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Sobering Result

The Alberta Liquor Retailing Industry Ten Years After Privatization

Executive summary

Sobering Result

In 1993/94 the Alberta Government implemented major policy changes involving the control, taxing, and distribution of liquor products. These changes included privatization of the retail and are housing functions, switching from an ad valorem (percentage of price) to a unit (flat) tax system of alcohol excise taxes, and the ending of direct control of liquor regulation and moving to a legislative and enforcement approach.

Ten years later the retail industry has evolved into monopolistic competition with its inherent excess capacity and high costs. The government has lost effective control of the liquor industry which will likely continue to evolve into an oligopolistic market structure as chain stores get greater control. Against the trends in other jurisdictions, liquor consumption has increased (with its potential risks of increasing social ills), wholesale costs have risen, and retail prices have increased. Although retail prices have increased, the tax revenues to government have fallen significantly.

Approximately 75% of Canadians consume alcoholic beverages. Estimates suggest 10% of consumers purchase 50% of the products sold. Average consumption of alcoholic beverages has been falling over the decades across Canada. Using international comparisons, Canadians are more moderate drinkers when compared to Americans and Europeans. The declining importance of expenditure on alcohol by Canadians is also shown by the fall in expenditures on alcohol as a percentage of consumer expenditure. Alcohol expenditure in 2000 was 1.72% of the average consumer’s budget. This was 7.5% lower than in 1996 at 1.86%. Two-thirds of alcoholic beverages are sold in retail outlets, and approximately one-half of the sales are on beer products.

Comparing provinces, Alberta has the highest per capita consumption of alcohol when measured by dollar value of expenditures or absolute alcohol consumed. Calgary rates the highest for major metropolitan areas, while Edmonton is a modest eighth. The consumption of alcoholic beverages is positively correlated with income. When calculated as a percentage of income, Alberta’s expenditures on alcohol are closer to the national average and that of its neighbours.

Social issues relating to alcohol consumption include ill- health effects, fetal alcohol syndrome, family violence and divorce, lost work and productivity, and crime including impaired driving. Against the general backdrop of falling crime rates in Canada, there is local evidence that crime is associated with alcohol availability and price. Greater ethnographic study needs to be done in order to determine if liquor privatization, and the resulting changes in marketing, are associated with crime rates. Alberta has the second highest impaired driving charge rates in Canada. Edmonton and Calgary are first and third, respectively, in metropolitan area comparisons. These rates appear to be relatively stable over the last seven years.

Public policy issues are created by the special characteristics of liquor as a consumer product. The potential misuse of alcohol and its associated problems lends support to those who call for public regulation and control in the marketing of alcoholic beverages. A major responsibility of government is to protect the interest of the general public against the abuse of alcohol and its costs imposed by a minority.

The socially responsible marketing of alcohol appears to be less effective with the private retailing of liquor when compared to a public retail system. The efforts to restrict or prevent sales to certain high-risk individuals are incompatible with the profit motive in private marketing. Regulation and enforcement become necessary, which, at the very least, add additional public costs. Additionally, there is greater potential for illegal liquor manufacturing or smuggling and sales under a system with a large number of private retailers. Again, policing, necessary in order to prevent this activity, incurs increased public costs.

Taxes on alcohol are imposed by both federal and provincial governments. There are a number of arguments to justify this type of excise tax. Liquor consumption generates social costs, liquor is a luxury product, it has an inelastic demand, and its consumption is complementary to leisure. A tax on liquor does two main things. It increases the price of alcoholic beverages, reducing consumption, as well as any associated social ills. It brings in revenue to governments, and the tax revenue obtained can (potentially) be used to help correct or compensate for these negative effects.

Alcohol excise taxes can be either charged per unit or as a percentage of price (ad valorem). An ad valorem tax is greater the higher the price of the product, and has the advantage that it automatically rises with inflation. This type of tax also has a progressive tax effect if, as in the case for alcohol beverages, people with higher incomes buy more expensive alcohol products. Alberta shifted to a unit tax system after privatization. The advantage of a unit tax is that the amount of tax is independent of the price of the product. Also, a unit tax does not change with price fluctuations—an advantage where prices are volatile. A unit tax will favour expensive products over cheap ones because the tax will comprise a smaller percentage of the purchase price of the expensive product. The initial (1993) unit tax rates were decreased as the private marketing of alcohol led to price increases. This has resulted in lost revenue to the province from alcohol beverages. Liquor revenue is down, measured either: as a percentage of total government revenues, on a per capita constant dollar basis, or on the basis of current dollar per unit absolute alcohol sold. The lost revenue may exceed $500 million over the last ten years.

