 percent of the Canadian average per capita consumption. The narrowing of the gap in per capita wine consumption between the Nova Scotia and the Canadian average can also be seen by comparing the percentage increase in per capita wine consumption between Nova Scotia and Canada over time.