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Oct 21, 2014

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Beer distribution in Canada
By Robert Hughey

The Canadian beer distribution system is a veritable minefield of rules and regulations, with each province of Canada setting its own and retaining its own authorities. Historically in Canada, a brewery had to have a brewing facility in each province where it wished to distribute beer. This was an effective way for provinces to get and keep brewery jobs within their respective jurisdictions and to boost revenues from taxes on beer produced and sole in the province.

Freer trade in Canada has meant an easier movement of beer from province to province but inter-provincial barriers still exist. Some provinces have cut reciprocal distribution deals with other provinces which are willing to have a two-way movement of beer between them. Such deals are not universal throughout Canada, however. In contrast to the federal government's direction toward freer trade in all goods, some provinces have taken other stances: Alberta, which has a completely privatized liquor distribution system, has in place a punitive policy of not returning beer bottles whether from a domestic or a foreign source.

So how's a brewer to negotiate all the variables in how each province regulates beer distribution in its own district? Here's an outline of the main provincial distribution regulations.

British Columbia

The British Columbia Liquor Distribution Branch (BCLDB) controls the distribution of beer in the province. For a small listing fee, B.C. microbreweries have first dibs on available shelf space at provincial liquor stores. Usually about 30 select stores are on offer in the distribution package, but all outlets in B.C. have previously devoted shelf space to microbrewery beers at one time or another.

There are 700 retail outlets for alcoholic beverages in British Columbia, 222 of which are provincial liquor stores. There are 300 privately owned cold beer and wine stores, which account for about 40 percent of the beer sold in the province.

From a consumer's standpoint, it is easy to order beer or scotch from most anywhere in the world in a B.C. liquor store, which has a good central distribution system according to Allan Reidlinger, president of Sailor Hagar's Brewpub, North Vancouver, British Columbia.

Yet out-of-province breweries may have difficulty in gaining shelf space, though Big Rock Brewery from Alberta, Unibroue from Quebec, Creemore Springs and the former Upper Canada Brewery from Ontario have made their way into the B.C. liquor stores through vigorously adhering to provincial guidelines and good old persistence.

"Basically, we're full so it's not easy at all to get a listing with BCLDB. We get over 3,000 applications every year, 60 to 70 percent of which are for new products. And of that, maybe 5 percent will actually get a listing," said Dave Hopgood, portfolio manager with the BCLDB.

Microbreweries are permitted to self-distribute but all moneys first go through the BCLDB, with payment made to breweries in three weeks. Microbreweries cannot operate a restaurant, though tasting rooms are allowed and a brewery can sell product on-site in an adjoining space.

A microbrewery, having bought new 351-ml bottles, may choose to buy into the bottle pool of Pacific Western Distribution, controlled by Molson and Labatt. Microbreweries receive sterile bottles from the system, though not necessarily its own new bottles, a cost saving over having to install an expensive bottle washer/scrubber and a brewery always has a fresh supply of beer bottles no matter how far afield in the province bottled beer is shipped, or regardless of the number of returns of brewery specific bottles.

Brewpubs, still limited to 65-seats (D License), cannot sell any beer off-license. A brewpub/hotel combination (A license), with a cold wine and beer store on premise, can sell bottled beer to go, yet the brewery cannot sell growlers of its own draft for off-site consumption. Led by Allan Reidlinger of Sailor Hagar's Brewpub and Paul Hadfield of Spinnakers Brewpub, a group of B.C. brewpub owners and operators has been lobbying the B.C. Liquor Control and Licensing Branch for permission to sell their beers in bottle in the province's liquor stores.

Meanwhile, government officials agree it's a great idea and are conducting a full policy review in B.C. Yet the brewpub lobbyists are getting the old line, that owners/brewers knew what the situation was when they got into the business of brewing at a brewpub.

"We knew we were not allowed by policy to distribute our beers when we started out but by law we should be allowed to distribute in bottle in the province's liquor stores," said Allan Reidlinger, president of Sailor Hagar's Brewpub.

