ECONOMIC IMPACT STUDY OF THE PRIVATE WINE AND

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ECONOMIC IMPACT STUDY OF THE PRIVATE WINE AND Powered By Docstoc
					ECONOMIC IMPACT STUDY
OF THE PRIVATE WINE AND
SPECIALITY STORE PROGRAM
NSLC TENDER NO: SR-16-I-06




Submitted to:

Nova Scotia Liquor Corporation


Submitted by:

Gardner Pinfold Consulting Economists Ltd




April, 2007
TABLE OF CONTENTS
                                                                                                                    Page
Executive Summary ......................................................................................................... i
I.  Study Context ........................................................................................................ 1
    1. Study Background ............................................................................................ 1
    2. Study Objective ................................................................................................ 1
    3. Study Requirements ......................................................................................... 1

II.    Methodology .......................................................................................................... 3
        1. Review of Available Data and Alternative Models .......................................... 3
        2. Interviews with Key Stakeholders................................................................... 3
        3. Preparation of Direct Expenditure Profiles ..................................................... 3
        4. Determine and Interpret Economic Impact Estimates..................................... 4

III.   Private Wine and Speciality Store Program Overview ........................................ 5
         1. PWSS Program Background.......................................................................... 5
         2. PWSS Program Design ................................................................................. 5
         3. Program Management/Operation................................................................... 6

IV. Economic Impact of PWSS Program.................................................................... 9
      1. Assumptions .................................................................................................. 9
      2. Economic Impacts of Private Wine Stores ................................................... 10
      3. Incrementality .............................................................................................. 11

V.     Review of Alternative Models ............................................................................. 15
         1. Alberta’s Private Wine Store Model.............................................................. 15
         2. British Columbia........................................................................................... 16
         3. Ontario......................................................................................................... 18
         4. Quebec ........................................................................................................ 19
         5. Manitoba and Saskatchewan ....................................................................... 20
         6. Australia....................................................................................................... 20
         7. New Zealand ............................................................................................... 21
         8. United Kingdom ........................................................................................... 21

VI. Analysis of NSLC PWSS Model .......................................................................... 23
      1. Impacts of Current Supply Chain ................................................................. 23
      2. NSLC Pricing Model .................................................................................... 25
      3. Benefits/Costs for Food and Hospitality Sector ............................................ 27
      4. Impact on Local Wineries............................................................................. 32
      5. Expanding the PWSS .................................................................................. 33
      6. Lessons Learned ......................................................................................... 44

VII. Recommendations .............................................................................................. 47
       1. Continuation of the PWSS Program............................................................. 47
       2. Changes to the PWSS Stocking Model ........................................................ 47
       3. Changes to the NSLC Pricing Model............................................................ 49
       4. Expanding the PWSS Program .................................................................... 50
APPENDIX A: Nova Scotia Economic Impact Model



Gardner Pinfold
Executive Summary
STUDY BACKGROUND                                       Barriers, risks, and opportunities arising from
                                                        each scenario; and
The Nova Scotia Liquor Corporation (NSLC) is
Canada’s fourth largest retailer of beverage           Potential benefits and costs to the retail sector;
alcohol with more than 100 retail stores, 23           Potential benefits and costs to the food and
agencies and 2,200. The NSLC implemented a              hospitality industry.
Private Wine and Specialty Store (PWSS)               METHODOLOGY
Program in 2003 in response to direction from
                                                      Review of Data And Alternative Models
government. Four PWSS operations began
operation in the HRM area in 2003 as part of a        This study conducted a review of all relevant
program designed to offer the consumer                documentation obtained from NSLC related to
enhanced service and choice.                          the PWSS as well as documentation obtained in
                                                      our literature review. Collection of qualitative
As the end of the initial 5-year term of the          and quantitative data includes an extensive
operating agreements is currently approaching,        review of PWSS Program documentation,
the Province of Nova Scotia requires                  including the 2002 Request for Proposals,
recommendations from the NSLC as to whether           proposals submitted by each of the four
the program should be expanded, remain the            successful proponents, the PWSS Operating
same, or be terminated.                               Agreement, the PWSS Operating Manual, and
STUDY OBJECTIVE                                       subsequent reports and studies conducted. In
The key objective of the study is to determine        addition, the review of relevant literature on
the economic impacts arising from the PWSS            pricing and supply models used within Canada
Program, and identification of the potential          and elsewhere has served to guide the review of
impacts resulting from public policy measures to      alternative approaches for the PWSS Program in
either expand or terminate the program. This          the future.
study conducts an Economic Impact Analysis            Interviews With Key Stakeholders
(EIA), using the Nova Scotia Input/Output (I/O)       Stakeholder interviews were conducted with
Model, to determine the economic impacts of the       private wine store owners/operators, agents, and
PWSS Program based on the economic results to         licencees, Nova Scotia wineries, and union
date. In addition, this study also examines the       representatives. Interviews were conducted with
impacts resulting from limited expansion of the       key stakeholders identified by the NSLC and on
PWSS Program, based on likely markets where           suggestion from the operators. Information
such outlets may be feasible, as well as the          provided through this interview process, along
possibility of termination of the program.            with the review of current pricing and supply
Recommendation on the optimal future of the           models were essential in developing appropriate
PWSS Program are presented based on this              approach to measure economic impacts and in
analysis.                                             developing recommendations for the general
STUDY REQUIREMENTS                                    direction for the PWSS Program. The
This study examines the economic impacts              information provided from these interviews also
within the Province of Nova Scotia as a whole,        provided specific data and information required
given that the PWSS Program, while                    for the appropriate measurement of direct
concentrated in the HRM area, has the potential       expenditures used to estimate economic impacts,
to spread to other areas of the province should a     as well as developing the profile of direct
decision be taken to expand the program.              expenditure patterns associated with the PWSS
                                                      Program.
The following issues are examined to the extent
that data and economic modeling tools allow:          Determine Economic Impact Estimates
 Impact of use of the NSLC supply chain on the       Economic impacts are determined by analyzing
  program;                                            the direct linkages within the Halifax and the
 Impacts of changes to the PWSS pricing model        Nova Scotia economy and assigning the direct
  in enhancing the success of the program;            expenditures to appropriate industry sectors
                                                      within the Nova Scotia economy. Total direct,
 Potential benefits and costs to NS wine industry;
                                                      indirect and induced GDP, employment and tax
 Potential impact of each scenario upon the
                                                      impacts are estimated based on the direct
  existing PWSS operators;


Gardner Pinfold                                                                                       i
ii                                  Economic Impact Assessment of PWSS Program – Final Report


expenditures of the PWSS Program. The                Incrementality
economic impacts results include direct, indirect
                                                     The extent to which the economic impacts
and induced economic impacts.
                                                     resulting from the private wine store operations
The economic impact results are derived from         in Nova Scotia depend on the extent to which the
the Nova Scotia I-O Model and presented in a         expenditures made by these operations would
series of summary tables                             have happened in their absence. One of the key
ECONOMIC IMPACT OF PWSS PROGRAM                      drivers in the incrementality issue is whether
                                                     consumer expenditures on wine from the private
The economic impacts of the PWSS Program are         wine stores is incremental to that which would
based on the capital investment, direct              have occurred otherwise.
employment and annual operations and direct
expenditures of the four private wine stores in      Studies have shown that the consumption of
Nova Scotia. These numbers were formatted into       wine increases with increased variety and
the Nova Scotia I-O Model and the I-O                privatization of wine sales. The effect of
simulations were run by the Economics and            availability change in wine consumption has
Statistics Division of the Nova Scotia               been extensively investigated in a number of
Department of Finance.                               cases of privatization, and it has consistently
                                                     found that privatization is followed by a
Economic Impacts of Private Wine Stores              substantial increase in the consumption of the
The direct expenditures of the four private wine     beverage privatized. Most studies examining
stores include capital investment, and annual        changes in the level of privatization in wine sales
operations and expenditures.                         have shown increased consumption, and some as
                                                     high as 95 percent increases.
The total employment impacts of the four private
wine stores range from 35 person years in 2003       Current data shows per capita wine consumption
to 52 person years in 2006. The total                in Nova Scotia has increased since the
employment impacts are comprised of the total        establishment of the Nova Scotia private wine
direct employment impacts (ranging from 15           stores, both in dollar terms and in volume. The
person years in 2003 to 34 person years in 2006)     growth in per capita wine consumption in Nova
and total spin-off employment impacts (ranging       Scotia has been larger than the overall increase
from 20 person years in 2003 to 18 person years      in Canadian per capita wine consumption over
in 2006).                                            this period.
The total household income impacts of the four       However, while there has been an increase in
private wine stores range from $1.18 million in      consumer awareness and increased consumption
2003 to $1.4 million in 2006. The total              of wines in Nova Scotia, it difficult to
household income impacts are comprised of the        definitively measure the percent increase in
total direct household income impacts (ranging       consumer consumption of wines directly
from $0.5 million in 2003 to $0.7 million in         attributable to the establishment of the PWSS
2006) and total spin-off household income            Program within the confines of this study. The
impacts (ranging from $0.7 million in 2003 to        issue of incrementality becomes further
$0.8 million in 2005).                               complicated when one considers that the true
                                                     economic impacts associated with the PWSS
The total tax revenue impacts of the four private
                                                     Program would include not only incremental
wine stores range from $109 thousand in 2003 to
                                                     wine purchases made at the private wine stores
$140 thousand in 2005. The total tax revenue
                                                     themselves, but incremental wine purchases
impacts are comprised of the total direct
                                                     made at restaurants, bars and events, as well as
provincial government revenue impacts (ranging
                                                     through the NSLC outlets, due to an increased
from      $38     thousand    in     2003      to
                                                     knowledge, awareness and appreciation of wines
$53 thousand in 2006) and total spin-off tax
                                                     in general, attributable to both the products and
revenue impacts (ranging from $71 thousand in
                                                     services offered by the private wine stores. A
2003 to $87 thousand in 2005 and $76 thousand
                                                     more detailed analysis is required to determine a
in 2006).
                                                     precise determinant of the incremental economic
                                                     impacts resulting from the PWSS Program.




                                                                                      Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                        iii


RECOMMENDATIONS                                       With the implementation of SAP technology and
1. Continuation Of The PWSS Program                   the goal of streamlining NSLC’s business
                                                      processes, an alternative processes for fulfilling
The analysis undertaken in this study suggests        PWSS requirements is currently being explored
that the PWSS Program has been successful in          by NSLC. Partial sales order stock that cannot be
achieving the objectives laid out in its original     used to fulfill other orders would be warehoused.
mandate in generating increased consumer              Warehousing free of charge represents a cost to
awareness and consumption of wines.                   NSLC.
Consumers have been exposed to a broader
selection of products, increased staff knowledge      The PWSS should expect that the NSLC will
and training in wines, increased selection of         charge inventory storage in the future. However,
wines through restaurants and other licencees, as     it should also be expected that NSLC will
well as an increased exposure through on-site         develop and maintain an improved inventory
wine tasting, and this has served to increase         management system for the PWSS Program and
consumer awareness and knowledge of wines.            that inventory storage charges reflect reasonable
                                                      charges (average industry charges) for this
Recommendation #1: The PWSS Program has               service.
addressed the market need for increased
selection of wines identified in previous             Another option that could alleviate the problem
studies and should be continued in Nova               of high inventory levels is the development of a
Scotia.                                               third party regional warehousing depot (third
                                                      party warehousing depot for the three Maritime
The analysis of per capita wine consumption in        provinces or four Atlantic provinces.) located in
Nova Scotia conducted in this study indicates a       a central location. The advantage of a regional
substantial increase in per capita wine               warehousing depot is the gain in economies of
consumption in Nova Scotia. While it is not           scale and the reduction in the shipment time lags
possible to determine with certainty what             associated with consolidated shipping due to a
proportion of this increase is attributable to the    larger market being serviced. Moving to a
PWSS Program, the economic impact analysis            regional warehousing depot would also result in
carried out in this report suggests that this         improvements in scheduling forecasts for
increase is at least in part, due to the              shipments and monitoring order flows.
establishment of the PWSS Program.
                                                      Recommendation #3: Consideration should be
2. Changes To The PWSS Stocking Model                 given to a third party regional warehousing
Time lags associated with consolidation of            depot to gain economies of scale associated
shipments for the (relatively small) Nova Scotia      with servicing a larger market, thereby
market result in the private wine stores being in a   reducing costs for the NSLC.
position of inventory warehousing to cover their      There may be gains to NSLC in achieving
individual share of market demand. As a result,       greater potential reduced costs due to economies
the inventory levels for the private wine stores      of scale associated with larger shipment orders.
are many times what would be required if              The private wine store operations could also
products are available on a more frequent             benefit from a third party regional warehousing
shipment basis. In addition, this makes it            depot due to the cost savings associated with
difficult for the private wine stores to take a       more frequent shipments, greater efficiencies in
chance on introducing new products to the             shipping and transportation, greater inventory
market.                                               turns, ease of scheduling to meet forecasted
Developing a viable inventory management              demand, potentially requiring smaller investment
program for the Nova Scotia PWSS Program,             requirements in inventory warehousing.
would go a long way in allowing the PWSS to           Further research is required to determine whether
operate their successfully and would eliminate a      a third party distribution depot would provide
significant barrier to success for the private wine   cost savings for NSLC as well as private wine
stores.                                               store operation
Recommendation #2: Consideration should be            3. The NSLC Pricing Model
given to developing a viable inventory
management program for the Nova Scotia                The results of the consultations with private wine
PWSS Program                                          store operators, agents and NSLC indicated that
                                                      there are currently substantial costs related to



Gardner Pinfold
iv                                    Economic Impact Assessment of PWSS Program – Final Report


time spent checking for errors in invoicing. The       Recommendation #5: The PWSS Program
time and resources spent checking invoicing for        should be expanded to include other regions
errors is costly and introduces inefficiencies for     of the province to address consumer demand.
both for the private wine stores and NSLC. In          The analysis of per capita wine consumption and
many cases, corrections in invoicing are required      the location of current NSLC outlets and private
due to errors both on the part of the private wine     wine stores within HRM conducted in this study
stores and the NSLC. Our analysis of the current       also suggests while there may be limited scope
NSLC pricing model indicated that there is room        for further expansion of NSLC outlets within the
for improvement in the current pricing model.          HRM, as this market may be close to saturated
Recommendation #4: Consideration should                for privately owned wine stores.
given to a flat-tax pricing model (lump sum            Outside of HRM, our analysis suggests there are
dollar amount per litre regardless of country          areas in Nova Scotia that could be better serviced
of origin) implemented for the PWSS                    through the introduction of private wine stores.
Program.                                               However, in addition to the complex operational
One key advantages of a flat-tax pricing model is      issues the private wine stores currently face, the
that it is fully transparent pricing model and very    private wine store would have the added
simple to administer. A flat tax would eliminate       challenge of finding a viable location with an
a separate markup on shipping, exchange, cost of       adequate population base that would support a
service, and a markup on product. The NSLC             PWSS.
would collect a fee as goods are shipped from          Evidence indicating scope for expansion of the
their warehouse. The flat-tax pricing model            PWSS Program outside HRM is based on a
could be designed with four to eight price             comparative analysis of per capita wine
categories with varied flat rate mark-ups.             consumption across regions and municipalities
In addition to the advantage of being simple to        (based on data available). This comparative
administer (no formula required to establish the       analysis provides evidence of large increases in
NSLC retail price and then apply a discount), a        the growth of per capita wine consumption rates
flat mark-up also means that any supplier price        in selected municipalities. Further, a comparison
increase or decrease is passed on to the private       of relative average household incomes and age
wine store operators. Whether this is passed on        compositions      across    municipalities    also
to consumers for all products however, depends         highlights municipalities that may present
on the private wine store operators.                   opportunities for private wine store operations.
As experienced in the case of Alberta, as a result     Private wine stores must not only locate in areas
of a flat-fee pricing system, there were small         that have sufficient per capita wine consumption
increases in prices for some economy wines,            rates and population levels that support their
however, there were substantial decreases in           business model. Because product selection,
premium and super premium wines at the other           service and convenience are key to retailing
end of the spectrum. Many premium products,            wines, PWSS operations must locate in areas that
such as high-end wines and champagnes,                 meet the increasingly sophisticated shopping
dropped by as much as 50 percent at retail on          needs of customers with regard to product
many brands. The flat tax pricing would give           selection, convenience availability, and service
higher priced product an advantage, with lower         and are representative of current consumer
prices being passed on to the consumer, which is       shopping patterns and markets.
the product area that the PWSS Program was             Successful expansion of the PWSS Program
designed to address.                                   outside of HRM will depend not only on a
Further analysis of the flat-tax model must be         careful selection of the location (market served),
undertaken to fully understand how this model          but as is the case within HRM, it will also
would likely work in the Nova Scotia market and        depend the business model developed, and the
whether it should be implemented.                      ability to invest in inventory warehousing, a
4. Expanding The PWSS Program                          sound understanding of the industry as well as a
                                                       solid understand of best business practices.
Our analysis of per capita wine consumption,
population, and average incomes by region and
municipality within Nova Scotia suggests that
potential exists for expanding the PWSS Program.



                                                                                       Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                         v


Recommendation #6: Expansion of the PWSS               investment, as well as a careful assessment of the
model should include the possibility for both a        location (market served) and an appropriate
“stand-alone model” as well as the current             business model with supporting lines of business
model using the NSLC supply chain.                     (in line with consumer needs).
One option for the NSLC to address the costs to        In summary, while there is no one-size-fits-all
NSLC associated with inventory warehousing             successful business model for private wine store
and partial sales order stock is to allow the          operations, the successful operation must have a
private wine stores to go on their own in a            clear understanding of the customer base, the
“stand-alone” type of model, sourcing their own        retail and wholesale environment in this
wine, cutting their own purchase order, arranging      industry, the financial requirements for financial
and paying for their own shipping and                  success in this industry; and an optimal business
warehousing, with the NSLC still remaining the         model design to meet changing customer needs.
importer of record. Under model, the private           What is very clear is that the private wine store
wine store would need a large customer base,           operator must have both an understanding of the
most likely comprised of licencee business as          financial investment required for inventory
well as satellite operation(s) in order to achieve     warehousing as well as the capacity to make this
economies of scale.                                    investment.
However, under the “Stand Alone” model, in
order for the private wine stores to ship full
containers, they would need a large customer
base, most likely comprised of licencee business
as well as satellite private wine store operation(s)
to achieve economies of scale. Such an “end-to-
end” may be more difficult to maintain on a
continued basis and will largely be dependent on
maintain a large client base.
While the “stand-alone” model could take
advantage of economies of scale, it should not be
the case that this is the only viable option for
expansion of the PWSS Program. It is also clear
that not every private wine stores and boutique
operation would have the capital investment
required to take advantage of this type of model.
Even in cases where the capital is in place, they
may not choose to take on this type of large-scale
operation.
Based on a detailed comparative analysis of per
capita wine consumption, average household
income,     and     age    composition       across
communities, as well as a financial analysis of
the operating revenues and expenses of the
existing private wine stores, it is evident there is
scope for small independent “boutique-style”
wine stores to operate with well-designed
business model and supportive customer base.
The expansion of the PWSS Program could offer
scope for the development of both “stand-alone”
private wine store model as well as a small-scale
independent model using the NSLC supply
chain.
More importantly, expansion of the PWSS
Program should be based on a solid
understanding of the investment requirement for
inventory warehousing, the capacity to make this



Gardner Pinfold
I
STUDY CONTEXT
1.      STUDY BACKGROUND
The Nova Scotia Liquor Corporation (NSLC) is Canada’s fourth largest retailer of beverage
alcohol through the operation of more than 100 retail stores, 23 agencies and 2200 licensees
throughout the province. In 2003 the NSLC implemented a Private Wine and Specialty Store
(PWSS) Program in response to direction from government. Four PWSS operations began work
in 2003 in the HRM area as part of a program designed to offer the consumer enhanced service
and choice. The PWSSs offer products not normally carried by the NSLC, with an emphasis on
wine and specialty liquors. The PWSSs operate under a contract between themselves and the
NSLC, with an arrangement for a 5-year initial term and an option for an additional 5-year term.

As the end of the initial 5-year term of the operating agreements is currently approaching, the
Province of Nova Scotia requires recommendations from the NSLC as to whether the program
should be expanded, remain the same, or be terminated. The PWSS operations achieved a range
of success, and both PWSS operators and the NSLC encountered a number of issues, particularly
in the early stages of the program. Aside from operating issues, the key issue to be determined is
whether the PWSS Program has had significant economic impacts, either positive or negative, on
the Nova Scotia economy, as well as the extent of the impacts. In that context, it is critical to
conduct an Economic Impact Analysis (EIA) to determine the effect of the PWSS Program based
on the economic results to date.

2.      STUDY OBJECTIVE
Specifically, the objective of the study is to determine the economic impact arising from the
PWSS Program, and identification of the potential impacts resulting from public policy measures
to either expand or terminate the program. It should be noted that the purpose of the study is not
to determine economic impacts from an overall privatization of the NSLC, but rather, it is to
determine the impacts resulting from the PWSS Program, as it currently exists. In addition, this
study also examines the impacts resulting from limited expansion of the PWSS Program given
likely markets where such outlets may be feasible. This study also examines the possibility of
termination of the program and makes recommendation on the optimal future of the PWSS
Program. This analysis includes consideration of the resulting impacts, either positive or negative,
upon the NSLC as well as the provincial economy as a whole.

3.      STUDY REQUIREMENTS
This study provides both quantitative and qualitative data to assess the impact of the PWSS
Program in the Nova Scotia economy by examining direct, indirect and induced economic
impacts for each of the three scenarios considered in this study. This analysis is based on an
assessment of the job or payroll creation, economic spin-off, and overall benefit to the provincial
economy.




Gardner Pinfold                                                                                   1
2                                     Economic Impact Assessment of PWSS Program – Final Report


This study examines the economic impacts within the Province of Nova Scotia as a whole, given
that the PWSS Program, while concentrated in the HRM area, has the potential to be rolled out to
other areas of the province should a decision be taken to expand the program.

The following issues are examined to the extent that data and economic modeling tools will
allow:

 Potential benefits and costs to the retail sector;
 Potential benefits and costs to the food and hospitality industry;
 Impact of use of the NSLC supply chain on the program;
 Impacts that changes to the PWSS pricing model, (or to other aspects of the operational
  model), might have in enhancing the success of the program;
 Potential benefits and costs to the Nova Scotia wine industry;
 Potential impact of each scenario upon the existing PWSS operators; and,
 Barriers, risks, and opportunities arising from each scenario.

This study utilizes the Nova Scotia Input/Output (I/O) Model to conduct the EIA.1




1
    A description of the Nova Scotia Economic Impact Model is contained in Appendix A.



                                                                                         Gardner Pinfold
II.
METHODOLOGY
1.      REVIEW OF AVAILABLE DATA AND ALTERNATIVE MODELS
Following our initial meeting with the Project Steering Committee (PSC), we conducted a review
of all relevant documentation obtained from NSLC related to the PWSS as well as documentation
obtained in our literature review. An extensive review of these documents was conducted to
develop a preliminary assessment of the economic impacts related to the PWSS Program as well
as the terms of the agreements between the private wine stores, and other relevant PWSS Program
information applicable for this study. Collection of qualitative and quantitative data includes a
review of PWSS Program documentation, including the 2002 Request for Proposals, proposals
submitted by each of the four successful proponents, the standard PWSS Operating Agreement,
the PWSS Operating Manual, and subsequent reports and studies conducted. In addition, the
review of relevant literature on pricing and supply models used within Canada and elsewhere has
served to guide the review of alternative approaches for the PWSS Program in the future. This
review was also required to develop the appropriate discussion guides and survey instruments for
the private wine stores, agents, and licencees and in estimating impacts and developing
recommendations for the future of the PWSS Program.

2.      INTERVIEWS WITH KEY STAKEHOLDERS
Stakeholder interviews were conducted with private wine store owners/operators, agents, and
licencees. One-on-one interviews were conducted with key stakeholders identified by the NSLC
and on suggestion from the operators. A total of 25 separate interviews were conducted with
PWSS operators, NSLC representatives, liquor agents, union representatives, local wine
producers, and licensees. The information provided through this interview process, along with the
review of current pricing and supply models, were essential steps in developing an appropriate
approach to measure economic impacts and in developing recommendations for the general
direction for the PWSS Program. The key informant interviews also provided specific data and
information required for the appropriate measurement of direct expenditures used to estimate
economic impacts, as well as developing the profile of direct expenditure patterns associated with
the PWSS Program.

3.      PREPARATION OF DIRECT EXPENDITURE PROFILES
Following the key informant consultation, tailored follow-up information requests were sent to
the private wine stores to collect data on the amount and categories of direct expenditures made
and employment generated by the private wine stores. Once this data was received, the direct
expenditure and employment profiles are prepared as input into the Nova Scotia economic impact
model. Total direct expenditures are allocated to the appropriate industry sectors to tailor the
economic impact estimation in the Nova Scotia Input-Output Model.




Gardner Pinfold                                                                                 3
4                         Economic Impact Assessment of NSLC PWSS Program – Final Report



4.      DETERMINE AND INTERPRET ECONOMIC IMPACT
        ESTIMATES
Economic impacts are determined by analyzing the direct linkages within the Halifax and the
Nova Scotia economy and assigning the direct expenditures to appropriate industry sectors within
the Nova Scotia economy. Total direct, indirect and induced GDP, employment and tax impacts
are estimated based on the direct expenditures of the PWSS Program. The economic impacts
results include direct, indirect and induced economic impacts:

 Direct impacts: are directly attributed to the incremental direct expenditures in the economy;
 Indirect impacts: relate to determining the value that the PWSS Program businesses
  generate economically for the Nova Scotia economy;
 Induced impacts: are derived from the purchases of employees from the PWSS Program and
  adjunct industries.

The economic impact results are derived from the Nova Scotia I-O Model and are presented in a
series of summary tables.




                                                                                Gardner Pinfold
III.
PRIVATE WINE AND SPECIALITY STORE
PROGRAM OVERVIEW
1.       PWSS PROGRAM BACKGROUND
In July, 2002 the NSLC launched the PWSS Program with the release of a Request for Proposals
that clarified its intent to move forward with the PWSS Program as a means of:

    Increasing and improving the selection of wine products available to consumers;
    Creating entrepreneurial opportunities for small business;
    Defining the business opportunity and high-level program parameters;
    Inviting proposals from qualified proponents to enter into a Operating Agreement with the
     NSLC to operate a PWSS within the parameters of the Liquor Control Act and Regulations
     and the policy and procedural requirements of the NSLC.

As a background to the PWSS Program, in the fall of the year 2000, the government of Nova
Scotia articulated a series of decisions including the following:

 The Liquor Commission would become a Crown Corporation, accountable to a board of
  directors;
 Privately operated agency liquor stores would open;
 Other private stores offering rare wines and more specialty products would be permitted to
  operate; and,
 New liquor stores could be operated privately or by the Liquor Corporation, depending on
  individual business case analysis.

The passing of Bill 20 in June 2001 effectively revised the Liquor Control Act to establish the
new NSLC and enable the implementation of the broader reform package.

2.       PWSS PROGRAM DESIGN
The PWSS Program was conceived in response to decisions flowing from the review of the
NSLC in the year 2000 and as small part of a much broader reform process intended to revitalize
the NSLC. The reform process involved the adoption of a new more flexible, customer-oriented
approach to managing the liquor business in Nova Scotia under which increased private sector
involvement would be permitted and the liquor commission itself would be recreated as a crown
corporation with a clear mandate to become a more service-oriented commercial operation.




Gardner Pinfold                                                                              5
6                           Economic Impact Assessment of NSLC PWSS Program – Final Report


The primary purpose of the PWSS is to improve customer service by increasing and improving
the selection of wine available in the province. The adoption of the PWSS Program reflects a
strategy to be responsive to government’s year 2000 decisions and to achieve broader public
policy objectives related to economic development:

    To permit greater private sector participation in the liquor business; and
    To create entrepreneurial opportunities for small business.

These objectives are implicit in the parameters of the PWSS Program defined in the following
documents:

    The PWSS Request for Proposal released in July, 2002;
    The (standard components of the) Private Wine & Specialty Store Operating Agreement; and,
    The Private Wine & Specialty Store Operating Guidelines.

The key components of the PWSS Program are designed to achieve the program objectives by:

 Establishing private wine and specialty stores;
 Limiting the products available through the private wine stores to those that would not
  generally be made available through the NSLC’s traditional distribution channels; and
 Targeting small business/entrepreneurs by explicitly excluding large retailers from
  participation.

The PWSS Program was implicitly designed to manage/limit the proliferation of private stores by
limiting the number of private wine stores in the province to a maximum of four and limiting the
number of private wine stores that could be operated by any one proponent to one.

3.       PROGRAM MANAGEMENT/OPERATION
Under the auspices of the program, private operators enter into a five year renewable Operating
Agreement with the NSLC under which they pay an annual fee in consideration of which they are
permitted to operate a private wine and specialty store to sell an agreed upon product mix
consisting of:

    Unlisted wine products;
    A limited number of Port of Wines (POW) listed products; and
    Non-Liquor items.

In keeping with the regulatory regime in place to manage the sale of liquor in the province,
operators are required to operate in a manner that is consistent with the NSLC’s policy and
regulation. In addition, the Operating Agreement explicitly requires them to:

 Locate, maintain and insure their respective properties to meet agreed upon specifications;
 Purchase all of its beverage alcohol product by case and from the NSLC at an agreed upon
  discount price;
 Maintain and securely store its inventory at its sole cost, risk and expense;
 Sell POW listed products at a price equal to or higher than is available at the POWs;
 Maintain minimum and maximum hours of operation;




                                                                                  Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                     7


 Manage its operation within the parameters of NSLC operating guidelines/manual including
  those specific provisions with respect to social responsibility (social reference pricing,
  advertising restrictions and sales to minors); and,
 Submit financial and other reports as required by the NSLC.

In the interests of providing private operators with a degree of protection/assurance and flexibility
to manage the Operating Agreement contains provisions to:

   Prohibit the establishment of another private wine store within a two kilometer radius;
   Provide NSLC’s guarantee;
   Two years exclusivity from the date of application for unlisted product carried by any or all
    private stores prior to listing that product in a NSLC retail stores;
   List the product at the highest price charged by a private store for a period of at least two
    months;
   Allow private stores to continue to carry and price the product absent the restrictions that
    would otherwise apply to listed products;
   Permit private operators to negotiate directly with suppliers and agents; and
   Offer a choice to operators to use NSLC and/or their own inbound freight provided that the
    product is delivered to the NSLC.

With respect to the NSLC, the PWSS Program was clearly designed to service a niche in which
the NSLC was traditionally inactive and therefore was under serviced; and to ensure that the
NSLC’s flexibility to manage the program itself and its broader business interests in the wine
market is not restricted in any way either by the program and/or by its relationship with the
private wine stores. To that end, the Operating Agreement contains provisions that explicitly:

 Limit the participation of private operators to areas in which the NSLC was not
  interested/involved at the time;
 Reject the notion that operators are agents, legal representatives, partners, subsidiaries, joint
  ventures, or employees of the NSLC and by extension seeks to protect the NSLC from any
  real or perceived obligations/liabilities generally associated with such relationships; and
 Reserve the NSLC’s right to:

        ♦   Modify its selling price for listed and unlisted products at its sole discretion provided
            notice is given;
        ♦   List any previously unlisted product provided notice is given;
        ♦   Review and/or audit all financial and other information it deems necessary;
        ♦   Amend regulations and/or operating guidelines by which the program is governed as
            it determines appropriate;
        ♦   Locate its retail operations without consideration for proximity to private wine stores;
        ♦   Terminate the Operating Agreement at any time provided notice is given.

The program and the Operating Agreement structures position the operators as independent niche
businesses and the NSLC as their regulator, wholesaler, and potential competitor.

Four successful proponents were identified in 2002. The first of the three standard Operating
Agreements were signed in January 2003 and the remaining Operating Agreement was signed in
March 2003. All four private wine stores are currently operating in the Halifax Regional
Municipality:

   Vin Art, Halifax West;
   Crystall & Luckett Wine Merchants, Bedford;


Gardner Pinfold
8                         Economic Impact Assessment of NSLC PWSS Program – Final Report


   Bishop’s Cellar, Halifax Peninsula; and
   Premier Wine and Spirits Boutique, Halifax Peninsula.

The operators submit quarterly reports to the NSLC and joint meetings are held periodically at
which operators and the NSLC identify and attempt to resolve issues, largely related to
administrative and logistic issues that arose through the initial implementation phase.

Originally, under the terms of the RFP, operators were to be given regular access to an estimated
250 unlisted products through an Agent Stocking Program under which agents would supply
products, which would be held at the NSLC for the use of the NSLC and/or the private operators.
Under this program, the NSLC will in cooperation with the PWSS Operators, manage and
provide stocking capacity for inventories ordered on their behalf by the NSLC.

In the years since the release of the RFP, revisions have been made to the original operating
agreement, including the following:

   The Agent Stocking Program fell into disuse largely due to a lack of agent participation;
   The freight component of the pricing model has been marked up;
   The parameters of the program and the terms of the Agreement have been revised in an effort
    to offset costs driven by the absence of a viable Agent Stocking Program and the mark up in
    the freight component of the pricing model. For example the NSLC has:
    ♦   Extended the time that the PWSS had to pay for and pick up orders received at the NSLC
        distribution center from 48 hours to 30 days and has assigned a point person to manage
        private stores’ purchase orders and distribution to reduce confusion and costs;
    ♦   Increased the Operating Agreement discount on prices charged by the NSLC by 5%; and,
    ♦   Offered freight rebates to the PWSS.
    ♦   NSLC, in cooperation with the PWSS operators, manages and provides stocking capacity
        for inventories ordered on behalf of the PWSS operators by the NSLC.




                                                                                 Gardner Pinfold
IV.
ECONOMIC IMPACT OF PWSS PROGRAM
This section presents the results of the economic impact analysis of the Nova Scotia Liquor
Corporation PWSS Program since its inception. The economic impacts of the PWSS Program are
based on the capital investment, direct employment and annual operations and direct expenditures
of the four private wine stores in Nova Scotia. These numbers were formatted into the Nova
Scotia I-O Model and the I-O simulations were run by the Economics and Statistics Division of
the Nova Scotia Department of Finance.

The economic impacts are examined through the direct, indirect and induced economic impacts:

 Direct impacts: are directly attributed to the incremental direct expenditures in the economy
  and is comprised of income earned (measured as contribution to GDP), direct employment,
  and incremental tax revenues generated.
 Indirect impacts: relate to determining the value that the PWSS Program businesses
  generate economically for the Nova Scotia economy. Revenues of adjunct related industries,
  such as food and related beverage businesses, etc., add to the economy.
 Induced impacts: are derived from the purchases of employees from the PWSS Program and
  adjunct industries. These purchases lead to more employment, wages, revenues, and taxes in
  the Nova Scotia economy.

1.      ASSUMPTIONS
The following assumptions are made in formatting the data to Nova Scotia I-O Model
specifications:

 Data is presented in current dollar terms for each of the years examined;
 All direct expenditure estimates are assumed to be in purchaser prices (with margins and
  taxes included);
 All Output values are in Producer Prices (margins and taxes excluded);
 The average spin-off wage is the Nova Scotia average industrial aggregate wage for 2003,
  2004 and 2005 sourced from Statistics Canada average weekly earnings data (Cansim Table
  281-0027). 2006 The average spin-off wage in Nova Scotia has not been released as of this
  date and the 2005 wage is used as a proxy.

                                         Table 1
                     The average yearly spin-off wages for 2003-2006
            Weekly Industrial   Number of         Supplementary             Nova Scotia Spin-off
Year        Aggregate Wage        weeks        Labour Income Rate               Wage Rate
2003            597.89              50                1.1393                      34,058
2004            611.93              50                1.1484                      35,137
2005            636.09              50                1.1458                      36,442
2006            636.09              50                1.1458                      36,442




Gardner Pinfold                                                                                9
10                              Economic Impact Assessment of NSLC PWSS Program – Final Report


 The Nova Scotia Department of Finance taxation template estimates provincial government
  revenue (income and spending taxes) on household income only and uses a household
  consisting of a single wage earner, one dependant and two children. Tax templates for 2003,
  2004, 2005, and 2006 are used to analyze the tax impacts for each of these tax years,
  respectively;
 The analysis of employment impacts of the private wine stores consists of both full-time and
  part-time employees. All part-time employment is converted to Full Time Equivalent (FTEs)
  and all employment impacts reported in this report are presented in FTEs. Taxes are calculated
  at different rates for the full-time and part-time employees and are presented as the aggregate
  of the two;
 Total employee fringe benefits are presented in the data set provided but are only assumed to
  apply to full-time employees.

