Canada: Stay Calm And Sell On

Last Updated: March 25 2015
Article by Geoff McIntyre

Wholesale pricing is coming to British Columbia starting April 1, 2015

A new formula for the wholesale pricing of wine is scheduled to take effect in British Columbia on April 1, 2015. According to the B.C. government's News Release dated November 19, "starting April 1, 2015, all liquor retailers, including BC Liquor Stores, will purchase their product from the BC Liquor Distribution Branch (BCLDB) at a common, wholesale price. This will do away with the existing complex model that offers retailers various discounts depending on the type of retailer they are."

The current system works backwards from fixed retail display prices in government liquor stores to generate a wholesale price. Various types of retailers must purchase wine through the BC Liquor Distribution Branch (BCLDB) at prices ranging from the full retail price (net of taxes) less 30% for independent wine stores, to 16% for licensed retail stores. Licensed establishments such as restaurants, bars and hotels pay the full retail price with no discount.

The new system (effective April 1, 2015) works upwards from the supplier's cost and applies a single standard markup (89% on the first $8.81/750 ml bottle plus 27% markup on the remainder) to arrive at a wholesale price. This wholesale price will apply to all types of retailers, with the exception of licensed establishments (restaurants, bars, hotels) who must continue to buy from government liquor stores at their retail price, with no discount. Interestingly, the 27% second tier markup noted above was originally supposed to be 67%, but was reduced in a January 15, 2015 government announcement. This change was likely in reaction to industry concerns that the new wholesale pricing structure as originally announced might actually cause some significant retail level price increases to medium and higher priced wines.

In preparation for the change to the new wholesale pricing system, the BCLDB has recently sent a request out to all B.C. wineries asking that they confirm the wholesale cost (which they call "prime cost") for each of their products. As a reference point, they have provided the prime cost on file for each currently listed product. Presumably this is the prime cost obtained from working backwards from the current LDB display price under the current system. Wineries have until February 13, 2015 to change their prime costs, if they so choose. If they don't, the BCLDB will move forward with the existing prime cost in their system.

But what does prime cost represent? For a wine manufacturer, this amount should capture all the direct costs of producing a particular wine product (grapes, direct labour, supplies, bottling costs & packaging as well as the direct components of overhead – annual amortized cost of equipment, barrels and manufacturing facilities). The process of capturing costs of production and allocating them to specific products can be complicated and is definitely beyond the scope of this article. In our experience, most small- to medium-sized wineries do not have accurate calculations for prime costs and rely instead on estimates.

Under the current pricing structure, B.C. wineries were able to exercise some degree of control over retail store prices through the price they established with the BDLDB. Under the new wholesale system, wineries will have consistency in the price they receive for their wine from various types of retailers, but will have less control over the price on the store shelves. This is because retailers will be much freer to establish their own retail prices based on their desired retail markup.

Since the Government's announcement last November, concern has been expressed in the B.C. industry that the new wholesale markups will lead to higher retail prices for medium and high-priced wines. Unfortunately, these are the price bands where most BC VQA wines currently reside.

The following table demonstrates the issue of rising prices for medium and high-priced wines, even after factoring in the reduction in the second tier markup from 67% to 27% for wines with a wholesale cost of greater than $8.81 per bottle. The table compares the retail display price (before tax) under the old and new systems, at various prime cost per bottle levels. A retail level markup of 30% is assumed, which this is basically consistent with the BCLDB store markup embedded in the current system. The calculations were done using the BCLDB's "Pricing Simulator" (old system) and "Wholesale Pricing Calculator" (new system) tools on their website.

Prime cost/bottle

$10

$15

$20

Retail price (pre-tax):

     

   old system

$20.50

$28.05

$35.60

   new wholesale pricing system

$23.76

$32.02

$46.28

       

Expected increase in retail price

$3.26

$3.97

$10.68

It seems clear that when retailers are feeling squeezed, there will be pressure on the suppliers to share the pain by reducing their wholesale prices. That brings us back to the current decision facing B.C. wineries regarding whether or not to adjust their prime cost, which affects the wholesale price to all retailers under the new system. The table above demonstrates that leaving prime costs unchanged puts pressure on the retailers to either increase retail prices or accept a decrease in their profit margin. Of course, a retailer could also choose to buy from a different winery with a lower wholesale price.

If all this sounds confusing – think of the total profit available on the sale of a bottle of wine as a pie. The only way the pie gets bigger is if the end retail price to the consumer goes up, and that is clearly not the B.C. government's goal in reforming the system. So if the pie is no bigger, the only way B.C. wineries get a bigger slice is to:

a) Have the retailer accept a smaller slice, or

b) Be their own retailer and sell more wine through their own wineshop or direct-to-consumer.

The only way to really understand how much room you have to work with is to develop a thorough understanding of the real cost to produce each of your products. Estimating is unreliable and can lead to ineffective pricing decisions that wipe out your bottom line without you even knowing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions