Tag Archives: alcohol

Why The LCBO Should Be Privatized

I wrote the below paper in the Fall of 2011, in the first year of my MBA at McMaster University. I thought I did a good job on the paper, so i figured I’d post it here. My hope is that future students who have this professor will get the same assignment, and will plagiarize the hell out of my work.

BRIEFING NOTE:
PRIVATIZING THE LIQUOR CONTROL BOARD OF ONTARIO

 Purpose

The purpose of this briefing note is to discuss the major implications and provide a recommendation about whether or not the Liquor Control Board of Ontario (LCBO) should be privatized or remain a Crown Corporation.

Background

The LCBO was created in 1927 at the end of prohibition in Ontario and was created to be a government run company that would control the sale, transportation and delivery of alcohol in Ontario.[1] Today the LCBO’s main concerns are protecting society from alcohol abuse; generating revenue for government; and supporting Ontario wine.[2] The LCBO is a provincial government enterprise reporting to the Minister of Finance and has 11 board members appointed by the Lieutenant-Governor.[3] Members are appointed for a term of up to five years and there are regular monthly Board meetings. [4] The LCBO has 618 stores across Ontario and 3,547 full time employees.[5] The LCBO’s monopoly on the alcohol business in Ontario makes them very profitable, and because the LCBO is a Crown Corporation its profits go back to the province. However, there are many that feel the government has no reason to be in the alcohol business, that the LCBO is inefficient and people would be better off with a privatized system.[6] They also argue that since Ontario has a reported budget deficit of about $24.7 billion dollars, the Ontario government could privatize the sale of alcohol and sell off the LCBO for what could be worth over $10-billion dollars.[7] There are many stakeholders that would be affected by the privatization of alcohol, and it is important to measure the positive and negative impact privatization would have on each group appropriately before making a decision.

Implications for Ontario Government

With the Ontario deficit at around $24.7 billion, privatizing alcohol sales, and selling off the LCBO’s assets could bring in an estimated $10 billion or more, this could greatly help boost the Ontario economy. However, the LCBO is currently very profitable, seeing a rise in profits consistently for the last 15 years and in 2008 bringing in $1.4-billion in profits, all of which was handed over to the government.[8] Some would argue that if Ontario where to sell off the LCBO they would lose this yearly billion dollar revenue, just for what would be a one-time only cash infusion. To counter the argument that privatizing Ontario’s liquor sales would greatly decrease provincial revenue, one can look at the Canadian Taxpayers Association 2002 study on the effects of privatizing liquor sales in Alberta. That study found that the Alberta government suffered no revenue loss from the privatization of liquor, because they still made money by collecting sales tax from privatized alcohol retail outlets.[9] Therefore when looking at the Alberta example, it would appear that the revenue Ontario could generate from privatized liquor sales would still be ample, and on top of that the Ontario government would still get the cash infusion it desires from selling off the LCBO.

Implications for Business

Ontario’s wine industry desperately wants to see the LCBO privatized.[10] They claim that it is hard to get shelf space, and with only one outlet in Ontario, that being the LCBO, customers do not have access to their product.[11] Grocery, variety and retail stores would love to see privatization, as it would allow them to start selling alcohol and bring in an entire new market to their stores.[12] The amount of new businesses and jobs privatizing alcohol would create would also receive a significant boost. When Alberta privatized alcohol in 1993 the amount of full-time jobs in the liquor retailing business jumped from 1,300 to 3,500.[13]

Implications for Consumers

Consumers will be happy with the convenience LCBO privatization will create, because they now will be able to buy groceries and alcoholic beverages in the same store, as well as enjoy increased selection.[14] [15]

One negative to consumers, is that under privatization they may actually face higher prices. The LCBO having a monopoly institutes uniform pricing when it comes to alcohol. Meaning, alcohol prices stay the same whichever LCBO you buy from.[16] Generally a monopoly means higher prices, but the LCBO’s prices are fairly low, so if the LCBO were to be privatized, than that would mean more competition leading to uneven pricing.[17] So certain stores may sell particular alcoholic beverages for more money trying to increase their profit margin.