2.       ECONOMIC IMPACTS OF PRIVATE WINE STORES
The economic impacts of the PWSS Program are based on the direct expenditures and direct
employment of the four private wine stores in Nova Scotia. These expenditures include capital
investment, and annual operations and expenditures. The total direct expenditures and direct
employment of the four private wine stores are shown in Table 2.

                                               Table 2
                         Total Private Wine Store Direct Expenditures on
                               Employment and Other Expenditures
                                            (2003 – 2006)
         Year           Wage and salary bill     All Other Expenditures*                          Total
         2003               $495,089                     $ 965,696                             $1,460,785
         2004                868,537                     1,031,715                              1,900,252
         2005                843,452                     1,026,768                              1,870,220
         2006                739,082                      858,582                               1,597,664
     *Note: All other expenditures represent only the portion of expenditures made in the Nova Scotia economy. All
     import components to direct expenditures for good and services have been stripped out.

Table 3 presents the employment impacts associated with private wine stores’ economic activity
in the Nova Scotia economy for the period 2003 – 2006. The employment impacts are measured
as FTE Person Years.

                                          Table 3
                   Employment Impacts of Private Wine Stores’ Activity
                          on the Nova Scotia Economy, 2003-2006.
                                             Direct        Spin-off                              Total
           Employment (PYs)
                      2003                     15             20                                   35
                      2004                     29             22                                   51
                      2005                     31             21                                   52
                      2006                     34             18                                   52

The total employment impacts of the four private wine stores range from 35 person years in 2003
to 52 person years in 2006. The total employment impacts are comprised of the total direct
employment impacts (ranging from 15 person years in 2003 to 34 person years in 2006) and total
spin-off employment impacts (ranging from 20 person years in 2003 to 18 person years in 2006).



                                                                                                  Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                     11


Table 4 presents the total household income impacts associated with private wine stores’
economic activity in the Nova Scotia economy for the period 2003 – 2006. The total household
income impacts of the four private wine stores range from $1.18 million in 2003 to $1.4 million
in 2006. The total household income impacts are comprised of the total direct household income
impacts (ranging from $0.5 million in 2003 to $0.7 million in 2006) and total spin-off household
income impacts (ranging from $0.7 million in 2003 to $0.8 million in 2005).

                                       Table 4
                Household Income Impacts* of Private Wine Stores’ Activity
                                      2003-2006.
                                             Direct         Spin-off                                 Total
         Household Income ($’000)
                       2003                   495             685                                    1,180
                       2004                   868             782                                    1,650
                       2005                   844             774                                    1,618
                       2006                   739             659                                    1,398
     *Note: All income impacts are based only on direct expenditures made by the private wine stores that remain in
     the local Nova Scotia economy. Any expenditures made for goods and services which originated outside of Nova
     Scotia (import component to direct expenditures) have been stripped out, and the resulting impacts are based only
     on direct expenditures that remain in the Nova Scotia economy.

Table 5 presents the total provincial government revenue impacts (tax revenue impacts)
associated with private wine stores’ economic activity in the Nova Scotia economy over the
period 2003 - 2006. The total tax revenue impacts of the four private wine stores range from
$109 thousand in 2003 to $140 thousand in 2005. The total tax revenue impacts are comprised of
the total direct provincial government revenue impacts (ranging from $38 thousand in 2003 to
$53 thousand in 2006) and total spin-off tax revenue impacts (ranging from $71 thousand in 2003
to $87 thousand in 2005 and $76 thousand in 2006).

                                         Table 5
           Provincial Government Revenue Impacts of Private Wine Stores’ Activity
                                       2003-2006.
                                           Direct           Spin-off      Total
           Prov. Gov’t Revenue ($’000)
                        2003                 38               71           109
                        2004                 57               80           137
                        2005                 53               87           140
                        2006                 42               76           118

3.       INCREMENTALITY
The economic impact results presented in the above tables have not been adjusted to address the
incrementality of the economic impacts of the private wine stores in the Nova Scotia economy.
These tables present the economic impact results associated with direct expenditures and
employment without non-incremental diminution.

The extent to which the economic impacts resulting from the private wine store operations in
Nova Scotia are incremental depends on the extent to which the expenditures made by these
operations would have happened in their absence. Given that the largest percentage of direct
expenditures by the private wine store operators in the Nova Scotia economy is related to
providing product and service to the customer, one of the key drivers in the incrementality issue



Gardner Pinfold
12                              Economic Impact Assessment of NSLC PWSS Program – Final Report


is whether consumer expenditures on wine from the private wine stores is incremental to that
which would have occurred otherwise. While it is difficult to assess the issue of incrementality
with precision, studies have shown that the consumption of wine increases with increased variety
and privatization of wine sales.

Most studies examining changes in the level of privatization in wine sales have shown increased
consumption, and some as high as 95 percent increases.2

     In 1970 several US states and the Province of Quebec eliminated public monopolies on the
      sale of wine. It was found that wine privatization in Idaho, Maine, Virginia, and Washington
      increased wine consumption in 3 of the 4 states.
     Mugford & Fitzgerald (1988) studied Iowa privatization using before and after survey data
      and average alcohol sales. Their findings indicated a “statistically significant increase in self-
      reported (last 30 days) purchases of wine.”
     Wagenaar & Holder (1995) examined the effects of privatization of the retail sale of wine in
      five other states (Alabama, Idaho, Maine, Montana, and New Hampshire) and found “that all
      five states experienced a statistically significant increase in wine sales after privatization.
      Specifically; 13% increase in wine sales in New Hampshire, 42% in Alabama, 137% in
      Maine, 75% in Montana, and 150% in Idaho.”
     MacDonald (1986) examined the demonopolization of four states and found that wine
      consumption following privatization was “significantly greater in 3 of the 4 states.”
     The introduction of private wine stores in Iowa in 1985 and in West Virginia in 1981 resulted
      in increases in wine consumption. Wagenaar & Holder (1991) also studied Iowa experience
      and that of West Virginia and they found “statistically significant increase in wine
      consumption following privatization of wine retail sales, up by 93% in Iowa and 48.2 % in
      West Virginia.”
     In 1969 Finland permitted the sale of medium beer in all food stores and cafes. Sales of
      medium beers more than tripled, and overall beer sales increased 100%. Recorded overall per
      capita alcohol consumption increased by 50% in a single year (Her, M et al).
     In two counties in Sweden in 1967 strong beer (above 3.6% by weight) began to be sold in
      grocery stores and bars. Total alcohol consumption in Sweden was 15% higher when
      medium-strength beer was available in grocery stores that it was before the experiment. (Her,
      M. et al).
     In Iceland in 1989 at the end of prohibition of beer, total alcohol consumption increased by
      23%.

The Alberta experience has showed an increase in consumption in the short term following
privatization. Alcohol consumption in Alberta fell by 4.1% between 1991 and 1992. It rose by
3.9% in 1993, the year of privatization and fell by 2.7 % in 1994 then rose again by 1.1% in 1995.
The largest increase is evident the year that privatization occurred. It is also important to note that
in the year of privatization Alberta’s consumption per adult rose while consumption in Canada as
a whole was falling.

In Quebec, a study by Adrian, Ferguson & Her (1996) found that in the post-intervention period
wine consumption continued along a rising trend established in the pre-intervention period, and
that the increase in wine consumption was the highest in the period following privatization. In

2
     “Impacts of privatization: what do we know and where should we go?”. Giesbrecht, N., Minghao H., Room, R., and
     Rehm, 1999.



                                                                                                Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                  13


general, their results demonstrated that consumer behaviour responded to increased availability
and increased variety.

The effect of availability change in wine consumption has been extensively investigated in a
number of cases of privatization, and it has consistently found that privatization was followed by
a substantial increase in the consumption of the beverage privatized. (Her, M et al.,1999)3. In the
case of Nova Scotia, the PWSS Program has brought hundreds of new wines to market. As a
result, consumers have been exposed to a wider selection of product.

Consultations with the four private wine store operators, licencees, and agents in Halifax
Regional municipality (HRM) indicate that the PWSS Program has generated an increased
consumer awareness and knowledge of wines at both the retail and licensee level. There has also
been an increase in staff knowledge and training in wines and this is passed on to the consumer.
In addition, there has also been an increase in wine tasting as a result of the private wine store
operations, and this has also contributed to an increase in consumer awareness. The private wine
stores have indicated that there has been both an increase in the demand for greater variety in
wine selection as well as increased demand for wine for collecting purposes.




Source: NSLC, 2007

Based on current data, per capita wine consumption in Nova Scotia has increased since the
establishment of the Nova Scotia private wine stores, both in dollar terms and in volume.4 As can
be seen in Figure 1, per capita wine consumption in Nova Scotia has experienced a substantial
increase in 2005 over the previous 10-year average. It is interesting to note that this growth in per

3
    See M. Her et al.’s discussion of the impacts of privatization on wine consumption evidence and implications in
    “Impacts of privatization: what do we know and where should we go?”. Giesbrecht, N., Minghao H., Room, R., and
    Rehm, 1999, (1999).
4
    Data on per capita wine consumption was obtained from NSLC, 2007.



Gardner Pinfold
14                         Economic Impact Assessment of NSLC PWSS Program – Final Report


capita wine consumption in Nova Scotia in 2005 is larger than the overall increase in Canadian
per capita wine consumption and greater than most provinces, with the exception of Quebec and
British Columbia. See Section VI of this report for a more detailed comparative analysis of
provincial per capita wine consumption in Canada over this period.

While there has been an increase in consumer awareness and increased consumption of wines in
Nova Scotia, it is not possible to measure the percent increase in consumer consumption of wines
directly attributable to the establishment of the PWSS Program within the confines of this study.
This would require a detailed survey of consumer purchasing patterns to determine if:
    Their wine purchases have increased, and if so;
    The extent to which increased wine purchases are due to the existence of the private wine
     stores and the services they provide.

The issue of incrementality becomes further complicated when one considers that the true
economic impacts associated with the PWSS Program would include not only incremental wine
purchases made at the private wine stores themselves, but incremental wine purchases made at:
    Restaurants:
    Bars;
    Events, and
    Through the NSLC outlets.

This is due to an increased knowledge, awareness and appreciation of wines in general,
attributable to both the products and services offered by the private wine stores. The extent of this
detailed analysis is beyond the scope of this study. However, current data indicates a substantial
increase in per capita wine consumption in Nova Scotia in 2005 over the previous 10-year
average. In addition, private wine store sales indicate that some portion of this increase in
aggregate per capita wine consumption in Nova Scotia is at least partially attributable to the
PWSS Program. A more detailed analysis is required to determine a precise determinant of the
incremental economic impacts resulting from the PWSS Program.




                                                                                    Gardner Pinfold
V.
REVIEW OF ALTERNATIVE MODELS
1.         ALBERTA’S PRIVATE WINE STORE MODEL
Alberta is the first province to provide the most fully privatized wholesale and retail distribution
of liquor model. The Alberta government implemented a “big bang” approach in its switch away
from the government-owned liquor distribution model. Alberta announced on September 2, 1993
that it was privatizing its system; six months later, on March 5, 1994, the last of 205 government
liquor stores in the province were closed. The privatization model in Alberta was based on a
changed philosophy that there was no longer a valid reason for government to be involved in the
liquor distribution business since the control of liquor sales and tax revenues can still be
maintained without managing or owning the distribution system. Today there are over 14,000
wines listed in the wholesale system with about 7,000 wines in stock and available to any of the
just over 1000 retailers in Alberta. Under the new Alberta liquor retailing model the:

 Private sector provides all retailing, warehousing, and distribution functions in Alberta;
 Alberta Gaming and Liquor Commission (AGLC, and formerly ALCB), regulates the
  industry under the Gaming and Liquor Act, the Gaming and Liquor Regulation and the
  policies of the Board of the AGLC;
 Government of Alberta remains the importer of record for all products coming into Alberta;
 AGLC collects all revenue from the sale of adult beverage products at the wholesale level
  prior to the goods being released to the retailer.

A key to the successful move to a privatized retailing network in Alberta appears to be the
swiftness with which the Alberta government acted. The legislative changes, implementation
plan, application process and criteria for opening a new private liquor store were developed and
communicated within 5 weeks following the privatization announcement.

Alberta implemented new tax measures that underpin how much consumers’ pay for alcohol
beverages at private liquor stores. Alberta agreed to cap its net tax revenues from alcohol
beverages at approximately $450 million per year, to be reviewed yearly.5 As retail sales
increased in the 1990’s, the Alberta government’s tax revenues also increased. In order to meet its
revenue cap commitment the Alberta government reduced its tax rate on alcohol beverages three
times between 1994 and 2002.6

The second tax measure was to change the way taxes on liquor are calculated. Alberta went from
using the “ad valorem” system to a simplified flat tax system where wine and alcohol beverages
are taxed based on alcohol content. (The flat-tax pricing model is discussed in more detail in
Section VI of this report).

Warehousing Operations

A privately-owned distributor, Connect Logistics Services (CLS), provides third-party liquor
warehousing and liquor distribution services in Western Canada with province-wide equal
delivery charges. The company is the agent solely responsible for the warehousing and

5
     This was designed to keep province’s net tax revenues at the same level as with government-owned liquor stores.
6
     Review of Liquor Mark-Up Structure and Related Policies, AGLC, P- 67, February 2003



Gardner Pinfold                                                                                                    15
16                         Economic Impact Assessment of NSLC PWSS Program – Final Report


distribution of spirits, wine, coolers, and imported beer in Alberta for the AGLC. Connect
Logistics Services receives product on behalf of about 230 Agents representing 2,000 Suppliers
(from over 70 countries) worldwide.

The company utilizes the services of 12 contracted carriers who deliver to 21 delivery zones
throughout Alberta with an on-time delivery record of over 98%. CLS also offers 24-hour
delivery to any customer in the province who requires it. Product storage is based on stock
movement, with faster-moving products stored for easier picking and shipping. A voice-directed
picking system, barcode-based product verification, and radio frequency scanning are all used to
ensure rapid, accurate order fulfillment. All licensees pay the AGLC directly the wholesale price
for products ordered from the CLS facility prior to those products being shipped by Connect
Logistics. The AGLC has also regulated that all products must be sold at the same price to every
licensee, eliminating volume discounting and ensures that small retailers are afforded equal
access to the products at the same price as the largest urban store.

Prior to privatization, there were 202 ALCB liquor stores and 102 privately operated liquor
retailing outlets including 23 private wine stores, 49 agency stores, and the balance consisting of
hotel beer retailing outlets. Today, there are over 1,000 retail liquor stores and general
merchandise stores operated by the private sector in Alberta, including approximately 925
freestanding retail liquor stores held by the private sector.

Privatization of liquor retailing and distribution has been a small business creation story for
Alberta. Moving to a privatized model more than offset the loss of the 1,300 jobs at the ALCB.
Most former employees of the ALCB found new careers in the new industry in Alberta and some
are owners of their own liquor retailing outlets. With 925 new retail stores created, few failures
and close to four times the number of agencies in operation, privatizing has created of 5,000 new
direct jobs in the adult beverage industry with a full compliment of spin off jobs generated
including beer cooler / refrigeration units, renovation and new construction, computer hardware
and software and insurance.

In addition to the full and part time jobs these stores have created, these new businesses are now
operating in double the number of Alberta communities previously served by the ALCB. The
government was able to eliminate the cost of their store and warehouse operations and realize
savings through the switch to consignment inventory while significantly reducing head office
operations and their associated costs.

2.      BRITISH COLUMBIA
In British Columbia, two branches of government are responsible for regulating and monitoring
the liquor industry: the Liquor Control and Licensing Branch (LCLB) and the Liquor Distribution
Branch (LDB). The LCLB issues licences for making and selling liquor and supervises the
service of liquor in licensed establishments. The LDB, under the authority of the Liquor
Distribution Act, has the sole right to purchase beverage alcohol, both in and out of British
Columbia. The LDB is responsible for the importation, distribution and retailing of beverage
alcohol in British Columbia and operates government liquor stores and distribution centres in the
province. The LDB is also responsible for the appointment of private retail agency stores.
In July 2002, the British Columbia government announced that, over time, the Liquor
Distribution Branch‘s role would shift from the operation of warehouses and retail stores to the
regulation of private-sector warehouses and retail stores. The Branch continues to be the importer
and wholesaler “of record” and is responsible for collecting liquor tax revenues. In February



                                                                                  Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                    17


2003, the Branch released its three-year plan targeting a minimum of 40 to 50 government liquor
stores to be closed in each of the next three years. The Branch’s is intention to gradually sell off
its 250 liquor stores run by the British Columbia Liquor Distribution Branch (BCLDB) and
privatize beverage wine and alcohol retail.

Under the British Columbia government’s privatization plan a number of key criteria are applied:

 Only existing beer and wine licensees are permitted to establish new private liquor stores and
  these stores must be attached to/on the same property as an existing licensed facility;
 No grocery stores or corner stores will be permitted to sell liquor, wine or beer;
 No government-owned liquor store will be closed until new private stores are in place to
  service a community;
 Each new licensee must seek approval under local community zoning and any other
  municipal bylaws that may apply.

In order to provide beverage alcohol products and service throughout the province, the LDB
enters into contracts that authorize terms and conditions with the private sector for the operation
of private retail outlets, such as licensee retail stores, rural agency stores, B.C. beverage alcohol
manufacturer stores, independent wine stores and duty-free stores.

As of November 1, 2006, private sector retail establishments included:

   609 LRSs (private liquor stores licensed to sell all liquor products);
   230 RASs (general merchandise stores in rural communities authorized to sell all liquor
    products);
   144 on-site manufacturer stores (stores at wineries, breweries and distilleries that sell
    products manufactured on-site);
   29 off-site manufacturer stores (stores operated by the BC wine industry that sell BC winery
    products);
   12 independent wine stores (private wine stores authorized to sell all types of wine); and
   11 duty-free stores.
With a workforce of approximately 3,500 full and part-time employees, the LDB operates two
distribution centres, one in Vancouver and one in Kamloops; a head office facility in Vancouver;
and over 200 government liquor stores throughout the province. In British Columbia, there are
more than 100 agents for alcoholic beverages. All warehousing and distribution is controlled by
the BCLDB. The provincial tax on wine is approximately 110 percent markup. An additional
sales tax of 10 percent provincial tax plus 7% GST (VAT) is applied at retail.
British Columbia has a local wine industry that represents 40-50 percent of total provincial wine
sales. Vancouver is well known for its many excellent restaurants and wine and food events.
Whistler, located 1.5 hours North of Vancouver attracts a high-end clientele to its more than 50
restaurants and bars. In 2001, BC hosted 5 million international tourists that spent $5.2 billion in
restaurants and generated $1.5 billion hotel room revenue.7




7
        Source: BC Tourism in Review 2001



Gardner Pinfold
18                         Economic Impact Assessment of NSLC PWSS Program – Final Report



3.      ONTARIO
Liquor Control Board of Ontario (LCBO)

The Liquor Control Board of Ontario (LCBO), established in 1927, is a self-financing operational
enterprise of the Province of Ontario maintaining full government operation system for
distribution and sale of alcoholic beverages. The LCBO operates 598 corporate stores across
Ontario. In addition, the LCBO authorizes 196 agency stores located within existing private retail
outlets, typically in remote and rural areas too small to support a corporate store. Alongside its
retail operations, the LCBO is also first receiver of all liquor commercially imported into Ontario
and enforces uniform and minimum prices.
Retailing is carried out by a mix of public and private operators: the Liquor Control Board of
Ontario sells all types of alcohol products, while the privately-owned Brewers Retail Inc. owns
and operates The Beer Store outlets and sells domestic and imported beer products, and privately
owned winery retail stores sell only their own products.
The LCBO is the sole importer of liquor products and operates five warehouses. The Brewers
Retail Inc. operates five distribution sites. Licensing of private companies occurs for warehousing
and distribution of domestic beer products, and for retailing of all beer products and domestic
wine only. Ontario currently has 1,674 retail points of sale, which translates into one store for
every 7,431 people (relatively low number of access points).
The LCBO has been steadily increasing its contribution to provincial revenues. Improved supply-
chain-management policies are delivering better financial results. Some of this increase has come
as a result of steadily reducing the number of products available in the mass-market stores,
centralizing inventory management and opening “revamped” emporiums. However, consumers in
the province have experienced increasing difficulty in finding the wines they want. In 2003/04,
the LCBO's net sales (not including PST and GST) were $3.3 billion, generating a dividend to
government of $1.04 billion. The LCBO's gross sales were $3.9 billion.
Wine retail stores
Ontario has 395 wine retail stores that are owned by the province's licensed wineries. The stores
are allowed to sell only the products of the winery that owns them. On-site stores (i.e., located at
the winery) number 105; the remaining 290 off-site locations are either stand-alone outlets or
housed within a larger retailer. Two wineries, Vincor International Inc. and Andrés Wines Ltd.,
operate the majority of the off-site stores. Free trade agreements meant that after 1987 no new
off-site wine retail stores could be authorized. Wine retail stores account for approximately 36
percent of Ontario-produced wine sales and 15 percent of total wine sales in the province. For
2003/04 this translated into gross sales of $182 million.
There are examples of privately run web-based shopping sites for Ontario wines. The Toronto
Star launched www.wineconnection.ca where mixed cases of a few specially selected VQA wines
can be delivered to consumers via Canada Post. Most are not listed with LCBO and can only be
bought otherwise from single on-site winery stores. In addition, an entrepreneur has started a web
site that now lists some 300 wines from about 16 Ontario producers, which are not listed with the
LCBO, www.winerytohome.com.
The privately run web-based wine shopping sites provide a shopping solution, deliver a service to
wineries with economies of scale by covering many producers, and is profitable to both parties.
The web-based shopping is designed to sell only Canadian products. There are plans to operate on




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Economic Impact Assessment of NSLC PWSS Program – Final Report                                                          19


behalf of BC wineries in the future, supplying across provincial boundaries from winery to
consumer.
There is no other private involvement in the wine distribution business, other than a few agency
stores in remote rural regions and the Ontario winery stores.

4.         QUEBEC
In Quebec, the government operated Société des alcools du Québec (SAQ) operation extends
through all levels in the system for spirits and wine products. Domestic breweries carry out
activities related to the importation, warehousing, wholesaling and distribution of most beer
products. Only a limited selection of imported beer products is sold through the government store
network. All other beer is available for sale through grocery stores and corner stores. Grocery
stores and corner stores also sell a limited selection of wine products (80% of wine is sold
through Government-owned and operated liquor stores).
Wine has been available for sale in grocery stores since 1978 whereas beer has been available for
sale in grocery stores since 1921. The inclusion of grocery and corner stores sales increases
Quebec’s total points of access to approximately 10,000 (one stores for every 754 people in the
province).
Per capita consumption of wine in Quebec ranks relatively high in North America. A recent
comparison of consumption rates (litres per person, total population or 15 years +) among sixteen
jurisdiction suggests that the highest per capita consumption of wine is in Australia – a license
state where government’s role in all three tiers is limited to licensing.8 The next highest
consumption rates for wine is in England and Wales – both license states where retail sales are
privatized. Quebec has the fourth highest consumption rates of all jurisdictions for wine and beer
among (products where accessibility is increased through sales in grocery and corner stores),
while consumption rates for spirits (where there is greater government control over retail sales)
ranks fourteenth out of sixteen jurisdictions.

                        Figure 2: Per-Capita Consumption of Wine, Beer, and Spirits:
                                      Cross-Jurisdictional Comparison




8
     These results are taken from a recent Ontario study comparing the distribution system for wine, beer and spirits
     among sixteen jurisdictions, including Nova Scotia, Ontario, Alberta, Quebec, British Columbia, Australia, New
     Zealand, United Kingdom, California, Washington, Oregon, Iowa, West Virginia, New York, Pennsylvania, and
     Michigan.



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20                          Economic Impact Assessment of NSLC PWSS Program – Final Report


Consumption of wine is lower in Alberta than in Ontario and British Columbia. Wine
consumption appears to be higher in jurisdictions with mature wine industries, including
Australia (highest), New Zealand (third highest) and California (fifth highest), with Quebec’s
fourth place position possibly related to changes introduced by the Government-owned SAQ that
allowed for wider access to quality imported products. The lowest consumption of wine was
found in West Virginia – a partial government operation state where the retail sales of beverage
alcohol is licensed. The consumption rate for spirits in Nova Scotia – a full government operation
system with the lowest number of access points of all jurisdictions, is amongst the highest of all
jurisdictions.
Recently, the SAQ set about rapidly expanding the size of the operation, opening new stores and
listing many new products. Supermarket style promotions increased sales rapidly but at much
lower margins. The SAQ delivery system, however, was not geared up for this change, and as a
result, costs rose exponentially. Inventory levels had to be held high since just-in-time inventory
was not implemented.

5.      MANITOBA AND SASKATCHEWAN
Saskatchewan maintains a 100% government retail, warehousing and distribution operation. The
provincial tax on wine is approximately $3.50 per bottle and private retailers normally markup
between 20 to 33 percent. Saskatchewan has a population of 1 million with small urban centers
leading to less premium restaurants and less premium wine sales.

Manitoba operates a roughly 90 percent Government Retail system with a total of ten private
retail wine boutiques. Warehousing and distribution are mostly controlled by Government but
private retailers are heavily involved in distribution to restaurants and hotels. Manitoba issued
private retail wine licenses quite recently. The first phase was four licenses in 1995 with the
second phase with six licenses in 1999. In Manitoba a total of nine private wine stores are
currently in operation along side the province's own stores.

The private stores' prices are controlled since they buy through the Manitoba Liquor Control
Commission, (MLCC). Under this model, the first million dollars of annual purchases is at 30%
discount to MLCC retail prices, the next million dollars of purchases at 15% and the remainder at
7.5% discount. This has the effect of keeping the stores small since as you expand the price-
window in which you can make a profit diminishes. Six of the private stores have taken the
government to court for alleged anti-competitive practices of the MLCC. The licenses to operate
private wine stores were only given for ten years to be renewed annually thereafter.

The private wine stores have proven very popular with consumers and restaurants as the selection
of wines has increased dramatically.

6.      AUSTRALIA
Some variations exist among the Australian states in terms of the type of licenses that are
required, however, none of the states leave any aspect of the system under full government
control.

In 1997, a High Court ruling disallowed the collection of state alcohol taxes. Currently, state
government collect fees from licensing permits, while the national government collects tax
(GST), the Wine Equalization Tax (WET) and excise tax/duties. Prior to 1999, it was common to
include a "needs" test prior to issuing a license (e.g. a private retailer wanting a license to open a



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Economic Impact Assessment of NSLC PWSS Program – Final Report                                      21


store would have to develop a business case that demonstrated a need for an additional store in
the local area). This practice was found to be unconstitutional because it limited competition. All
states, other than South Australia have moved away from this practice. Per capita consumption
rates for spirits, wine and beer are high in Australia (based on 2002/03 data from Statistics
Australia). Although points of sale (1,396 people for each point of access) is relatively low, the
overall rates of alcohol use are consistent with the high consumption rates.

The national government plays a policy role in terms of developing national strategies related to
health and harm reduction (including a National Alcohol Strategy that was released in 2001, the
establishment of an Alcohol Education and Rehabilitation Foundation to fund and support
community-based education and rehabilitation projects, and the Australian Alcohol Guidelines
that set levels for low risk and high risk alcohol consumption. Two states reviewed (New South
Wales and Western Australia) have recently launched reviews of their licensing practices and
related policies.

7.      NEW ZEALAND
New Zealand has a licensing system with respect to importing and distributing alcoholic
beverages. Licensed agents carry out activities related to importation of beverage alcohol. No
license is required to produce spirits or beer products, unless the producer sells directly to the
public. Domestic wine makers are required to be licensed to protect the integrity and reputation of
the industry.

The Government charges a levy on all liquor that is imported into or manufactured in the country
and uses the revenue to fund the New Zealand Alcohol Advisory Council which is responsible for
encouraging and promoting responsible use. Retailing licenses are administered by local
authorities.

Currently there are 3,333 retail points of sale in the state, which translates into one store for every
1,227 people representing a relatively high rate of access points. Frequency of use statistics are
comparable to Australia and are lower than the United Kingdom. The per capita consumption for
wine is relatively high (see Figure 2 above).

8.      UNITED KINGDOM
England and Wales operate under a licensing system, including a licensing requirement for all
retailing activities to the general public, including manufacturers or wholesalers who sell directly
to the public. No licenses are required for production and sale to wholesalers, or for wholesaling
to retail outlets, unless sales will be made directly to the public.

Local authorities (municipalities) are responsible for licensing and collect associated revenues.
Police have responsibilities for enforcement of licensing laws. Currently there are 46,582 retail
points of sale in the state, which translates into one store for every 1,133 people.

Per capita consumption for wine and for beer is relatively high (see Figure 2 above). Frequency
of use statistics are higher than Australia and New Zealand – slightly more than 25% of the
population drink above the recommended weekly guidelines and more than 6 million people
drink above the recommended daily guidelines. In March 2004, the Prime Minister launched a
public consultation exercises that has resulted in an Alcohol Harm Reduction Strategy.




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22   Economic Impact Assessment of NSLC PWSS Program – Final Report




                                                     Gardner Pinfold
VI.
ANALYSIS OF NSLC PWSS MODEL
1.       IMPACTS OF CURRENT SUPPLY CHAIN
NSLC’s supply chain, which manages the warehousing and distribution of products had a
successful fiscal 2005-2006.9 The new Warehouse Management System (WMS), implemented by
the NSLC in 2004-2005, has shown improvement in warehouse inventory turns and fill rates to
the stores. This system allows the supply chain to increase domestic inventory turns in the
Distribution Centre to 21.9 times per year and decreased inventory by $4.5 million. Evidence of
increased efficiencies can also be seen in the retail support system with overall fill rates to stores
improved to 98.5% and accuracy on these store orders improved to 99.94 percent.10

NSLC has also implemented improved tracking and inventory management. Based on a year-end
inventory of $13 million, there was only a loss of or unaccountability of $1,200 representing less
than .01 percent of the total costs of managing the supply chain.

This study examines the issue of whether the current NSLC supply chain serves to meet the needs
of the private wine store operations. Consultation with private wine store operators indicates that
private wine store operators are satisfied in general with improvements that have been made in
the NSLC supply chain and service levels. These improvements in warehouse inventory turns and
fill rates have been reflected in improved service to the private wine stores. Our analysis also
indicates that there are still aspects of the system that represent areas for further improvement.

One supply-chain related cost, cited by both the private wine stores and NSLC representatives, is
the cost associated with time spent checking for invoicing errors on shipments. In cases where the
cost of the product is incorrectly calculated (either higher or lower than expected) this has
typically been due to discrepancies in the supplier invoice price, resulting in time spent by both
the private wine stores and by NSLC employees to review and confirm pricing on each shipment.
Our analysis indicates that the additional time and other resources spent checking and validating
invoices has resulted in incremental costs not only to the private wine stores, but to the NSLC as
well. In some cases, corrections in invoicing are required due to errors both on the part of the
private wine stores and the NSLC, tying up resources for both the private wine stores and the
NSLC.

The costs associated with time spent checking invoices on shipments may be resolved to some
extent with the graduated integration of NSLC’s Enterprise Resource Planning (ERP) business
process IT management system. With the implementation of the early planning and research of
the ERP platform and the integration of SAP technology (the enabling system), the sales order
will be tied to the original purchase order (locked in at time of purchase) indicating the correct
supplier invoice price for the private wine stores’ product orders. The new system will provide
“one view” for all levels of the business operation, beginning with the purchase order, and will
reduce the opportunity for invoicing errors. The integration of supply chain management systems
is an effort to further develop the NSLC as a more cohesive unit and allow NSLC to increase
overall efficiency.

9
     See: NSLC’s 2005/06 Annual Report
10
     Increased efficiency rates reported in NSLC’s 2005/06 Annual Report.



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24                         Economic Impact Assessment of NSLC PWSS Program – Final Report


Another cost identified by the private wine stores is related to the additional cost associated with
the time lag between orders due to the infrequency of shipments representing a relatively large
investment in inventory to compensate for shipping time lags. Private wine store operators
indicated that this time lag makes it difficult to take a chance on ordering new products. If the
private wine stores are correct with their judgment of a successful new product, they sell out
quickly and must wait for the next shipment to replenish stocks and if they are wrong, they are in
a position of overstock if unproductive inventory with no turns and a delay in finding suitable
replacements.

However, while it is recognized that there is a heavy inventory investment required for the PWSS
operations, it should also be recognized that correct forecasting of inventory requirements is an
integral part of the business planning required for private wine store operators, given the nature of
the market. Successful operation of a private wine store requires a sound knowledge of not only
wines, but also a knowledge of the market, fluctuations in consumer demand, forecasted
shipments, and therefore careful inventory planning is required. To the extent that there is a time
lag between shipments, largely because the Nova Scotia market is comparatively small, the issue
of inventory planning, forecasting and warehousing to accommodate for the timing of shipments
becomes an inherent challenge facing all private wine store operators. Private wine store
operations must plan to “build-in” safety stock to accommodate delays in shipping, poor forecast
supplier issues, unexpected events, and similar to many companies, shelf life of product.
However, it is also recognized that these investments in product supply represent a substantially
larger investment in inventory supply costs than was initially envisioned by the private wine store
operators.

While the private wine stores reported that the vast majority of shipments are received as ordered,
another issue cited by the private wine stores is the cost of shipments received in poor condition.
This causes the private wine stores additional effort when receiving goods. However, both the
PWS operators and NSLC representatives indicate that there have been substantial improvements
in this regard.

Does the current NSLC supply chain of the PWSS impose any barriers to
increased competition for the PWS?

One aspect of the supply chain consistently cited by the private wine stores as a potential barrier
to increased competition is the inability to carry generally listed product, which prevents PWSS
from competing on the same items. This in and of itself is not a concern for private wine stores
that source their products independently of the NSLC‘s catalogue. Consultation with both agents
and private wine stores indicates that the lack of access to the NSLC general listing has put
suppliers and their agents in a difficult position. Broadly speaking, suppliers and their agents
prefer to focus on the NSLC since the NSLC chain of 100 plus stores is a much more lucrative
opportunity than a sale to a PWSS, and choose not to supply the PWSS channel. Often agents
refuse to offer wines to the private wine stores, pending a decision by the NSLC on a listing
application. Because of the two-year exclusivity arrangement, offering a new product to the
PWSS means agents cannot offer this product to the Port of Wines listing for two years after it is
approved for the PWSS. When they do offer private wine stores products, they are typically those
products that have either been turned down by the NSLC or recently de-listed by them.

However, our assessment of the original Terms of Reference for the PWSS Program indicates
that the PWSS Program is designed to introduce new product and this is inconsistent with broad
access to the broad General List. Therefore, access to the NSLC general listing is inconsistent
with the purpose and mandate of the PWSS Program, as it was originally conceived. The primary


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Economic Impact Assessment of NSLC PWSS Program – Final Report                                                     25


purpose and goal of the PWSS Program is to improve customer service by increasing and
improving the selection of wine available in Nova Scotia. As such, setting up the private wine
stores such that they have access to the NSLC General List is not consistent with the promotion
and introduction of new product to increase the selection of wine.11

Another aspect of the NSLC supply chain that private wine store operators cite as a potential
barrier to increased competition is the absence of a viable agents stocking program (ASP) which
has forced the private wine stores to source product directly. Inventory levels for the private wine
stores are larger than what would be required had products been available through the ASP. As a
result, sourcing product has become a complex aspect of the business operation for the private
wine stores. Private wine stores able to make large investments up front in carrying inventory for
new product have an advantage over those private wines stores that are not able to make this
investment.

