B.C. Wineries Eye Price Hikes

A new wholesale pricing model, shifting exchange rates and envy of Washington state prices

by Peter Mitham
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Wines from the Okanagan Valley and other regions of British Columbia could become more expensive as wineries take advantage of the strong U.S. dollar and changes in government policies.

Vancouver, B.C.—Shifting mark-up protocols and fluctuating exchange rates have British Columbia wineries eyeing price increases in 2015. The average bottle of wine made entirely from B.C. grapes sold for $17.76 (CAD) in the most recent fiscal year, but a combination of factors could see that increase in the coming months.

During a seminar on wine law that Law Seminars International hosted last month in Vancouver at the start of the Vancouver International Wine Festival, Al Hudec, a corporate lawyer with the firm Farris, Vaughan, Wills & Murphy LLP, noted that the end of subsidies for the B.C. Liquor Distribution Branch (BCLDB), a new government markup structure for alcohol that kicks in April 1 and a shift in Canada’s dollar versus the U.S. greenback that will boost the price of imported wines could create an opportunity for wineries to raise prices.

Canada’s dollar, in particular, has dropped sharply after trading at near parity for four years, and is now worth 78 U.S. cents. This has boosted the cost of imports, with a recent study for the University of Guelph suggesting Canada could see overall food prices rise by 2.4 percent this year, with some food imports rising by as much as 7 per cent.

Wine wasn’t specifically examined in the study, but Hudec said the outlook for pricing in B.C. is by no means easy to determine.

“It is going to be very difficult for a while to sort out pricing,” he told Wines & Vines. While the effect of exchange rates on the price of imports is well known, fallout from changes to the retail system is not. Historically, the cost of distributing liquor in the province — done from two provincial warehouses — was back-stopped by the government’s general revenue fund.

“Under the new wholesale pricing model, the LDB pays the same wholesale markup as the rest of the industry and needs to establish a further markup to cover its operating cost,” Hudec explained. “Given that historically its operating costs have been 17 to 18 per cent of revenues, this implies it may have to increase some prices to cover its costs.”

At the same time, wineries have been asked to submit the wholesale pricing on which the markups will be made — without knowing by how much their products will be marked up. This makes it difficult to know what the final shelf price of their products — which, in another change of practice, won’t include applicable taxes — ill be.

“Some producers may take the opportunity to take a price increase‎,” Hudec said — an opportunity easily seized in the overall turmoil surrounding pricing. However, as Hudec and panellists at last month’s seminar noted, no one wants to offend the consumer.

David Enns, one of the panelists and co-owner of Laughing Stock Vineyards, believes the lower end of the market will be more sensitive to price increases while premium-tier wines will have more leeway to boost prices.

“All you have to do is look into Washington State — the same kind of premium product [there] is almost double the price,” he said. “A bottle of Cabernet-Merlot or a Syrah out of Walla Walla from Seven Hills Vineyard, or from Red Mountain, is going to be $60 or $80 a bottle. Our Syrah is $36 a bottle.”

While the pedigree of a B.C. wine might be different, Enns said the gap in pricing suggests that wineries that need to increase prices — and have the track record to support the increase — may be able to manage a modest step up as the industry sorts out the new pricing environment.

“They can offer up their product with price escalation this year,” he told Wines & Vines. “The market should get paid for its hard work and diligence over a decade, and that’s what Al was talking to. Consumers are starting to recognize the quality factor, and they’re starting to be willing to pay for it and this is a pivotal year because there’s this trend he sees correlated out of the U.S. that the consumer is willing to accept and pay more for a superior product.”

Laughing Stock itself takes a long-term view of pricing. Its original business plan identified where pricing should be to support the winery’s development through its first decade, and as it prepares to debut a Pinot Noir offering this year, Enns said it is looking out another decade.

“Price increases in the past 10 years have just been there to allow for inflationary pressure, and general industry price increases,” he said. “We look at the marketplace, what we have to do to make that bottle of wine, and we look at where we want to be … five to 10 years from now. That’s how we set the price.”

Changes to the province’s retailing environment may affect wineries that sell primarily at retail. Enns feels that those that have developed good relationships with restaurants and the direct-to-consumer channel – which collectively account for 65% of Laughing Stock’s sales — will be largely unaffected.

This is the sense of Mark Simpson of B.C. Wine Studio in Okanagan Falls. What the B.C. wine industry is facing is something that’s largely déjà vu from the time he spent as brewmaster for Granville Island Brewing in the 1990s.

“What’s most important here is to maintain loyalty and communications with existing customers, and to be open to opening up new channels like grocery stores,” he said during a question-and-answer session at last month’s seminar. “I know I’m going to have to pay slotting fees and kickbacks and case discounts – all that nasty business that goes along with that. … So just man-up and get busy: make good wine, sell it at a fair price, and make sure that your customers are really engaged in what you’re doing.”

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