An Ontario Legislative Library Research study entitled The Social Consequences Of Privatizing Liquor And Beer Stores, found that increased availability did not mean an increase in consumption of alcohol.[18] Consumption behavior in the long run is dictated more so by price and income rather than availability.[19] The same study also found that privatizing alcohol did not lead to any increases in social problems such as alcohol-related crime.[20] However privatization would most likely lead to increased underage drinking as the LCBO is very strict when it comes to selling to minors, and by increasing amount of liquor outlets selling alcohol under privatization, this would lead to less efficient policing.[21]

Implications for Special Interest Groups

The Ontario Public Service Employees Union (OPSEU), which represents LCBO employees, does not want to see privatization.[22] Since the LCBO is government owned, LCBO employees are considered “government employees” and therefore receive much higher wages than they would in the private sector if they were selling alcohol. Therefore if the LCBO was privatized current LCBO employees would be negatively affected and probably be forced to get a new job, or face a lower salary, which the OPSEU does not want to see.

Recommendations

The sale of liquor in Ontario should be privatized and the LCBO’s assets should be sold off to help reduce Ontario’s debt. The rationale for this recommendation comes from the following arguments:

  • The Ontario government no longer needs to be in the liquor retail business and the amount of revenue forgone from not owning the LCBO will still be generated from taxing the sale of liquor sold at new privatized retail outlets.
  • The Ontario Wine industry wants privatization as it gives them easier access to the market, and retail chains want privatization as it opens an entirely new profitable product line for them.
  • Consumers want privatization as it will be more convenient for them to buy alcohol and it will give them more selection.
  • The alleged negative societal downsides of alcohol privatization such as increased consumption and crime have proven too not be statistically significant.
  • While there are some negatives to privatization such as possibly increased price to consumers, an increase in underage drinking, and an unhappy Ontario Public Service Employees Union. The positives of privatization far outweigh the negatives.

[1] Jazairi, Nuri. “LCBO Privatization Study.” York University. http://www.yorku.ca/nuri/lcbo.htm (accessed October 7, 2011)

[2] Jazairi, Nuri. “LCBO Privatization Study.”

[3] “Corporate Structure.” LCBO. http://www.lcbo.com/aboutlcbo/media_centre/corporate_structure.shtml (accessed December 22, 2011).

[4] “Corporate Structure.” LCBO. http://www.lcbo.com/aboutlcbo/media_centre/corporate_structure.shtml (accessed December 22, 2011).

[5] “Quick Facts.” LCBO. http://www.lcbo.com/aboutlcbo/media_centre/quick_facts.shtml (accessed December 22, 2011).

[6] Milke, Mark. “Ending the Prohibition on Competition – The Case for Competitive Liquor Sales in British Columbia.” Canadian Tax Payers Federation. http://www.taxpayer.com/sites/default/files/downloadable/31.pdf (accessed October 7, 2011).

[7] Willis, Andrew, and Boyd Erman. “Ontario ponders sale of Crown corporations to beat down deficit.” The Globe and Mail. http://www.theglobeandmail.com/report-on-business/ontario-ponders-sale-of-its-crown-corporations/article1401807/ (accessed October 7, 2011).

[8] Willis and Erman. “Ontario ponders sale of Crown corporations to beat down deficit.”

[9] Milke. “Ending the Prohibition on Competition” pg. 39

[10] Trichur, Rita. “In the vineyard, fermenting dissent.” The Globe and Mail. http://www.theglobeandmail.com/report-on-business/in-the-vineyard-fermenting-dissent/article1998335/ (accessed October 7, 2011).

[11] Trichur. “In the vineyard, fermenting dissent.”

[12] Milke. “Ending the Prohibition on Competition” pg. 40

[13] Milke. “Ending the Prohibition on Competition” pg. 4

[14] Milke. “Ending the Prohibition on Competition” pg. 41

[15] Spurr. “Watering down our cocktails.” http://www.nowtoronto.com/daily/news/story.cfm?content=181016 (accessed October 8, 2011).

[16] Milke. “Ending the Prohibition on Competition” pg. 3

[17] Milke. “Ending the Prohibition on Competition” pg. 3

[18] Glenn, Ted. “The Social Consequences Of Privatizing Liquor And Beer Stores.” Legislative Assembly of Ontario. http://www.ontla.on.ca/library/repository/mon/1000/10267288.htm (accessed October 7, 2011).

[19] Glenn. “The Social Consequences Of Privatizing Liquor And Beer Stores.”

[20] Glenn. “The Social Consequences Of Privatizing Liquor And Beer Stores.”

[21] Jazairi. “LCBO Privatization Study.”

[22] “Stop the talk about LCBO privatization, says OPSEU.” National Union of Public and General Employees. http://www.nupge.ca/node/2838 (accessed October 8, 2011).

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