However, our analysis of the supply chain system indicates that the NSLC is currently providing
a stocking program for the PWSS operators in allowing them to warehouse product beyond thirty
days without charge and without payment of the product while in warehouse storage until they
take possession. This practice essentially provides warehousing services free of charge to the
PWSS of inventory that has been shipped but not picked up by the PWSS operators. The practice
of allowing the PWSS stores to collect partial lots of their order (pick up their order by the case)
represents a cost to the NSLC, and this cost cannot be sustained indefinitely. As such, the private
wine stores currently have access to the NSLC warehousing services, and to the extent that they
do not collect their entire order within thirty days, this warehousing service is being provided free
of charge.12

Potential risks for the licencee sector arise largely if the private wine stores have a “stock out”
situation that takes too long to resolve requiring the licensees to change their menus. The results
of the consultation with the licencees however, indicated that the potential costs to the licencees
may be lowered due to greater competition for licencee business as result of the introduction of
the private wine store operations in the market.

2.       NSLC PRICING MODEL
One key advantage of the current pricing model cited by both private wine store operators and
agents was the transparency of the pricing model. The current “bottom up” pricing model is
designed to cover costs of services provided along the supply chain. Private wine store operators
and agents can identify and separate costs of shipping and handling product with some
calculation. Although the current pricing model is transparent in that prices can be calculated,
consultations with both private wine store operators and NSLC representatives indicated
however, that the current pricing model provides ample room for errors in invoicing. As indicated
above, there is a cost associated with time spent by both the private wine stores and by NSLC
employees checking invoices and confirming pricing on each shipment.

Based on the discussion and consultation with agents, private wine store operators, and NSLC
undertaken for this study, it was suggested that there would be a cost advantage to simplifying the
current pricing model using a “flat-tax” or flat-fee pricing model. One of the primary advantages
cited for a flat-tax pricing model (a lump dollar sum per litre regardless of country of origin) by
both private wine store operators and NSLC representatives is that it is very simple to administer.

11
     In addition, the private wine stores already do have access to a percentage of the POW listing.
12
     See section VII below for recommendation regarding change in the structure and fees charged for warehousing
     services.



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26                              Economic Impact Assessment of NSLC PWSS Program – Final Report


No formula is required to establish the NSLC retail price with a discount calculated from this
price. The NSLC would collect a fee as goods are shipped from their warehouse.

The primary advantages cited of adopting a flat-tax pricing model are that it:

    is very simple to administer;
    is a fully transparent pricing model;
    would create a level playing field for retailers; and that it
    would allow private wine stores to price their products according to market conditions.

A flat-tax pricing model would eliminate a separate markup on shipping, exchange, cost of
service, and on product. In addition, a flat-tax pricing model could be designed with four to eight
price levels with varied flat rate percentage mark-ups. More work would be required to identify
an optimal configuration of a flat-fee pricing model tailored to the NSLC supply chain model.

Flat-tax Pricing Model: Lessons Learned From Alberta
In order to understand the benefits of moving to a flat-tax pricing model, it is important to
identify lessons learned from a flat-fee pricing model adopted elsewhere. After reviewing several
alternate pricing models, (including minimum/maximum profit per litre, mark-up tiers, ad-
valorem, and flat mark-up pricing model), the Alberta Liquor Commission Board determined that
the flat mark-up pricing model would be the most effective means of maintaining government
revenues at pre-privatization levels. In addition, it was also determined that the flat-tax mark-up is
the easiest to calculate out of the alternate pricing models considered. Simplifying the
calculations was of benefit to the industry (less time spent in preparing and checking invoices)
and it also made forecasting of revenue for ALCB that much easier.13 The flat mark-up eliminated
all costs of service differentials, (real or perceived), leveling the playing field for both domestic
and imported products, and thereby avoiding the potential for trade disputes. With a flat-tax
mark-up pricing model, the Liquor Board is less affected by supplier price changes or shifts in
consumer demand among brands, since the key variable affecting government revenue is volume.
In setting retail mark-up rates, private sector retailers concern themselves more with inventory
turnover rate and less with the country of origin.

A flat-fee mark-up also avoids the compounding effect of an ad-valorem mark-up on premium
brands, making it easier to compare rates applied to different product types. In addition, with a
flat-fee mark-up pricing system, any supplier price increases or decreases are passed on to private
retailers. Whether the private retail operators, in turn, passed these increases or decreases on to
their customers is their own business decision. However, this decision is influenced by market
forces. Once retailers have purchased product, they are free to set their own liquor retail prices.
Prices vary from store to store, based on competitive market forces and consumers are free to
shop for alcoholic beverage products in the same fashion they shop for any other commodity.

In the case of Alberta, as a result of adopting the flat-tax pricing system, small increases in prices
for some economy priced wines did result. However, at the other end of the spectrum there were
substantial decreases in the prices of premium and super premium brands. While many economy
brands went up slightly in price, premium products such as high-end wines and champagnes
dropped by as much as 50 percent in retail prices on many brands as compared to pre-
privatization price levels (and as compared to retail prices in neighbouring jurisdictions). The
ALCB set in place a series of mark-up transition rules, and combined with supplier price

13
     The ALCB also determined that the flat mark-up also eliminated any financial incentive to misrepresent the true
     value of goods to which any other mark-up was being applied.



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Economic Impact Assessment of NSLC PWSS Program – Final Report                                                         27


adjustments, consumers did not see dramatic price fluctuations as the new policy came into
affect.14

Total government revenue from the sale of adult beverage products in 1993 (at the time the
Alberta government moved to privatization), was approximately $420 million, remaining
relatively constant since that time, reflecting their policy of revenue neutrality.15 For the 2005/06
fiscal year, the government revenue from adult beverages is approximately $560 million. The
revenue-neutrality as well as the cost advantage (simplifying calculations and ease of forecasting
revenue) associated with the flat-tax pricing system both represents significant benefits for the
ALCB of implementing the flat-fee pricing system.

3.        BENEFITS/COSTS FOR FOOD AND HOSPITALITY SECTOR
Consultations with representatives from the food and hospitality sector, agents, and the private
wine store operators indicated that the PWSS Program has resulted in positive benefits for the
food and hospitality sector. Benefits to this sector are largely related to the increased wine
selection available due to the PWSS Program. Specifically, these benefits include:

    Greater variety of wines available for customers;
    Enhanced service to Licensees (delivery, wine tasting, menu prints);
    Greater training support for licencee staff;
    Partnering or marketing, promotion; and
    Greater capacity to provide service after government hours.

Increased consumer awareness
The PWSS Program has brought a large number of new wines to the Nova Scotia market. Private
wine store operators indicate that there has been a substantial increase in consumer awareness and
knowledge of wines over time based on consumer knowledge of wines at the outset of the PWSS
Program as compared to the current knowledge of consumers, and that this has been due at least
in part, to the PWSS Program. Professional sales staff at private wine store operations have made
a positive difference in increasing the awareness of the public about wine. More specifically,
salespeople in the private wine stores are trained to “up-sell” on a quality basis, and consumers
have been exposed to a much broader selection of wines from around the world at affordable
price through the private wine stores. This exposure has increased awareness of wines at not only
the retail level, but at the licensee level as well. As a result of the PWSS Program, there has been
an increase in wine tasting, food and wine pairing, increased staff knowledge and training in
wines and this knowledge has been passed on to the consumer.

Increased consumption of wines
Based on current data, per capita wine consumption in Nova Scotia has increased since the
establishment of the Nova Scotia PWSS Program. There has been both an increase in the demand
for greater variety in wine selection as well as increased demand for wine for collecting purposes.




14
     The establishment of the flat fee mark-up system allowed the government of Alberta to remove all subsidies put in
     place at the outset of privatization to establish the free market system for liquor retailing and distribution. By not
     having subsidies in place, the government was able to maintain its existing revenue targets.
15
     When revenue targets were exceeded, the flat mark-up was adjusted downward to maintain revenue targets.



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28                             Economic Impact Assessment of NSLC PWSS Program – Final Report


Provincial comparisons of per capita wine consumption is shown in Table 6 below. As can be
seen in Table 6, per capita wine consumption has grown steadily over the period since the PWSS
Program was introduced (2003 to 2005). Per capita wine consumption in Nova Scotia was 8.0
litres in 2003 rising to 9.0 litres in 2005. However, as can be seen in Table 6, per capita wine
consumption also increased over the same period for all provinces. Therefore it is useful to
compare the growth in per capita wine consumption in Nova Scotia that that in other provinces
over the same time period.

Over the 1995-2005 period, Nova Scotia ranks 6th in a provincial comparison of the 10-year
average per capita wine consumption, and below the national average wine consumption (11.3
litres) with an average per capita wine consumption of 6.9 litres. However, when examining the
period since the introduction of the PWSS Program for which the data is available (2003 to
2005), Nova Scotia ranks 4th in Canada in terms of the relative percent growth in per capita wine
consumption. Furthermore, the percent growth in per capita wine consumption in Nova Scotia is
larger than the overall increase in per capita wine consumption in Canada over the 2003 to 2005
period and greater than the growth most provinces, with the exception of Alberta, Saskatchewan
and Newfoundland and Labrador.

                                               Table 6
                       Provincial Comparison of Per Capita Wine Consumption
                                         Canada, 1995 – 2005
                                               (Litres)
  Per Capita (LDA)        10yr av.                           % Change % Change               % Change
  Wine Consumption (1995-05) 2003 2004                2005   2003-05    2003-05              1995-05
 Nova Scotia                 6.9      8.0     8.5       9.0    12.4%      41.0%                71.6%
 Newfoundland                4.0      4.6     4.9       5.3    15.0%      43.1%                68.2%
 New Brunswick Per           5.6      6.4     6.8       7.1    11.1%      38.4%                58.1%
 Prince Edward Isl Per       6.4      7.3     7.8       8.2    12.8%      45.0%                68.9%
 Quebec                     15.6     17.8    18.2       18.6    4.2%      41.1%                52.2%
 Ontario                    11.0     11.7    12.2       12.7    9.0%      15.8%                29.5%
 Manitoba                    7.3      7.8     8.1       8.4     8.3%      19.1%                30.5%
 Saskatchewan                4.5      4.7     4.9       5.4    15.0%      11.2%                30.4%
 Alberta                     8.5      8.9     9.5       10.2   14.0%      16.8%                36.1%
 British Columbia           12.0     13.0    13.5       14.3   10.3%       7.3%                25.0%
 Canadian Average           11.3     12.4    12.8       13.4    8.0%      23.5%                37.9%
Source: Provincial per capita wine consumption statistics provided by NSLC, April 2007

It is also interesting to note that while Nova Scotia experienced the largest growth per capita wine
consumption in Canada in percentage terms (71.6 %) over the 1995 – 2005 period, the largest
relative growth occurred in the period since the introduction of the PWSS Program (2003 to
2005). When examining the 10-year period 1995 to 2005, the average annual percent change in
per capita wine consumption in Nova Scotia 3.7 percent as compared to 4.1 percent in the period
following the introduction of the PWSS Program (2003-2005). This table also highlights the
percent growth in per capita wine consumption in Nova Scotia in the period following the
introduction of the PWSS Program relative to other provinces in Canada. The average annual
percent growth in per capita wine consumption in Nova Scotia over this period is the third highest
in Canada, followed by Newfoundland and Labrador and Prince Edward Island.

Not only wine consumption in Nova Scotia, and Canada as a whole is growing, as illustrated
above, but private wine store operators have indicated that the demand for variety in wine is
increasing and many wine drinkers are driven by selection. This trend cuts across most age
groups and, increasingly, income levels. The private wine stores engage in product sampling and


                                                                                         Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                        29


tasting, both of which increase customers comfort levels with regard to new wine and serves to
increase customer awareness when selecting wines. Some of the new wines now coming in to the
province have reflected the trend in changing product dynamics, including increasing blends in
grape varieties.

                                                Table 7
                 Provincial Comparison of Average Annual Per Capita Wine Consumption
                                     Canada, 1995 – 2005, (Litres)
                                                  Average                  Average
                  Per Capita Wine          Annual Percent Change    Annual Percent Change
                Consumption (LDA)                (2003-05)               (1995-2002)
          Nova Scotia                              4.1%                      3.7%
          Newfoundland                             5.0%                      3.9%
          New Brunswick                            3.7%                      3.5%
          Prince Edward Island                     4.3%                      4.1%
          Quebec                                   1.4%                      3.7%
          Ontario                                  3.0%                      1.4%
          Manitoba                                 2.8%                      1.7%
          Saskatchewan                             5.0%                      1.0%
          Alberta                                  4.7%                      1.5%
          British Columbia                         3.4%                      0.7%
          Canadian Average                         2.7%                      2.1%
        Source: Provincial per capita wine consumption statistics provided by NSLC, April 2007

While the province’s population has remained relatively constant during the past few years, the
wine sales of the private wine stores have steadily increased since they began operation - as have
the NSLC's, resulting in increased per capita wine consumption. However, as discussed above it
is difficult to determine the extent to which this is a result of increased demand for wine in
general or an increase in awareness and demand due to the PWSS Program.

Projected Wine Consumption in Canada
Over the past three years, the increase in wine sales in Canada is twice as high as in the rest of the
world. According to the 5th study on the Current Trends in the International Wine and Spirits
Market and Outlook to 2010, Canada will show a rapid increase in its retail wine sales over the
next three years, assuring it an enviable position in the world's wine industry.16.

Canada ranked 9th worldwide in 2005, in terms of still wine sales (versus sparkling) in value.
Canadians consumed 396 million bottles in 2006, representing an increase of +23.23% over the
2001-2005 period. By 2010, growth in consumption in Canada should continue to reach 3.490
million hectolitres, the equivalent of 465 million bottles. Over the next 10 years, wine
consumption in Canada will have increased by an average of 4.5% per year.17




16
      See the 2006 study on the Current Trends in the International Wine and Spirits Market and Outlook to 2010, by the
      British firm IWSR for Vinexpo. For the fifth year, British firm IWSR was mandated by Vinexpo to produce a
      detailed report on global consumption, production and international exchanges in the wine and spirit industry, with
      the outlook to 2010. The study was conducted in 28 wine-producing countries and on 114 wine and spirit consumer
      markets. The analysis period extends from 2001 to 2010. Since 1971, the IWSR database provides the most detailed
      and precise information on the global alcoholic beverage market.
17
     Projections given in the 2006 study on the Current Trends in the International Wine and Spirits Market and Outlook
     to 2010, by the British firm IWSR for Vinexpo.



Gardner Pinfold
30                              Economic Impact Assessment of NSLC PWSS Program – Final Report


The wine market is a growing industry both in Canada and worldwide. Over the next three years,
global wine consumption is expected to continue to rise and will show a growth of 20.02 million
hectolitres, representing an average of 266.9 million bottles a year.18 The global wine market will
represent 117 billion dollars (1), an increase of 9.4% between 2005 and 2010. This global sales
figure is equivalent to that made by the global cosmetic industry, or three times that of the global
recording industry.

The sales figure derived from retail sales in Canada will be proportionate to the rise in
consumption. Sales figures are expected to increase by 19.59% between 2005 and 2010 to reach
2.435 billion dollars. Between 2005 and 2010, the total average growth of retail sales expected
worldwide is 9.62%.19

Combined, the United States and Canada are the number one market when it comes to the
increase in imported still wine consumption, both are on the top 10 list of consumer countries of
imported still wines. In Canada, imported wines represent 69.93% of the products available on
the market and 2.02 million hectolitres of imported wines were consumed in 2005.20 They should
see an increase of 20.22% between 2005 and 2010 to reach 2.497 million hectolitres consumed or
71.54% of the volumes consumed. France remains the leading supplier on the Canadian market
despite a decrease in volume of 5.78% between 2001 and 2005, followed by Italy and Australia,
the latter showing an increase of 171.83% over the same period. By 2010, it is expected that
Canadians will give Canadian wines their due, and consumption should rise by 11.19%,
representing 993,000 hl or the equivalent of 132.4 million bottles.

Canadians prefer quality red wine. Although Canada is considered to be predominantly a beer-
drinking country, statistics show that the consumption of beer per capita is decreasing with per
capita consumption of wine increasing.21 In 2005, consumption per capita of Canadian still and
sparkling wines showed an increase of 18.61% and should continue to reach a growth of 10.51%
between 2005 and 2010.

Factors that explain why Canadians are choosing wine more often include:

 Baby boomers' increasing interest for wine products;
 Commercial vitality of the different private retailers and liquor boards across the country;
 A broader diversity of wines available permitting more effective targeting of new consumers;
 Arrival of New World wines marketing Canada with consumer friendly varietal labeling (ex:
  merlot, chardonnay);
 Research studies showing the beneficial effects of wine on health; and
 Consumer sophistication for this type of product.

Wines marketed at less than $8 a bottle are quickly disappearing in Canada while those between
$8 and $20 are seeing strong growth in their sales. It is estimated that between 2001 and 2010,
volumes marketed between $8 and $20 per bottle will more than double and will represent, at this
time, 82% of still wine sales. Wines marketed at more than $20 should see a marketing growth of
35.50% during this period.22



18
    Ibid.
19
     Ibid.
20
    Ibid.
21
    In 2005, Consumption of beer per capita was 88.22 litres, compared to 89.29 litres in 2001 (source: 2005 Annual
    Statistical Bulletin – Brewers Association of Canada).
22
   All dollar figures are converted to 2007 Canadian dollars dollars.



                                                                                                   Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                31


In 2001, consumption of red wine represented 56% of Canadian consumption. Between 2001 and
2005 red wine consumption increased by 34.22% and is expected to continue to grow between
2005 and 2010. In 2006, roughly 63.5 percent of still wine consumption in Canada is composed
of red wine.

The following figure provides a projection of per capita wine consumption in Nova Scotia to the
year 2010 prepared by the Association of Canadian Distillers (ACD). This projection is based on
provincial per capita consumption statistics, assuming current trends continue.

                                                    Figure 3




  Source: Association of Canadian Distillers (ACD), 2007

As can be seen in Figure 3, the trend in per capita wine consumption in Nova Scotia shows that
the gap in per capita wine consumption between Nova Scotia and the rest of Canada is narrowing.
The per capita wine consumption in Nova Scotia in 2003 (when the PWSS Program was
introduced) was 8.03 litres versus the Canadian average per capita wine consumption of 12.36
litres per year. However, by 2006, the per capita wine consumption in Nova Scotia, is 9.49 litres
(a 69.1 percent increase over 2003) versus the Canadian average per capita wine consumption of
13.73 (an 18 percent increase over 2003). By 2010, the per capita wine consumption in Nova
Scotia is projected to be 11.56 litres (a 75.2 percent increase over 2006) versus the Canadian
average per capita wine consumption of 15.38 litres (representing a 21.8 percent increase over
2006 consumption).

