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A Win(e)-Win(e) Solution for the LCBO

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As Ontarians wait in line at the LCBO this holiday season they will be pondering whether they'll go through the same drudgery of choosing among a limited range of products at cookie-cutter stores this time next year, or the year after that.

Political leaders are again debating what to do with the LCBO. Some want to privatize it. Some want to retain the status quo. There is a win-win for both sides: the government auctioning the right for businesses to operate LCBO franchises, rather than full privatization.

Most retail alcohol in Ontario is sold at the provincially-owned LCBO, the Beer Store -- owned by three multinational beer companies-- and brewery- and winery-owned retail stores. The LCBO also authorizes a number of privately-operated agency LCBO stores in rural communities.

The LCBO returns a sizeable profit to the provincial government: $1.63 billion in 2011-12, according to the LCBO.

Those opposed to selling the LCBO argue that selling it would reduce provincial profits -- something a government with a yawning deficit would never consider. The province could exact this profit whatever the configuration of the distribution system, such as through higher taxes in a more efficient, private system.
However, leaving taxes aside, the provincial government can get out of the day-to-day business of selling alcohol to consumers while increasing revenues. What should an overhauled system look like?

Rather than rely on the yearly profits from a single corporation, the government should auction off the right to operate alcohol wholesale operations and retail stores to the highest bidder. This would not be a full privatization, but effectively a franchising. The government should hold these auctions every five to 10 years, requiring that franchisees re-bid to hold onto the licences. This will keep the money rolling in for the future.

Retailers would have the flexibility to offer a range of products and set prices -- subject to price minimums -- to meet the demand of their local clientele, rather than the current one-size-fits-all model. Indeed, some would choose to focus on cut-price options. Alternatively, Ontario beer, wine and liquor connoisseurs would be able to seek out stores that specialize in top-end products. The argument that the LCBO generates savings for consumers through its massive buying power -- which the Auditor General refuted in his 2011 report -- likely does not apply to these niche products.

As it is, Ontario consumers are being left out of the worldwide renaissance in niche alcohol products. To take one example, Total Wine, a U.S.-based liquor retailing superstore, claims that its typical store carries 8,000 different types of wine, 2,500 beers and 3,000 different spirits. Giving Ontario retailers the flexibility to buy on their own stock could result in similar such stores here.

The government could auction off the licences of agency stores with sales above a certain threshold, as well as those of the Beer Store and other private retailers, with auction revenues compensating the current occupants. The government could also limit the percentage of outlets a buyer could own -- provincially and locally -- to prevent another monopoly system from replacing the current one.

As well, Queen's Park could limit the number of retail outlets province-wide and locally and regulate their operating hours. While there is a link between price and ease of store access and consumption amounts, there is no conclusive link between consumption and type of control.

Sound like a good system? The irony is that this is nothing new. This is exactly the model for reform a government-appointed panel recommended. The Report of the Beverage Alcohol System Review Panel from 2005 lays out the above plan for LCBO reform that would eventually make the province $200-million more per year than it currently collects from the LCBO.

The government should get this report off the shelf. Otherwise, the government will continue leaving sizeable revenues on the table and Ontarians will continue waiting in line at LCBOs with limited choices.

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