"Legally they can't stop us from distributing product. But we just don't have enough money to go to court to change the policy," said Reidlinger.

A draft letter from J. Chambers at the Liquor Distribution Branch stated that as of November 2, 1997, brewpubs had been granted the same general distribution rights as for microbreweries-though brewpubs faced a 2,500-hl production cap. But the B.C. Craft Brewers Association, led by the Sleeman's and Okanagan Springs Brewery tandem, responded to the provincial government that the microbrewery industry in British Columbia was so fragile that any more competition would cause the industry to fall apart. Less than a week later, a directive from the premier's office quashed the brewpub distribution initiative. Yet in reality, there is no law in B.C. which states that brewpubs cannot distribute their beer through the province's liquor stores; it is merely branch policy not to permit it. Microbreweries had previously agreed that bottled beer from brewpubs in liquor outlets was fine.

An appeal commission made up of a three member panel, which includes a judge, is currently reviewing branch policy.

"Brewpubs operate under what is known as a General Manager's Order. Laws governing the sale of beer have been patched together over the years, making change difficult," said Dave Hopgood, portfolio manager with the BCLDB.

Brewpubs are already being charged the distribution fee under the current fee setup. The charge for distribution is equal to the bottled product markup which is based on a common bottled malt levy. In effect, brewpubs in B.C. are already paying 50 percent more for the privilege to not distribute through provincial liquor stores.

Two brewpubs in British Columbia have a Licensed Retail Store, an LRS, attached to the brewery: Sailor Hagar's in North Vancouver and Swans/Buckerfield Brewery in Victoria, B.C. The LRS license permits these two brewpubs to bottle and sell their own brands, and sell beer from microbreweries and wine.

A moratorium on the LRS license was called five years ago when there were 200 Licensed Retail Stores, and no further licenses have been issued since. For example, neither Yaletown nor Steamworks, two Vancouver brewpubs that opened within the last five years, had the option of applying for an LRS. For a brewpub, the LRS has to be in close proximity, as in attached, to the brewing facility and can't, for example, be moved down the street to a separate site.

Alberta

Alberta is completely privatized and wide open territory for the movement of beer. Any person with a license can import beer from anywhere, though beer must go through a bonded warehouse and the tax paid before it's released.

Still, Alberta does have its own way of controlling the movement of beer into its province. Alberta doesn't return bottles, treating both domestic and foreign beers as imports-it collects and crushes these bottles. Microbreweries from other provinces such as B.C. lose about 20 cents per bottle for new replacement glass. In other jurisdictions, such as Saskatchewan and Manitoba, credit is given for domestically imported beer.

Microbreweries, which are licensed under the Alberta Gaming and Liquor Commission, can self-distribute and sell directly to retailers. A brewing company is not required to have a brewing facility located in the province for it to sell and distribute beer in the province.

Brewpubs can sell draft beer for take-away.

Saskatchewan

Beer distribution in Saskatchewan, which currently has 12 brewpubs and no microbreweries, is controlled by the Saskatchewan Liquor and Gaming Authority (SLGA). To sell beer in Saskatchewan, it is not necessary to have a brewery located in the province.

A new regional brewery tax structure beneficial to small-scale brewers has been implemented in Saskatchewan. Breweries producing between 2,000-hl to 75,000-hl of beer now have a tax markup of $86.20 per hl in bottle, $108.80 per hl in can and $63.30 per hl for draft. The old tax markups of $111.20 per hl in bottle, $133.80 per hl in can and $88.30 per hl for draft remain as the markups for national brewers.

A microbrewery is formally not allowed to "cherry pick" where it will distribute its beers; a brewery must be prepared to sell throughout Saskatchewan.

All beer must be sold through the SLGA, but individual companies can arrange their own delivery. If a craft brewery sets itself up as a micro, not as a brewpub that also wholesales, it would be treated as any other brewery such as Great Western.

Brewpubs, having been given permission to sell wholesale, are only allowed to sell draft beer. A brewpub must have at least one mainstream guest beer available. There is a lower provincial tax on the first 2,000 liters, with a minimum charge of 12 cents per ounce, plus federal Goods and Services Tax and a Liquor Consumption Tax on the retail price.

Off-license sales are now permitted for brewpubs. Originally brewpubs could only sell mainstream beers, and only if the brewpub was 1.6 km from any other retail beer-to-go licensee (known in the west as an "off-sale.")

As with most laws, there are exceptions. The Bushwakker Brewpub received permission to off-sale their beers, which was grandfathered in. But for new brewpub licensees, the 1.6 km rule applies to in-house beers as well as mainstream beers.

A brewpub can order in beer from anywhere in the world for sale on-site but cannot off-sale them.

A brewpub license granted by the Saskatchewan Liquor and Gaming Authority permits the holder to share in the monopoly on pub licenses with hotels, and in some cases allows the holder to share in the monopoly on licenses for the operation of beer and wine stores.

Thus, some brewpubs are not allowed to operate retail stores selling mainstream beer and wine because they are within 1.6 km of an existing similar outlet. All brewpubs who wish may retail their own beer. Some don't. Thus, the suspicion arises that some brewpub owners only operate their bars as brewpubs to obtain a pub license and/or a license to retail mainstream beer.

The only way to get a pub license is to be a brewpub or a hotel. When the Saskatchewan government suggested allowing neighborhood pubs, the holders of existing pub licenses lobbied hard against the idea.

Manitoba

Beer distribution in Manitoba is centrally regulated by the Manitoba Liquor Control Commission (MLCC). The setup in this province is straightforward. A microbrewery can self-distribute draft or bottles to bars, pubs, restaurants, government liquor stores and hotel vendors. Or it could choose to use one of three distributors for a fee of, for example, $8 per keg.

All beer is purchased by the MLCC which does not warehouse it. A central computer system records all orders, and a microbrewery need only access the information and make deliveries so that it is virtually a guaranteed next day delivery system. The MLCC takes its cut off the top and then issues a weekly check to the brewery.

Microbreweries outside Manitoba wishing to ship beer to the province need only to get an approved listing from the MLCC and then choose a distributor.

At present, there are no brewpubs in Manitoba, although there is some talk of brewpubs opening in the future.

Ontario

In Ontario there are parallel beer distribution systems, Brewers Retail (BR) being the main one for breweries of all sizes, with the Liquor Control Board of Ontario (LCBO) providing limited shelf space for beer alongside wine and liquor. Microbreweries can self-distribute to bars and restaurants. Aside from bottle and draft sales at the brewery, they are not authorized to sell their beers other than through the BR or the LCBO. Early in 1998, the Liquor Licence Board of Ontario, LLBO, was renamed the Alcohol and Gaming Commission of Ontario, which is the policy setting organization.

Brewers Retail has a current listing fee of $23,870 per brand per package size to get distribution through all 432 of its retail stores. Once a microbrewery has paid this listing fee it can choose which Brewers Retail stores it will use. But for most microbreweries paying for beer outlets in remote Northern Ontario it most probably will never use does seem a waste of money which could be better spent promoting its beers locally. Many micros do want to be in the BR but only in the more populous southern section, the Golden Horseshoe, of this large province.

Out-of-province breweries seeking to distribute beer in Ontario must apply for a listing at the Brewers Retail. They pay the required fee of $23,870 per brand per package size, meet all criteria for laboratory, packaging, labeling, pricing and bar coding, sign the agreement and then begin shipping beer through the LCBO to the BR distribution system to as many BR stores as the brewery selects. As the LCBO is the sole importer of all beverage alcohol into Ontario, all beer must go through LCBO warehousing.

If a brewery chooses to go through the LCBO, in lieu of the BR stores, it still must meet laboratory, packaging, labeling and bar code requirements. But LCBO fee structure is less onerous than BR's, with only a cost of service fee, or handling fee. However, the LCBO decides which outlets the out-of-province beer is shipped. If an adequate sales target is not met by the brewery/importer, then the LCBO may delist the product at its discretion.

A special case is the Magnotta Brewery in Scarborough, and now Vaughan, which has taken an uncommon approach to selling its beers in Ontario. Magnotta's products are only sold at the brewery's retail store and cannot be bought at either the BR stores or the LCBO outlets.

Magnotta's original strategy was to open breweries at several of its existing winery outlets, but recent policy changes have led to a scaled-back operation-the addition of a single brewery at its 55,000 square-foot flagship site in Vaughan. A May 16, 1997 directive from Rowland Dunning, vp Corporate Affairs for the Liquor License Board of Ontario (LLBO), the licensing side of things in Ontario, states: "All beer products sold at an on-site brewery store must be fully manufactured by the brewer at the manufacturing plant adjoining the store."

"The intent of this was to force Magnotta to not cross-sell within its own company," said Mike Ligas, head brewer at Magnotta.

When Magnotta opened its first brewery, it was under the governance of a regulation which decreed that "50 percent of all beer products sold at an on-site brewery store had to be manufactured at the brewery adjoining the store."

"Movement of beer between Magnotta breweries was an option the company needed to exploit to maximize brewery capacities and efficiencies," added Mike Ligas, head brewer at Magnotta.

But the LLBO/LCBO changed the rules in mid-game. Magnotta neither received confirmation that the board ratified the 100 percent rule, nor was any reason given for the change.

To put this in context, a quote from the 'Liquor Licence Act of Ontario':

'Manufacturer's licence to sell to LCBO
22. (1) A manufacturer of spirits, beer or Ontario wine may apply to the Board for a licence to sell the spirits, beer or Ontario wine to the Liquor Control Board of Ontario under the Liquor Control Act.
Issuance (2) The Board may issue a manufacturer's licence to an applicant under this section.
Conditions (3) A manufacturer's licence is subject to such conditions as may be imposed by the Board or prescribed.'

And from the 'Agreement to Purchase Beer for Resale to BRI, (Brewers Retail Inc)':

'The Liquor Control Board of Ontario, LCBO, has the sole and exclusive power and authority to import liquor products, including beer products, into Ontario and to control the sale, transportation and delivery of such liquor products in Ontario.'

"It is Magnotta's position that the LCBO uses its regulatory power to support its competitive place in the marketplace with a view to making money," said Arnold Schwisberg, counsel for the Magnotta Brewery.

"The LCBO can't be both a retailer and a regulator," stated Arnold Schwisberg.

When Magnotta applied for a manufacturing license extension for the Magnotta Brewery in Scarborough to encompass the new Vaughan Brewery, they were told of a new LCBO policy regarding a second location. If a brewery was brewing 25,000 hectoliters of beer per year, it would be entitled to a second store, which effectively meant no microbreweries qualified, other than existing breweries already at that level of production, an obvious constraint to growth according to Arnold Schwisberg. As a result, Magnotta was forced to have two separately incorporated companies.

"It is Magnotta's position that the LCBO appears to do things in anticipation of Magnotta's growth with a view to preventing it," said Arnold Schwisberg, counsel for the Magnotta Brewery.

"The LCBO appears to pass policy different than that which is recommended to it by its policy advisors. The LCBO appears to put forward policy which favors its own profitability while limiting a brewery's ability to self-distribute and the LCBO does not allow submissions regarding policy," said Arnold Schwisberg, Magnotta's lawyer.

"At Magnotta, each brewery operates as an integrated whole but it is forced to have duplicative manufacturing facilities. Basically it was a constraint to growth," said Arnold Schwisberg. "The two Magnotta breweries were prevented from selling each other's products."

"The LCBO pockets more money if products pass through its distribution system than if through a private outlet," added Arnold Schwisberg.

The LCBO declined to give out documents supporting its case, forcing Magnotta to appeal to the courts for said information.

While this certainly seems to be directed at the Magnotta Brewery/Winery operation, it also has the effect of stopping contract brewing. Brewing under license remains legal-one brewery may license another brewery to brew one or several of its products and receive a royalty in return. The brewery which does the brewing takes care of all other aspects, from paying the required taxes to brewing and distributing the beer.

At present, Ontario brewpubs can only sell beer directly over the bar at their respective locations, though brewpub owners have launched lobbying efforts to relax the laws. The LLBO now appears willing to allow brewpubs to produce beer with an ABV above 6.5 percent and to grant permission for brewpubs to move and sell brewpub produced beer at trade-shows and beer festivals. However, permission for brewpubs for the movement of brewpub produced beer to one other location which is owned and operated by the same company was to receive further review, while retail sales at a brewpub were not likely to happen.

A counter proposal by Ron Keefe of the Granite Brewery, for brewpubs to bottle one or two beers and ship to 4 or 5 LCBO outlets in close proximity to each brewpub received consideration, though no ruling has yet been handed down.

Brewpub operators Ron Keefe, Granite Brewery, Toronto, Ontario, and his brother, Kevin Keefe, Granite Brewery in Halifax, Nova Scotia, have struck a deal with the Hart Brewing Co, Carleton Place, to brew and bottle Peculiar, an ale, for distribution in Ontario and Nova Scotia.

Ron Keefe says that in general, his dealings with the LCBO have been fine, though they tended to be somewhat nit picking when it came to the size and positioning of the bar codes on the label. As part of the process of getting a listing, the Granite Brewery also had to submit a printout of its web page for board approval. While Keefe has heard stories of other brewers' difficulties in getting beer moved from the LCBO central warehouse to the desired distribution outlets once there, he remains optimistic.

The Granite's Peculiar, in 650 ml brown bottles and retailing for $3.30, including all taxes, is now available in over 200 LCBO stores across Ontario.

Quebec

In Quebec, under the auspices of the controlling agency RACJ (regie d'alcool des courses et des jeux), a brewer's license includes the right to warehouse and distribute beer and to sell directly to licensed retailers such as bars, restaurants, depanneurs (corner stores) and grocers.

For years, Quebec breweries could not sell beer directly to consumers at the brewery, though they could offer free samples of beer, denying them what most breweries saw as a valuable outlet for product and a very useful personal contact with consumers. This was set to be changed, but the Quebec government waffled, backed away, and then passed a law which permits a brewery to not only sell directly to consumers but to have a brewery tap as well.

In a unique bit of market control, individual brands sold in provincial liquor stores, Societe des Alcools du Quebec (SAQ) stores, cannot be sold in the broader system of depanneurs and grocers.

In Quebec brewers must use a returnable bottle that they or their agent must collect and reuse. In a bid to encourage recycling, the deposit on large beer cans and bottles over 450-ml has increased by 15 cents, putting the new deposit at 20 cents. Small container deposits remain unchanged.

Recyc-Quebec reached the deal with the brewers and the province's environmental department for the new higher deposit early in 1998. Showing good business sense and a spirit of cooperation, a number of Quebec microbreweries have banded together to share truck space and cut shipping costs.

Interprovincial beer shipment agreements exist between Quebec and all other provinces with the exception of New Brunswick. Quebec and New Brunswick are currently negotiating for such an agreement at the request of Moosehead Breweries Ltd., St. John, New Brunswick, which wants to distribute in Quebec.

Beer from out of province is funneled through the Societe des Alcools du Quebec (SAQ) system.

Quebec does not charge a handling fee, but has federal taxes set at $2.29 a case and provincial taxes hitting the $5.00 mark per case.

Brewpubs in Quebec are allowed to sell their beers on premise only.

The Maritimes

Nova Scotia has permitted the movement and sale of beer from one brewpub site to another bar or restaurant which is owned and operated by the same person or company, but other off-site sales are not legal.

Kevin Keefe of the Granite Brewery in Halifax, Nova Scotia, who was instrumental in pushing for the change, says it took him a year to get his second license after a long, hard struggle with the government bureaucracy.

"Nothing is easy when you're dealing with a government bureaucracy. But at least in a smaller province such as Nova Scotia it was a bit easier to keep going back, whereas in a large metropolitan area such as Toronto, it may take up to a year before you can even get in again to see the liquor authorities," said Keefe.

Kevin Keefe, who along with his brother Ron Keefe, owner/brewer at the Granite Brewery No. 2 in Toronto, have just begun brewing and bottling their Peculiar brand at the Hart Brewery, Carleton Place, Ontario. Returning from Hart with 5 cases of the newly bottled Peculiar to use as a marketing tool in order to generate interest in Nova Scotia, Kevin Keefe hopes this will lead to a listing.

Ontario will be the main market for Peculiar, though Keefe has plans to introduce Peculiar at Nova Scotia's main specialty liquor store, Port of Wines. Kevin Keefe said it was not an easy process to get a listing and that he still had no idea of final costs to get Peculiar on the shelf.

"Inter-provincial barriers are still in place, though the large regionals such as Unibroue from Quebec and Sleeman from Ontario have a presence in Nova Scotia," said Keefe, "but you don't see any beers from smaller microbreweries such as McAuslan's of Montreal."

Sam Adams is the only imported beer from American microbreweries to appear in Nova Scotia. Otherwise it would appear to be onerous to export beer to this province-it is not a large market and, coupled with the trade barriers in place, the province only sees the likes of Budweiser and Old Milwaukee as alternatives.

The newly opened Maritime Brewing Co. in Halifax has a restaurant, which offers an accessible test marketing site for Maritime's beers. Seasonal specialty beers such as a filtered wheat or a Christmas ale can have test runs in the restaurant. If the brews prove popular, then Maritime, having an existing cold store license, can apply for a special listing for the new beers, which has a minor fee, for sale in the cold beer store. While the listing is not automatic, the Nova Scotia Liquor Commission has been very co-operative, says Kirk Annand, headbrewer and vice-president in charge of production at the Maritime Brewing Co.

Sean Dunbar, sales manager at Picaroons Brewing Co. in Fredericton, New Brunswick, said the brewery had applied for a beer listing in October of 1997 for Nova Scotia but was rejected. The feedback he got from the liquor commission was that the brewery did not meet the criteria-despite several meetings with the liquor commission officials, where it appeared all was in order. While Dunbar suspects politics at play, he was also told that Nova Scotia was in the process of deciding whether or not to carry any other microbrewed beers.

"It's probably better that we didn't get listed with the Nova Scotia Liquor Commission as we were running at peak volume when the decision came down," a reflective Sean Dunbar says.

One thing Dunbar knew, it wasn't because of labeling requirements. New Brunswick has some of the strictest codes in Canada, and he was told beforehand that labeling would not be a problem in Nova Scotia as Picaroons had already been approved in New Brunswick.

Picaroons was in the process of installing a recycled 30-hl brewing system in place of its original 8-hl Peter Austin system, which would be kept to handle keg product.

"But with the installation of a new, larger brewing system, we'll certainly be glad of a listing in Nova Scotia," adds Dunbar, who was advised to reapply now that a new provincial government had been installed.

On the island of Newfoundland, if a microbrewery brews on the island, it can retail its beers in the corner store, a distinct distribution advantage. A brewery is also permitted to retail through an on-site store with the appropriate retail license in place.

Over on Prince Edward Island a brewpub is only allowed to sell beer over the bar and not yet permitted to bottle for off-license sale.

Now take all the various distribution policies across Canada and toss in the requirement for French and English on packaging in provinces such as Ontario and Manitoba, and the complexity of the issues surrounding distribution of beer in Canada becomes evident.

But as Jim Koch of the Boston Beer Co observed when he first brought Sam Adams Ale and Lager into the Ontario market from the U.S.: "Your have to play by the local regulations", with the implication being, even if you don't agree with them.

STORIES BY
ROBERT HUGHEY