The closing of the gap in per capita wine consumption between Nova Scotia and the Canadian
average can also be seen in Table 8 below. In 2003, the per capita wine consumption in Nova
Scotia was 65 percent of the Canadian average per capita consumption. By 2006, however, the
Nova Scotia per capita wine consumption in was 69 percent of the Canadian average and by 2010
it is projected to be 75 percent of the Canadian average per capita consumption. The narrowing of



Gardner Pinfold
32                             Economic Impact Assessment of NSLC PWSS Program – Final Report


the gap in per capita wine consumption between the Nova Scotia and the Canadian average can
also be seen by comparing the percentage increase in per capita wine consumption between Nova
Scotia and Canada, over time.

                                                Table 8
                    Historical and Projected Trend in Per Capita wine Consumption
                                Nova Scotia and Canada (2000 to 2010)
                                                     2000          2003         2006           2010
 NS per capita Consumption                           6.73           8.03         9.49         11.56
 Canada per capita Consumption                       11.21         12.36        13.73         15.38
 % of Canadian per capita Consumption               60.0%         65.0%        69.1%          75.2%
 % change in NS per capita Consumption                            19.3%        18.2%          21.8%
 % change in Canadian per capita Consumption                      10.3%        11.1%          12.0%
  Source: Association of Canadian Distillers (ACD), 2007


4.       IMPACT ON LOCAL WINERIES
This study also assessed the impact of the PWSS Program on Nova Scotia wineries. Consultation
was conducted with local Nova Scotia winery owners and operators throughout the province.
Wineries were asked about the impact of the current PWSS Program on their operations, as well
as the impact of the PWSS Program should it expand to other areas throughout the province.
Local winery owners indicated there has been an overall positive impact resulting from the
introduction of the PWSS Program. Winery operations indicated that the current private wine
store operations have contributed to increased consumer awareness and knowledge of wine
varieties, wine labeling, “new wines” and varietal blends, source of wines, as well as an increased
awareness of local Nova Scotia wines. In addition, they indicated that the presence of the existing
PWSS locations within the HRM market have had positive benefits for their operations due to the
marketing of Nova Scotia wines that has resulted. Many local wineries have limited hours of
operation in the winter or during the tourism “shoulder” seasons. Having the private wine store
operations stock and display their product year round has resulted in a significant benefit to them
in increased sales volume. In addition, during the regular tourist season, many tourists visiting the
private wine store operations were not previously aware of the Nova Scotia wine industry. As a
result of the Nova Scotia wines displayed in the private wine stores, there has been more tourist
interest in Nova Scotia wine products, also resulting in increased sales.

When asked about the impact on the local wineries if the PWSS Program should expand to areas
outside HRM, the local wineries indicated that such an expansion would be expected to have net
positive impacts on their operations. Due to the continued marketing of local Nova Scotia wines
that has resulted through the private wine store operations in HRM and the increased consumer
awareness of wines, it is expected that an expansion of the PWSS would continue to benefit Nova
Scotia wineries.

Even when asked how a private wine store operation, potentially located in close proximity to a
Nova Scotia winery outlet would impact their operation, local wineries indicated that this would
still generate net positive benefits for their operations. Local winery owners stressed the point that
it is the increased consumer awareness of wines in general, (and Nova Scotia wines in particular)
that is of critical long-run importance to the viability of their operations. Winery operators
indicated that even in the case where a private wine store is located in the same town as their
winery outlet stores, it is expected that this would be a positive benefit to their operation. This is
due, in large part, to the increased consumer awareness and knowledge of wines that would result.
Expansion of the PWSS Program would provide a venue for local citizens as well as tourists to


                                                                                        Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                    33


sample, explore, and learn about varieties of wines, and it is this increased appreciation of wine
that is of critical importance to the local winery operations. Winery owners also indicated that this
would be particularly true provided the private wine store also agreed to stock their local product.

5.      EXPANDING THE PWSS
Is there scope for expanding the PWSS program within HRM or to other
areas of the province?
Our analysis suggests there are areas in the province that could be better serviced through the
introduction of private wine store operations. However, this analysis also suggests that the HRM
market may be close to saturation for privately owned wine stores.

Apart from any fundamental changes to the present operating agreement, the addition of more
PWSS operations within HRM would be challenging for both new entrants and existing PWSS
operators alike. There are few, if any, locations that would provide a new PWSS with the sales
volume needed. Since the PWSS Program has been underway, the NSLC together with the
private wine stores have captured the “niche” market within HRM such that there is little scope
for an additional privately-owned operation to open. Renovations, improved wine selection,
improved location (proximity to grocery stores) and service (increased knowledge of wines) at
many NSLC stores has added additional market saturation. With the expansion of the current
NSLC chain of stores and the operations and location of the existing private wine stores, the
market appears to be close to “fully serviced” within HRM. Consultations with the licencees,
agents, and the private wine store operators also indicate that there is little scope for expanding
the PWSS Program within HRM.

One feasible possibility would be a small satellite store supported by an existing PWSS within a
distinct market within HRM. Otherwise we believe HRM is well served by the current mix of
PWSS and NSLC outlets.

Location of PWSS Operations Outside HRM
In addition to the complex operational issues the private wine stores currently face, a location
outside of HRM would have the added challenge of finding a viable location with an adequate
population base that would support a PWSS. For the most part, rural and small municipalities
represent a challenge in continuing to increase wine consumption.

However, our analysis suggests that potential does exist outside of HRM for additional PWSS
operations. It will be critical that the location is selected such that the population base would
support the business both in terms of size of the market served and in terms of demand for
increased variety in wine offerings.

Table 9 provides a breakdown in the volume of wine sold (Litres) through NSLC retail stores the
various regions in the province over the past number of fiscal years. These figures show the
volume of wine sold through both the NSLC retail outlets plus licencee sales for the past three
years for which there is complete fiscal data. It is interesting to note that there has been a
substantial percentage increase in the volume of wine sold over the period between 2003/04 and
2005/06 fiscal years in all regions of the province, with the largest percent increase in the
northern and eastern regions, followed by Halifax, and the Valley and South Shore (all three
regions showing a larger percentage increase than the provincial average percent increase of 11.4




Gardner Pinfold
34                              Economic Impact Assessment of NSLC PWSS Program – Final Report


percent). Given shifts in population among these regions, a more complete comparison is based
on per capita wine consumption across regions (See Table 12 below).

                                               Table 9 23
                     Volume of Wine Sales, (Licencee Plus Retail Sales), Nova Scotia
                              All Price Bands, All Stores, Volume (LTR)
                                          2003/04 to 2005/06
                             Actual Volume (LTR)                      Percent Change
                         2003/04     2004/05 2005/06 2003/04 to 04/05 2004/05 to 05/06 2003/04 to 05/06
Halifax & Area          1,877,602 2,030,496 2,136,535     8.1%              5.2%           13.8%
Dartmouth & Area        2,068,590 2,100,099 1,742,833     1.5%             -17.0%          -15.7%
Northern & Eastern       715,879     792,052 855,331      10.6%             8.0%           19.5%
Cape Breton              699,547     744,802 782,516      6.5%              5.1%           11.9%
Valley & South Shore     886,414     937,613 1,005,330    5.8%              7.2%           13.4%
Undefined                 30,023      20,549  471,654
All Regions             6,278,055 6,625,609 6,994,199     5.5%              5.6%           11.4%
Source: NSLC, April, 2007

Table 9 also indicates there has been a decrease in the volume of wine sold in Dartmouth and area
over the 2003/04 to 2005/06 period. This may be in part due to a drop in licencee sales. Table 10
shows the change in the volume of wine sold though through NSLC retail stores the various
regions in the province for NSLC retail outlets for retail sales only (excluding licencee volume
sold through bars, restaurants, etc.) for the same three years.

Table 10 shows there has been an increase in the retail volume of wine sold over this same period
in all regions of the province, with the largest percent increase following the same pattern, in the
Northern and Eastern regions, followed by Halifax, and the Valley and South Shore (all three of
which are above the average percentage increase for the province as a whole of 13.6 percent in
retail sales).

                                                 Table 10 24
                            Volume of Wine Sales, (Retail Sales Only), Nova Scotia
                                 All Price Bands, All Stores, Volume (LTR)
                                             2003/04 to 2005/06
                                   Actual Volume (LTR)                              Percent Change
                             2003/04     2004/05    2005/06       2003/04 - 04/05    2004/05 - 05/06 2003/04 - 05/06
Halifax & Area              1,751,394 1,891,643    1,996,693           8.0%               5.6%           14.0%
Dartmouth & Area            1,346,962 1,436,969    1,517,319           6.7%               5.6%           12.6%
Northern & Eastern           668,286     741,840    791,687           11.0%               6.7%           18.5%
Cape Breton                  624,369     666,393    685,677            6.7%               2.9%           9.8%
Valley & South Shore         804,185     858,437    928,242            6.7%               8.1%           15.4%
Undefined                     26,442      19,302     10,558
All Regions                 5,221,638 5,614,584    5,930,175           7.5%              5.6%              13.6%
Source: NSLC, April, 2007

Trends in per capita wine consumption across regions/municipalities

23
     Please note: This table provides RETAIL + LICENCEE wine sales volume, and includes volume sold through
     bars, restaurants, etc. Also, 2006/07 volume numbers are incomplete the total volume for 2006/07 fiscal year is
     not available at this time.
24
     NSLC RETAIL sales volume does not includes volume sold through bars, restaurants, etc. Also, 2006/07 volume
     numbers are incomplete the total volume for 2006/07 fiscal year is not available at this time.



                                                                                                  Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                          35


A more complete comparison across regions and municipalities is based on per capita wine
consumption due to changes in population over time. A per capita wine consumption across
regions and municipalities allows for an analysis of differences in per capita wine consumption
across regions and municipalities at the sub-provincial level.

Table 11 provides a breakdown of wine volume sold (litres) through NSLC stores by county for
combined retail and wholesale sales. (Note: wholesale numbers volumes can not be identified
separately due to privacy concerns of wholesale customers in small markets.). Table 11 also
provides a breakdown of population by county using official Census Canada population statistics
by county. Table 12 provides a breakdown of per capita wine consumption by county based on
wine volume sold (litres) through NSLC stores by county for combined retail and wholesale sales
for the years since the introduction of the PWSS Program. Population by county by year is
estimated using an average annual incremental change in population by county from 2001 to 2006
to obtain population estimates for the corresponding years (2003/04 to 2006/07). It should also be
noted that the data for wine volume sold for fiscal year 2006/07 data is incomplete (represents 11
months of data only; it is missing final numbers from March 2007), therefore, total wine sales in
fiscal year 2006/07 is under-represented.


                                                                25
                                              Table 11
                 Nova Scotia Total Wine Consumption by County, Population by County
                                           2003/04 to 2006/07
                                       Volume (litres)                   County Population
      County         2003/04       2004/05       2005/06      2006/07     Pop 2001    Pop 2006
 Cape Breton           449,542       485,610          516,180           510,856          109,330             105,928
 Colchester            205,014       218,716          229,214           220,379          49,307              50,023
 Cumberland            153,693       173,012          184,827           180,623          32,605              32,046
 Digby                 101,064       106,232          108,006           101,267          19,548              18,992
 Guysborough            27,714        30,487           30,585            30,600           9,827               9,058
 Halifax              3,092,444     3,331,811        3,520,532         3,481,813         359,111             372,679
 Hants                  62,057        68,960           77,776            79,407          40,513              41,182
 Inverness              58,647        63,684           69,251            67,688          19,937              19,036
 Kings                 267,764       280,575          298,417           297,227          58,866              60,035
 Lunenburg             284,316       306,558          316,982           313,727          47,591              47,150
 Pictou                203,066       228,943          251,405           252,032          46,965              46,513
 Queens                 51,740        54,351           62,616            65,122          11,723              11,212
 Richmond              104,813       108,095          108,548           108,311          10,225               9,740
 Shelburne              49,634        51,299           54,817            55,823          16,231              15,544
 Victoria               86,545        87,412           88,536            85,319           7,962               7,594
 Yarmouth              100,715       102,760          121,691           123,661          26,843              26,277
 Annapolis             145,911       154,970          164,767           162,826          21,773              21,438
 Antigonish            126,393       140,891          159,300           157,945          19,578              18,836
 Total County         5,571,072     5,994,366        6,363,450         6,294,626         908,007             913,462
 Undefined(1)          706,983       631,243          630,749           695,660
All Regions            6,278,055       6,625,609       6,994,199          6,990,286      908,007             913,462
Source: NSLC, April 2007
(1) Undefined includes NSLC Distribution Centre sales, #101 Special, and undefined as per NSLC data.

Based on estimated per capita wine consumption by county (Table 12), relative comparisons are
made on differences in per capita wine consumption at the sub-provincial level. It should be noted

25
     Please note: the 2006/07 data is incomplete (represents 11 months of data only; it is missing final numbers from
     March 2007).



Gardner Pinfold
36                              Economic Impact Assessment of NSLC PWSS Program – Final Report


however, that these are only estimates of per capita wine consumption using NSLC retail and
wholesale wine sales by store. In some cases, the market area served by an NSLC store may
encompass two counties, depending on the location of the store, therefore the per capita wine
consumption by county is distorted. In addition, other factors may distort estimated per capita
wine consumption by county, such as a large proportion of wine sales at a particular store by non-
residents of the county (e.g., tourist sales); a demographic shift (increase in the proportion of the
population within a county that consume wine); a large number of people who commute to work
or shop within a county (and purchase wine) but do not live in the county; all of which can distort
per capita wine consumption statistics by county.

Table 12 shows the highest per capita growth in wine consumption over the 2003/04 to 2006/07
period to be in Hants county, followed by Queens, Antigonish, Pictou and Yarmouth counties.
Other counties showing a high growth rate in per capita wine consumption above the provincial
average growth rate include Cumberland, Inverness, Guysborough and Cape Breton counties.

While these estimates provide an indication of the comparative growth in per capita wine
consumption at the county level, they do not highlight substantial difference in per capita wine
consumption that may be present at the municipal level. Table 13 provides a breakdown of the
volume of wine sales for selected municipalities.

                                            Table 12(1)
             Per Capita Wine Consumption (NSLC Retail + Wholesale Sales) by County
                                         2003/04 to 2006/07
                                                                         Percent Change in Per
                           Per Capita Consumption (litres/person)        Capita Consumption
      County        2003/04       2004/05      2005/06        2006/07(2)      2003/04-2006/07
 Cape Breton           4.2           4.5          4.8             4.8              15.8%
 Colchester            4.1           4.4          4.6             4.4              6.6%
 Cumberland            4.7           5.4          5.7             5.6              18.8%
 Digby                 5.2           5.5          5.7             5.3              2.0%
 Guysborough           2.9           3.3          3.3             3.4              16.0%
 Halifax               8.9           9.6         10.0             9.9              10.2%
 Hants                 0.2           0.3          0.3             0.3              36.5%
 Inverness             3.0           3.3          3.6             3.6              18.7%
 Kings                 4.5           4.7          5.0             5.0              9.7%
 Lunenburg             7.0           7.7          8.0             7.8              12.6%
 Pictou                4.3           4.9          5.4             5.4              24.8%
 Queens                4.5           4.8          5.5             5.8              29.3%
 Richmond             10.4          10.9         11.0            11.1              6.4%
 Shelburne             3.1           3.2          3.5             3.6              15.5%
 Victoria             11.1          11.3         11.5            11.2              1.4%
 Yarmouth              3.8           3.9          4.6             4.7              24.4%
 Annapolis             6.7           7.2          7.7             7.6              12.6%
 Antigonish            6.6           7.4          8.4             8.4              27.9%
 Province             6.90          7.27         7.67            7.65              10.9%
Source: NSLC, April 2007
(1) Undefined includes NSLC Distribution Centre sales, #101 Special, and undefined as per NSLC data.
(2) Please note: 2006/07 volume data is incomplete (represents 11 months only; missing final data for March 2007).




                                                                                                 Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                          37




                                           Table 13(1)
                          Wine Consumption (Litres), Retail and Wholesale
            Selected Communities Where PWSS Operations Could Be Established, Nova Scotia
                                                         Consumption (Litres)
           Community           Stores      2003/04        2004/05      2005/06     2006/07
       Amherst                   301,302, 801        76,822           91,612           98,650          97,035
       Antigonish                  303,800          126,393          140,891          159,300         157,945
       Baddeck                       408             53,170           53,057           51,930          49,907
       Bridgewater                 505, 506         321,912          353,216          366,604         358,714
       Digby                         520            101,064          106,232          108,006         101,267
       HRM                         Multiple        3,260,125        3,509,376        3,708,801       3,671,674
       Kentville                     546             60,596           64,844           73,699          73,178
       Mahone Bay                    570             48,130           51,806           53,457          54,243
       New Glasgow                 345, 347         111,963          124,818          142,277         141,547
       CBRM                        Multiple         449,542          485,610          516,180         510,856
       Truro                       392, 394         179,758          192,386          200,017         192,904
       Windsor                       196             52,951           58,433           66,303          66,856
       Wolfville                     595             73,933           76,380           79,716          75,954
       Yarmouth                      598             91,333           93,097          112,125         115,728
     (1) 2006/07 volume data is incomplete (represents 11 months only; missing final data for March 2007).
      Source: NSLC, April 2007

Based on the total wine sales by municipality (total volume of retail and wholesale wine sold
through NSLC stores provided in Table 13 above), Table 14 provides an estimate of per capita
wine consumption for selected municipalities. Table 14 also provides a breakdown of population
figures for various level of census aggregation by municipality using official Census population
figures. Population estimates by year are estimated using the average annual incremental change
in population from 2001 to 2006 to obtain population estimates for the corresponding intervening
years (2003 to 2006).26

The difficulty associated with determining the appropriate population served to estimate per
capita wine consumption is magnified at the municipal level. As shown in Table 14, the per capita
consumption figures change significantly depending on which level of census aggregation is used
to measure population.

Using HRM as an example, per capita wine consumption ranges from 8.9 in 2003/04 to 9.9 in
2006/07. If we compare these per capita wine consumption figures with the town of Amherst, we
see that the per capita wine consumption for Amherst is 8.1 in 2003/04 and 9.7 in 2006/07. This
is deceiving however, since the population served by the Amherst store is larger then the town of
Amherst, thereby lowering the per capita wine consumption below that of HRM.