Liquor prices in Alberta track the Canadian average closely, but spike with privatization in 1993, and then level out as tax rates decreased. When liquor prices are compared with “all other items” in Alberta, it appears the unit tax has dampened the changes in liquor prices, until they take off in 2001. And, over the period of privatization, liquor prices have been more volatile in Alberta than in the rest of Canada. Over the last decade, liquor prices have increased more in Alberta than in British Columbia. Current retail prices are similar in the two provinces, on average, but show considerable variability between stores in Alberta. If the unit tax system had maintained relative tax revenue, wholesale prices would be considerably higher in Alberta today than they are. These lower taxes have dampened the upward pressures on wholesale price, limiting retail price increases. The interesting thing about liquor is that a low price is not (or should not be) an objective in the responsible control of alcohol consumption. Public welfare is higher when price is high, consumption is low, and revenues obtained compensate for the social costs.

The number of liquor stores in Alberta has increased dramatically and is high compared to other jurisdictions. Liquor retailing in Alberta is currently a “monopolistically competitive” industry, one in which there are a large number of firms, but each firm produces a product that is “differentiated” from that produced by its competitors. Product differentiation occurs in a number of ways. These include location, the specific selection of products to stock, product expertise, store decor, opening times, advertising, customer loyalty programs, and discounting. Since each firm produces a similar but somewhat different product compared to every other firm in the industry, there is an incentive for each firm to play up the difference in its product in order to boost its sales. Product differentiation allows for an inefficient number of outlets and significantly increases the costs of retailing. Prices have increased, but not to the degree they might have, because the share taken as government revenue has fallen.

The wide variability in prices now found in Alberta demonstrates the degree of differentiation. Additionally, liquor producers appear to be utilizing their market power in order to set prices and pass on increased servicing and marketing costs due to the numerous individual stores now in the Alberta liquor retailing industry. These costs have increased the landed costs, pushing up wholesale prices. Chain stores are now increasing their presence as they realize economies of scale from administrative advantages, advertising, and mini-warehousing. However, these advantages are currently constrained by the wholesale price system, where each firm pays the same wholesale and transportation charges, regardless of the actual cost.

Conclusions

  • The retail liquor industry in Alberta has been evolving over the past decade following the change from a government monopoly to a competitive private market and the change from an ad valorem tax to the unit (or flat) tax markup. 
  • Evidence on the links between alcohol consumption and social ills is overwhelming. Absolute alcohol consumption is high in Alberta relative to the rest of Canada and has begun to climb since 1997. The potential for increased social costs is real. 
  • Socially responsible marketing would educate the public about such dangers as drinking and driving and fetal alcohol syndrome. The public’s objective is to minimize the abuse of alcohol through the limit and control of the sale of liquor, in particular to prevent the sale to underage consumers and the intoxicated. In contrast, the objective of private firms is to sell product. A publicly-owned and controlled system of distribution does not have this inherent incompatibly of incentives. 
  • Private retailing of liquor has required greater regulation and enforcement costs. Some of these costs are incurred in the Ministry while others are shifted to local police departments. 
  • Alberta Government revenues from the sale of alcohol have stayed constant in absolute current dollars. This means that, with inflation, population growth, and growth in sales, revenues have fallen between 1993 and 2001. Prices have increased, but not to the degree they might have because the share taken as government revenue has fallen. 
  • The change from a government monopoly to a private market has resulted in a monopolistically competitive market structure. Some consumer advantages include greater convenience with the increase in number of stores, including more stores in rural small towns, and stores are open longer and later hours. The disadvantages include inefficiencies in the form of excess capacity, duplication, and redundancy, particularly in urban centres. This inefficiency generates considerable higher costs of retailing, even though wages are at half of those compared to other jurisdictions. 
  • The liquor retailing market has been handicapped in its ability to achieve market efficiencies by the control on the wholesale distribution and transportation costs and the restriction requiring stand-alone outlets. However, there are some economies of scale yet to exploit, facilitating the expansion of retail chains. Future directions in the industry appear to favour large grocery chains such as Safeway, the Real Canadian Superstore, the Calgary Cooperative Association Ltd., IGA, and others. 
  • Prices for liquor products in Alberta are comparable to those found in British Columbia (January 2003). However, tax revenues returned to government are much lower in Alberta. This means the privatization effort has been supported and subsidized by the government through a reduction in the tax share of the final retail price. This reduction in tax revenue has limited the greater escalation of prices due to the cost increases caused by excess capacity. 

In summary, the Alberta government has lost effective control of the liquor industry, which will likely continue to evolve into an oligopolistic market structure as chain stores get greater control. Against the trends in other jurisdictions, liquor consumption has increased (with its potential risks of increasing social ills), wholesale costs have risen, and retail prices have increased. Although retail prices have increased, the tax revenues to government have fallen significantly.

ISBN: 0-88627-338-2
Greg Flanagan

Greg Flanagan is a public finance economist with an MES (Political Economy and the Environment) from York University, and MA (Economics) from the University of British Columbia. Greg has taught and been in administration for 30 years in the Alberta post-secondary system, and recently retired from the University of Lethbridge. He has been involved with Parkland Institute since its inception as a board member, frequent researcher, and advocate; and is a distinguished research fellow.

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