In the case of Antigonish, per capita wine consumption is very high using the Town of
Antigonish population, ranging from 27.8 in 2003/04 to 37.3 in 2006/07. However, using the =
Census Subdivision (CSD) level of aggregation to represent the population Antigonish, the per
capita wine consumption for Antigonish is 16.4 in 2003/04 and 20.5 in 2006/07. This is still
deceiving however, since the population served by the Antigonish stores is larger then the CSD
level of aggregation for Antigonish due to the number of people commuting to Antigonish to
work, therefore the true per capita wine consumption is most likely below this estimate. This
same phenomenon is also true for Digby, New Glasgow, Truro, Windsor and Yarmouth. When a


26
     Data for wine volume sold for fiscal year 2006/07 data is incomplete (represents 11 months of data only; it is
     missing final numbers from March 2007), therefore, total wine sales in fiscal year 2006/07 is under-represented.



Gardner Pinfold
38                                Economic Impact Assessment of NSLC PWSS Program – Final Report


larger level of aggregation for population is used for these municipalities however, the per capita
consumption dropped well below that of HRM.

                                                  Table 14
                                        Per capita wine consumption
                      Selected Communities Where PWSS Operations Could Be Established
                                                Nova Scotia
                               Population                           Per Capita Consumption (litres/person)
                                                                                                      Growth in Per Capita
     Community                                                                                           Consumption
                              2001       2006       2003/04      2004/05 2005/06       2006/07(1)      2003/04 to 2005/06
     Amherst                 9,470       9,505          8.1        9.7         10.4       10.2               28.2%
     Antigonish              4,754       4,236          27.8       31.7        36.7       37.3               32.1%
     Antigonish CSD          7,730       7,702          16.4       18.3        20.7       20.5               26.2%
     Baddeck                 4,217       4,140          12.7       12.7        12.5       12.1               -1.6%
     Bridgewater             7,621       7,944          41.5       45.2        46.5       45.2               12.0%
     Digby                   2,111       2,092          48.0       50.6        51.5       48.4                7.3%
     Digby MD                8,281       7,986          12.4       13.1        13.4       12.7                8.4%
     Digby CD or CA          19,548     18,992          5.2        5.5          5.7        5.3                8.1%
     HRM                    359,111     372,679         8.9        9.6         10.0        9.9               12.1%
     Kentville CD            25,172     25,969          2.4        2.5          2.9        2.8               20.1%
     Mahone Bay                991        904           50.3       55.2        58.0       60.0               15.3%
     New Glasgow             9,432       9,455          11.9       13.2        15.1       15.0               27.0%
     New Glasgow CA          36,735     36,288          3.1        3.4          3.9        3.9               27.7%
     CBRM                   105,968     102,250         4.3        4.7          5.0        5.0               16.5%
     Truro                   11,457     11,765          15.5       16.5        17.1       16.4               10.1%
     Truro Heights           13,391     13,312          13.5       14.4        15.0       14.5               11.5%
     Truro CA                44,276     45,077          4.0        4.3          4.5        4.3               10.5%
     Windsor                 3,778       3,709          14.1       15.6        17.8       18.0               26.1%
     Windsor, MD of          13,780     13,881          3.8        4.2          4.8        4.8               24.9%
     W. Hants
     Wolfville               3,658       3,772          20.0       20.5        21.3       20.1                6.5%
     Wolfville+              8,825       9,271          8.2        8.4          8.7        8.2                5.7%
     Wolfville Heights
     Yarmouth                7,561       7,162          12.3       12.7        15.5       16.2               25.5%
     Yarmouth MD             10,466     10,304          8.8        9.0         10.8       11.2               23.5%
     Yarmouth CA             26,843     26,277          3.4        3.5          4.2        4.4               23.8%
     Source: NSLC, April 2007
     (1) 2006/07 volume data is incomplete (represents 11 months only; missing final data for March 2007).
     Note: It is not possible to know what area is served by stores in each community, more than one population figure is
     used in some cases to show how per capita consumption may vary
     CSD = Census Subdivision, MD = Municipal District, CD = Census Division, CA = Census Agglomeration

In the case of Wolfville, when a larger level of aggregation for population is used, the per capita
consumption of wine is comparable to that of HRM. In the case of Mahone Bay and Bridgewater,
the per capita consumption of wine is significantly higher than that of HRM, and a larger level of
aggregation for population is required to obtain an appropriate measure of the per capita
consumption of wine since these communities service larger surrounding areas.

While recognizing the difficulties in determining the appropriate level of aggregation to obtain
valid estimates of per capita wine consumption, it is the percent growth in per capita wine
consumption that is the appropriate statistic for relative comparison. The percent change in per
capita wine consumption over time, using alternate census levels of aggregation for population
provides a useful comparison across municipalities. Table 14 estimates the percent change
(growth) in per capita wine consumption over the period 2003/04 to 2005/06 time period, using
alternate census levels of aggregation for population across municipalities. (Note the year



                                                                                                     Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                    39


2005/06 is used for this comparison since 2006/07 represents an incomplete year of volume of
wine sales. This will be updated once the complete data for 2006/07 fiscal year is available).

Looking at the relative growth in per capita wine consumption across municipalities shows
variation across municipalities. HRM has experienced a 12.1 percent growth in per capita wine
consumption. Communities such as Antigonish, Bridgewater, Mahone Bay, Windsor, and
Yarmouth show substantial percent growth in per capita wine consumption over the 2003/04 –
2005/06 period, even though these communities showed a high per capita wine consumption
statistic is 2003/04 using the population statistics provided. Communities such as Truro, and New
Glasgow also show a high percent growth in per capita wine consumption regardless of the level
of census aggregation used to measure population. Amherst, CBRM and Kentville also show a
high percent growth in per capita wine consumption, whereas communities such as Digby and
Wolfville show a lower percent growth in per capita wine consumption. Baddeck is an exception,
showing a negative growth in per capita wine consumption.

Average income and age composition across municipalities

Other factors influence the rate of growth of per capita wine consumption including average
income and age composition. According to projections on wine consumption in Canada,27 one of
the key factors driving increased wine consumption for Canadians is an increasing interest for
wine products by baby boomers and increased consumer sophistication for this type of product
(as well as the arrival of New World wines with consumer friendly labeling, studies on the
beneficial effects of wine on health, and a broader diversity of wines available permitting more
effective targeting of new consumers). The segment of the population less than 20 and older than
65 are less likely to consume wine. Communities with a larger proportion of the population of
prime working age offer a higher average income as well as a higher probability of an increased
interest and demand for a broader variety of wines. In addition, communities that are positioned
as a central location for shopping, restaurants, recreational facilities, and other conveniences are
also more likely to experience growth in per capita wine consumption. Because today’s consumer
is looking for convenience and “one stop” shopping opportunities, and because there is a natural
shopping fit between wine and food, communities with large retail grocery outlets as well as
convenience shopping centres that contain boutique grocery stores, delis, specialty food shops,
bakeries and cheese shops, flower shops or art and gift boutiques are more likely to experience a
growth in per capita wine sales because of the convenience of the shopping experience.
Table 15 provides a distribution of average incomes and age composition by municipality for
Nova Scotia. A comparison of average household incomes across municipalities provides an
indication of the relative economic well-being of residents. Municipalities are sorted according to
average household income. The distribution of the age profile across municipalities show the
percentage of the population of in the municipality less than 19 years of age, between 20 and 65
years of age, and over 65 years of age. A comparison of the distribution of age composition
across municipalities provides a broad indication of the proportion of the population in the
community most likely to present a growth in demand for wine.
As can be seen in Table 15, average household incomes in HRM are the highest in the province.
It is also interesting to note that the proportion of prime working age persons (aged 20 to 65) in
HRM (65%) is also among the largest in the province. Port Hawkesbury, Antigonish, Lunenburg,
Hants East, and Wolfville follow HRM in terms of the highest average income in the province.


27
     Projections given in the 2006 study on the Current Trends in the International Wine and Spirits Market and
     Outlook to 2010, by the British firm IWSR for Vinexpo.



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40                                Economic Impact Assessment of NSLC PWSS Program – Final Report


These municipalities also have a high proportion of persons aged 20 to 65, with the exception of
Lunenburg, which has a relatively high proportion of persons aged 65 or older.28

Municipalities such as Pictou, Kentville, and the Municipality of Kings also have average
household income greater than $45,000 and more than 60 percent of their population between the
ages of 20 and 65 years old. Although municipalities such as Barrington and Argyle have average
household income greater than $45,000 and more than 60 percent of their population between the
ages of 20 and 65 years old, these municipalities are not centrally located for shopping,
restaurants, and other conveniences and are perhaps less likely to experience as great a growth in
per capita wine consumption.

In addition, municipalities such as Chester, Mahone Bay, Windsor, Hantsport, Stellarton,
Shelburne, Hantsport, the Municipality of Colchester and the Municipality of Inverness all have
average incomes above $40,000 and a high proportion of their population between the ages of 20
and 65 years old. Cape Breton Regional Municipality (CBRM), Amherst and Truro have average
household incomes close to $40,000, a large proportion of working age population and are
centrally located for shopping, restaurants, and other conveniences and therefore, may be more
likely to experience as great a growth in per capita wine consumption.




28
     The HRM, Wolfville and Antigonish municipalities all have a fairly large proportion of their population associated
     with or working for a university.



                                                                                                     Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                 41



                                              Table 15
                         Distribution of Average Household Income and Age
                                  Communities, Nova Scotia (2003)
                                            Av. Household        Percent of Population in Age Categories
              Municipality                     Income           Age 0-19         Age 20-65         Age over 65
 Halifax Regional Municipality                  56,366            24%               65%               11%
 Town of Port Hawkesbury                        52,856            27%               61%               12%
 Town of Antigonish                             51,301            23%               55%               23%
 Town of Lunenburg                              51,093            18%               55%               27%
 Municipality of Antigonish                     49,901            29%               61%               10%
 Municipality of Hants East                     48,737            27%               63%               10%
 Town of Wolfville                              48,593            22%               58%               21%
 Municipality of Barrington                     48,347            25%               62%               13%
 Municipality of Argyle                         48,110            23%               61%               16%
 Municipality of Pictou                         48,101            23%               63%               14%
 Town of New Glasgow                            47,684            22%               58%               20%
 Municipality of Lunenburg                      46,676            22%               62%               16%
 Town of Kentville                              46,228            22%               61%               17%
 Town of Stewiacke                              46,191            28%               57%               15%
 Town of Clark's Harbour                        45,291            25%               56%               19%
 Municipality of Yarmouth                       45,278            25%               61%               14%
 Municipality of Kings                          45,071            26%               61%               13%
 Municipality of Inverness                      44,926            24%               59%               16%
 Municipality of Colchester                     44,793            26%               61%               13%
 Town of Hantsport                              44,581            23%               57%               20%
 Town of Windsor                                44,110            23%               54%               23%
 Town of Mahone Bay                             43,934            17%               54%               29%
 Town of Pictou                                 43,813            24%               58%               19%
 Town of Stellarton                             43,798            26%               58%               16%
 Municipality of Chester                        43,492            21%               62%               17%
 Town of Bridgewater                            43,213            22%               59%               19%
 Municipality of Shelburne                      43,049            23%               61%               16%
 Town of Berwick                                42,967            23%               52%               26%
 Town of Westville                              42,099            28%               59%               13%
 Town of Oxford                                 41,326            23%               60%               18%
 Town of Shelburne                              40,555            23%               62%               16%
 Municipality of Cumberland                     40,426            22%               60%               18%
 Cape Breton Regional Municipality              40,269            23%               60%               17%
 Town of Amherst                                40,002            23%               58%               19%
 Town of Truro                                  39,916            20%               58%               21%
 Town of Mulgrave                               39,856            25%               58%               16%
 Municipality of St. Mary's                     39,211            22%               59%               19%
 Town of Trenton                                38,767            26%               59%               15%
 Municipality of Annapolis                      38,204            22%               60%               18%
 Town of Canso                                  38,020            21%               61%               18%
 Town of Annapolis Royal                        37,952            17%               56%               27%
 Town of Bridgetown                             37,456            23%               56%               22%
 Municipality of Guysborough                    37,249            20%               60%               20%
 Town of Yarmouth                               37,056            25%               56%               19%
 Town of Middleton                              37,051            24%               53%               23%
 Town of Lockeport                              36,330            19%               54%               26%
 Town of Springhill                             35,984            22%               59%               19%
 Town of Digby                                  32,833            18%               56%               25%
 Town of Parrsboro                              29,872            23%               54%               23%
Source: Service Nova Scotia and Municipal Relations. 2007. Municipal Indicators. Government of Nova Scotia based
on Statistics Canada data. (online: http://www.gov.ns.ca/snsmr/muns/indicators/public/default.asp)




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42                          Economic Impact Assessment of NSLC PWSS Program – Final Report



In summary, a comparative analysis of per capita wine consumption across regions and
municipalities (based on the limited data available) provides evidence of large increases in the
growth of per capita rate consumption rates in selected municipalities, indicating scope for
expansion of the PWSS Program outside HRM. Further, a comparison of relative average
household incomes and age compositions across municipalities also highlights municipalities that
may present opportunities for private wine store operations. However, it is beyond the scope and
listed requirements of this study to identify communities that represent potential for the PWSS
Program with any degree of certainty.

Private wine stores must not only locate in areas that have per capita wine consumption rates and
population levels that support their business model, they must also locate in areas that meet the
increasingly sophisticated shopping needs of customers with regard to product selection,
availability, convenience and service and are representative of current consumer shopping
patterns and markets. Product selection, service and convenience are key to retailing wines.

Expanding the PWSS Program: Optimal Model

One option for a viable model for expanding the PWSS Program would be a “stand alone” private
wine store model, where the private wine stores source their own wine, cut their own purchase
order, pay for their own shipping and warehousing, with the NSLC remaining the importer of
record or right of first receipt. Under this “stand alone” model, in order for the private wine stores
to ship full containers, they would need a large customer base, most likely comprised of licencee
business as well as satellite private wine store operation(s) outside of HRM. In this manner, the
private wine store could achieve economies of scale. Under this model, the private wine store will
have increased control “end-to-end”, from sources wines through to shipment and distribution.
This increased control over inventory will have a large impact on being able to achieve
economies of scale. In addition, there would be ample scope for implementing a flat fee pricing
model under this type of model.

Our analysis also suggests that one option for a viable “stand alone” model would be the
establishment of satellite operation(s) of an existing PWSS to be located in one of the suggested
locations outside of HRM (and possibly within HRM) as it could draw on the inventories and
expertise of an existing operator. This would allow the private wine store operator to achieve
some “economies of scale” associated with the investment requirement in inventory and allow
them to stock their satellite store and service licencee business in other regions of the province
using their inventory warehousing.

If the NSLC opts for a “stand alone” model, private wine stores would need more distribution
points, a large customer base, (most likely comprised of licencee business), as well as satellite
private wine store operation(s) outside of HRM. This model requires a larger operation and
customer base, given the capital investment required to take advantage of the economies of scale
associated with investing in satellite operation(s) businesses providing a larger customer base,
and a greater ability to pursue licencee business throughout the province.

However, it should be noted that not all private wine stores and boutiques operations would have
the capital investment required to take advantage of this type of model. While this large-scale
business model is identified as a viable option that could take advantage of economies of scale, it
is not be the case that this is the only viable option for expansion of the PWSS Program. Based on
a comparative analysis of per capita wine consumption rates, average incomes and age
compositions across municipalities as well as a financial analysis of the operating revenues and



                                                                                     Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                  43


expenses of the existing private wine stores, it is evident there is scope for small independent
“boutique-style” wine stores to operate successfully with a well-designed business model and
supportive customer base. This implies that another option for a viable model for expanding the
PWSS Program would be the “current model”, where the PWSS operation utilizes the NSLC
supply chain to source, ship and warehouse product (with charges), and with the NSLC also still
remaining the importer of record or right of first receipt. Under the current model, the private
wine store has the ability to consolidate shipments with NSLC traffic and the take advantage of
the freight rebate.

The “stand alone” model and the conventional model both represent possible private wine store
operation models, however, the location of these stores will be critical in ensuring financial
success for the private wine store, as well as ensuring growth in the overall wine industry in Nova
Scotia. Based on the comparative analysis of per capita wine consumption, age composition, and
average household incomes and across municipalities suggests there are several possible locations
in Nova Scotia (e.g., Antigonish, Bridgewater, Wolfville, Mahone Bay, New Glasgow, Amherst,
Truro, Cape Breton Regional Municipality, etc,). However, further market analysis is required to
determine the optimal location.

New wine stores applications should be considered on the basis of the merit of their business plan
as well as the criteria discussed above. While there is no one-size-fits-all successful business
model for private wine store operations, the successful operation must have a clear understanding
of the customer base, the retail and wholesale environment in this industry, requirements for
financial success in this industry, and an optimal business model design to meet customer needs.

Potential Private Wine Store Business Models

Our analysis suggests that the co-location of wine and grocery stores enhances the natural
association of food and wine pairings with the added convenience for the shopper preparing a
meal. Selecting private wine store locations adjacent to specialty, boutique or deli-style food or
grocery locations allows private wine stores to image their stores to best meet changing consumer
expectations. This strategy offers the private wine stores to have an “anchor point” to their
operation, that they can add to using additional services and lines of business related to the
variety of wines offered.

Because the private wine stores can have a kitchen as part of their operation, there is ample scope
for the private wine stores to offer other related services and product offerings related to food,
including: offering cooking classes with wine, food sampling with wine, instructional classes on
pairing food with wine, wine appreciation classes, wine tastings, or catering services for small
functions with an emphasis on introducing new wines. In addition, based on other motivations to
purchase wine, our analysis shows there is scope for the private wine stores to capitalize on
consumers’ preference for convenience shopping and locate in proximity to large food outlets,
centres containing a concentrating on food boutiques and specialty shops, art or gift boutiques,
flower stores, or small gift boutiques. This type of business model would also service the growth
in consumers during the peak tourism season in Nova Scotia.

In addition, the private wine stores can serve as a wholesale distributor of wine to licensed
establishments throughout Nova Scotia (restaurants, bars, hotels, and lounges). This offers
another line of business for the private wine store and may also be a driver in the selection of
location outside HRM. Communities with larger populations and greater variety in restaurant
selection offer another source of revenue for the private wine stores. While location will be
critical, it will not ensure success. Private wine store operators must examine retail market


Gardner Pinfold
44                          Economic Impact Assessment of NSLC PWSS Program – Final Report


patterns to ensure that the store location and market focus is best designed to meet the evolving
needs of the consumer. Given that customer service is also key to success, they must also strive to
support and enhance the skills of their employees to deliver superior customer service in a vibrant
retail environment.

Impact on existing PWSS operators of expanding the PWSS Program to
include more private wine stores

Our analysis suggests that should additional PWSS operations be allowed within HRM the impact
would be largely two-fold. First, from a retail perspective, a new PWSS should located within the
trading area of an existing PWSS within HRM would result in sales being drawn from the same
group of customers. The impact on the existing PWSS could be very detrimental depending upon
the skills and resources of the new private wine store operation. Second, there would also be an
impact on the licensee side, which is more difficult to determine in an ex-anti context. This
impact would depend less on location of the new PWSS (goods are delivered to licensees) but
rather more on the skills and resources of the new PWSS operator(s) and their ability to provide
service to the licencees. This in turn could have a negative effect of the existing private wine store
operations, depending largely on the changes in customer service and loyalty of licencees to
existing private wine stores.

Outside of HRM, additional PWSS operations would have little impact on existing PWSS within
HRM. In the case of a satellite model of an existing HRM private wine store however, there could
be significant positive impacts for the existing private wine store operation as it will be able to
draw on the inventories and expertise of an existing operator. This will allow the existing HRM
private wine store to achieve economies of scale in their warehousing operation investment and
allow them to stock their satellite store using their inventory warehousing investment the has been
required. The analysis of this issue is also contingent on any changes made to the existing PWSS
Program as well as to the warehousing operation of NSLC in the future. A centralized regional
warehousing depot located in northern Nova Scotia could have significant positive impacts for
PWSS’ located both within and outside HRM, depending on the shipping schedule and stocking
program made possible.

6.      LESSONS LEARNED
Lessons learned in the design and delivery of the PWSS Program

Consultations with the private wine store operators indicated that many of the lessons learned
have arisen as a result of assumptions made at the outset of the PWSS Program by both PWSS
operators and the NSLC that turned out to be incorrect. Based on these consultations, it is clear
that this has created significant challenges for the private wine stores, especially in the first year
or two of operation. More specifically, these challenges have resulted in significant additional
costs to all PWSS operations. One of the biggest lessons learned resulted from assuming that an
operational Agent Stocking Program would be in place for the PWSS Program when in actuality,
it failed operationally.

Subsequently, changes were made that enhanced the viability of the PWSS Program. Two key
changes include the additional discount of five percent for the private wine stores in recognition
of unforeseen operating costs associated with sourcing and warehousing product and the freight
rebate to encourage PWSS operators to consolidate shipments with the NSLC's traffic. More
recently, changes made in the warehousing within the NSLC of PWSS stock has provided a
valued additional service.


                                                                                     Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                   45


Consultations with the private wine store operators also revealed that they were not aware of the
difficulty they would encounter in convincing agents to offer products to the private wine stores
versus the NSLC. There seems to still be a perception on the part of agents that if the private wine
stores are offered a product that turns out to be successful they may be penalized in the future by
the NSLC. Some suppliers say no to the private wine stores in offering new product in case the
NSLC may want the product in the first two years, thereby earning a larger return for the agent.

Both private agents and wine store operators indicated that there have been significant lessons
learned in the educational component of the private wine stores in increasing customer awareness
of wines and in showing that PWSS were a compliment to what the NSLC was doing. They also
indicated that there are significant lessons learned initially in understanding how to attract
consumers to the private wine stores.

What works well in the design and delivery of the PWSS program?

Private wine store operators indicated that the investment in a PWSS Specialist by the NSLC has,
on balance, worked reasonably well. It allows them to resolve most issues that arise with a single
person. In addition, the PWS operators indicate that current NSLC managers have been very
quick to resolve problems that they have had over the past year. The additional discount of 5
percent granted two years ago has also helped them (at least partially), enhance the viability of
their business.

In addition to the structural features noted above, the ability to source whatever products they
choose, wherever they may come from has been critical to the private wine store operations. It
allows the private wine stores to offer their customers a broad range of items from around the
globe thereby differentiating themselves from other PWSS stores and the NSLC. Our analysis
also suggests that the ability of the private wine stores to protect a new wine product offering for
two years from being added to the Port of Wines (POW) list has given private wine store owners
a short-term buffer from competition from NSLC for those new wines that have been successful.

Our analysis also indicates that the private wine store operators were not expecting the marketing
and product/imaging changes the NSLC would be going through during the initial period that the
PWSS Program was being introduced. This reflects some naivety on the part of the PWSS in
assuming that the NSLC would not respond to changing demands of consumers.

Our analysis of the current warehousing arrangement provides additional support to the private
wine stores. The inventory management program at the NSLC warehouse allows the private wine
stores to better manage their shipments and cash flow to compensate for any lags in shipment
arrival as a result of any unforeseen changes in shipment schedules or delays due to consolidated
shipping. These changes allow the private wine stores operators to maintain product selection at
lower cost with a more efficient use of cash flow. Our analysis also suggests that the NSLC is in
fact, investing in inventory for the PWSS and acting in essence like an Agent Stocking Program.
However, the private wine store operations should not expect warehousing services to continue
without charge. However, it should be expected that this charge would be very reasonable, based
on the fact that there have been changes over time in the warehousing terms offered by the NSLC
and private wine store operations have adjusted their operations according to these terms. Any
introduction of large warehousing fees would initially introduce large incremental costs to private
wine stores that may prove detrimental to their operations.




Gardner Pinfold
46   Economic Impact Assessment of NSLC PWSS Program – Final Report




                                                     Gardner Pinfold
VII.
RECOMMENDATIONS
1.      CONTINUATION OF THE PWSS PROGRAM
The analysis undertaken in this study suggests that the PWSS Program has been successful in
achieving the objectives laid out in its original mandate in generating increased consumer
awareness and consumption of wines. Consumers have been exposed to a broader selection of
products, increased staff knowledge and training in wines, increased selection of wines through
restaurants and other licencees, as well as an increased exposure through on-site wine tasting, and
this has served to increase consumer awareness and knowledge of wines. The introduction of the
private wine stores through the PWSS Program has resulted in increased variety of product and
greater related service for this “niche” market.

    Recommendation #1: The PWSS Program has addressed the market need for
     increased selection of wines identified in previous studies and should be
     continued in Nova Scotia.

The PWSS Program has resulted in new wines being introduced to the market and an increased
awareness of wines at both the retail and licensee level. Furthermore, statistics show that the
demand for variety in wine is increasing in Canada and many wine drinkers are driven by
increased selection and variety. The analysis of per capita wine consumption in Nova Scotia
conducted in this study indicates a substantial increase in per capita wine consumption in Nova
Scotia over the previous 10 year average. While it is not possible to determine with certainty what
proportion of this increase is attributable to the PWSS Program, the economic impact analysis
carried out in this report suggests that this increase is at least in part, due to the establishment of
the PWSS Program. The private wine stores in HRM have further developed their business
models since they have begun and they have sought to carve out a share of this growing niche
market through an increased exposure to a broader selection of wines, increased staff knowledge
and training in wines, increased selection of wines to restaurants and other licencees, and this has
been is passed on to the consumer.

2.      CHANGES TO THE PWSS STOCKING MODEL
The time lags associated with consolidation of shipments for the (relatively small) Nova Scotia
market result in the private wine stores being in a position of inventory warehousing to cover
their individual share of market demand given these lags in shipment. As a result, the inventory
levels for the private wine stores are many times what would be required if products are available
on a more frequent shipment basis. In addition, this makes it difficult for the private wine stores
to take a chance on introducing new products to the market. As a result, this requires budgeting
for a substantial inventory costs beyond the possibilities for many “small business enterprises”
operating in a Nova Scotia market. Requiring small private wine enterprises to take the entire
purchase order associated with large shipment requirements could result in a financial hardship
that may result in business closures.

Developing a viable inventory management program for the Nova Scotia PWSS Program, would
go a long way in allowing the PWSS to operate successfully and would eliminate a significant
barrier to success for the private wine stores.



Gardner Pinfold                                                                                     47
48                         Economic Impact Assessment of NSLC PWSS Program – Final Report


    Recommendation #2: Consideration should be given to developing a viable
     inventory management program for the Nova Scotia PWSS Program

Early in the PWSS Program, the private wine stores were required to take ownership of their
purchase orders in full. The number of purchase orders and the ability for the stores to take full
orders became burdensome for both parties. Currently, the NSLC, in cooperation with the PWSS
operators, manage and provide stocking capacity for inventories ordered on their behalf by the
NSLC.

With the implementation of SAP and the goal to streamline NSLC’s business processes, an
alternative processes for fulfilling PWSS requirements is currently being explored by NSLC.
Under the new SAP technology, when the PWSS places a sales order, the sales order is associated
with the purchase order. When the purchase order is received into inventory, the goods are
tracked as part of the sales order stock under the SAP system and therefore, cannot be used to
fulfill other orders. Because the sales order stock cannot be used to fulfill other orders, this
process could result in inefficiencies if the customer’s sales order is not fulfilled in full.
Otherwise, partial sales order stock that cannot be used to fulfill other orders would be
warehoused. Warehousing free of charge represents a cost to NSLC.

One option is to require the private wine store to take the entire purchase order. The standard
industry best practice is to require the private wine stores to pay for their purchase order and pick
it up within 30 days. Beyond this, the private wine store could be offered terms (in the future
could consider 30 day terms). In order to avoid the situation of many small orders, there could be
a minimum purchase order amount implemented terms (in the future could consider a minimum
purchase order amount). Otherwise, the requirement that the private wine store take the entire
purchase order could result in numerous small orders, resulting in substantial administrative
inefficiencies. Under this model, if the private wine stores use NSLC for warehousing, the
warehousing service will not be free of charge.

The PWSS should expect that the NSLC will charge inventory storage in the future. However, it
should also be expected that NSLC will develop and maintain an improved inventory
management system for the PWSS Program and that inventory storage charges reflect reasonable
charges (average industry charges) for this service.

Another option that could alleviate the problem of high inventory levels is the development of a
third party regional warehousing depot (third party warehousing depot for the three Maritime
provinces or four Atlantic provinces.) located in a central location. The advantage of a regional
warehousing depot is the gain in economies of scale and the reduction in the shipment time lags
associated with consolidated shipping due to a larger market being serviced. Moving to a regional
warehousing depot would also result in improvements in scheduling forecasts for shipments and
monitoring order flows.

    Recommendation #3: Consideration should given to a third party regional
     warehousing depot in order to gain economies of scale associated with
     servicing a larger market, thereby reducing costs for the NSLC.

There may be gains to NSLC in achieving greater potential reduced costs due to economies of
scale associated with larger shipment orders. The private wine store operations could also benefit
from a third party regional warehousing depot due to the cost savings associated with more
frequent shipments, greater efficiencies in shipping and transportation, greater inventory turns,
ease of scheduling to meet forecasted demand, potentially requiring smaller investment
requirements in inventory warehousing.


                                                                                    Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                  49


Moving to a regional warehousing depot could also be consistent with both the “stand-alone”
PWSS model and the continuation of the current PWSS model. Private wine stores could source
their own wine, either cut their own purchase order and arrange for their own shipping and
warehousing or use the NSLC supply chain and third party warehousing, with the NSLC still
remaining the importer of record. However, under the “stand alone” model, in order for the
private wine stores to ship full containers, they would need a large customer base, most likely
comprised of licencee business as well as satellite private wine store operation(s) to achieve
economies of scale. Such an “end-to-end” may be more difficult to maintain on a continued basis
and will largely be dependent on maintain a large client base. In addition, there would be ample
scope for implementing a flat fee pricing model under either a “stand-alone” model or an
extension of the current model using the NSLC supply chain.

3.       CHANGES TO THE NSLC PRICING MODEL
The results of the consultations with private wine store operators, agents and NSLC indicated the
current pricing model provides ample room for mistakes in invoicing. Both NSLC and the private
wine stores indicated that there are currently substantial costs related to time spent checking for
errors in invoicing. The time and resources spent checking invoicing for errors is costly and
introduce inefficiencies for both for the private wine stores and NSLC. In many cases, corrections
in invoicing are required due to errors both on the part of the private wine stores and the NSLC.
Our analysis of the current NSLC pricing model indicated that there is room for improvement in
the current pricing model.

    Recommendation #4: Consideration should given to a flat-tax pricing model
     (lump sum dollar amount per litre regardless of country of origin) implemented
     for the PWSS Program.

One key advantages of a flat-tax pricing model is that it is fully transparent pricing model and
very simple to administer. Simplifying the calculations would make forecasting of government
tax revenue that much easier. A flat tax would help to eliminate a separate markup on shipping,
exchange, cost of service, and a markup on product. The NSLC would simply collect a fee as
goods are shipped from their warehouse. The flat-tax pricing model could be designed with four
to eight price categories with varied flat rate mark-ups. A flat mark-up (lump sum dollar amount
per litre, regardless of country of origin) also has the potential to eliminate costs of service
differentials, real or perceived, leveling the playing field for both domestic and imported
products.

In addition to the advantage of being simple to administer (no formula required to establish the
NSLC retail price and then apply a discount), a flat mark-up also means that any supplier price
increase or decrease is passed on to the private wine store operators. Whether this is passed on to
consumers for all products however, depends on the private wine store operators.

As experienced in the case of Alberta, as a result of a flat-fee pricing system, there were small
increases in prices for some economy wines, however, there were substantial decreases in
premium and super premium wines at the other end of the spectrum. Many premium products,
such as high-end wines and champagnes, dropped by as much as 50 percent at retail on many
brands. The flat tax pricing would not only be easier to administer, but it would also give higher
priced product an advantage, with lower prices being passed on to the consumer, which is the
product area that the PWSS Program was designed to address. In the case of Alberta, the
introduction of the flat-tax system did not result in a decrease in total government tax revenue,
but rather a tax revenue increase.


Gardner Pinfold
50                               Economic Impact Assessment of NSLC PWSS Program – Final Report


Further analysis of the flat-tax model must be undertaken to fully understand how this model
would likely work in the Nova Scotia market and whether it should be implemented.

4.        EXPANDING THE PWSS PROGRAM
Our analysis of per capita wine consumption, population, and average incomes by region and
municipality within Nova Scotia suggests that potential does exist for expansion of the PWSS
Program.

    Recommendation #5: The PWSS Program should be expanded to include other
     regions of the province to address consumer demand

The analysis of per capita wine consumption and the location of current NSLC outlets and private
wine stores within HRM conducted in this study also suggests while there may be some limited
scope for further expansion of NSLC outlets within the HRM, this market may be close to being
saturated for privately owned wine stores. A large portion of the “niche” market within HRM has
been captured through the recent changes and expansions of the NSLC as well as the introduction
of the four private wine stores such that the market appears to be close to “fully serviced” within
HRM.29

Outside of HRM, our analysis suggests there are areas in Nova Scotia that could be better
serviced through the introduction of private wine stores. However, in addition to the complex
operational issues the private wine stores currently face, the private wine store would have the
added challenge of finding a viable location with an adequate population base that would support
a PWSS. Evidence indicating scope for expansion of the PWSS Program outside HRM is based
on a comparative analysis of per capita wine consumption across regions and municipalities
(based on data available). This comparative analysis provides evidence of large increases in the
growth of per capita wine consumption rates in selected municipalities. Further, a comparison of
relative average household incomes and age compositions across municipalities also highlights
municipalities that may present opportunities for private wine store operations.

Private wine stores must not only locate in areas that have sufficient per capita wine consumption
rates and population levels that support their business model. Product selection, service and
convenience are key to retailing wines. PWSS operations must also locate in areas that meet the
increasingly sophisticated shopping needs of customers with regard to product selection,
convenience availability, and service and are representative of current consumer shopping
patterns and markets.

Seasonal variations in population (largely due to tourism) result in substantial changes in
potential wine consumption rates in many areas of Nova Scotia. There is also a potential increase
in the wine consumption population in university market areas during the peak academic term due
to the return of faculty and students to college and university. This is particularly so in the HRM,
Wolfville, Antigonish (and to some extent, Sydney) markets.

Other potential locations that might be considered include municipalities in the Annapolis valley
(Kentville, Wolfville), as well as areas in Southwest Nova Scotia (Bridgewater, Mahone Bay,
Yarmouth,), northern and eastern Nova Scotia (Amherst, Truro) and in Cape Breton (Sydney,
CBRM). However, it is beyond the requirements of this study to identify communities

29
     A complete assessment and identification of specific locations within HRM that could be serviced by additional
     private wine store(s) would require a full market analysis to determine this potential, and this analysis is beyond
     the scope of this study.



                                                                                                       Gardner Pinfold
Economic Impact Assessment of NSLC PWSS Program – Final Report                                                          51


representing potential sites for the PWSS Program with a degree of certainty. 30

Apart from any fundamental changes to the present operating agreement these cited locations
would nonetheless be challenging and there is no guarantee of success for the private wine store.
Successful expansion of the PWSS Program outside of HRM will depend not only on a careful
selection of the location (market served), but as is the case within HRM, it will also depend the
business model developed, and the ability to invest in inventory warehousing, a sound
understanding of the industry as well as a solid understand of best business practices.

    Recommendation #6: Expansion of the PWSS model should include the
     possibility for both a “stand-alone” model as well as the current model using
     the NSLC supply chain.

As outlined above, one option for the NSLC to address the costs to NSLC associated with
inventory warehousing and partial sales order stock is to allow the private wine stores to go on
their own in a “stand-alone” type of model, sourcing their own wine, cutting their own purchase
order, arranging and paying for their own shipping and warehousing, with the NSLC still
remaining the importer of record. Under this model, the private wine store would need a large
customer base, most likely comprised of licencee business as well as satellite operation(s) in
order to achieve economies of scale.

However, it is also clear that not every private wine stores and boutiques operations would have
the capital investment required to take advantage of this type of model. As well, even in cases
where the capital is in place, they may not choose to take on this type of large-scale operation.
While the “stand-alone” model could take advantage of economies of scale, it should not be the
case that this is the only viable option for expansion of the PWSS Program. Based on a detailed
comparative analysis of per capita wine consumption, average household income, and age
composition across communities, as well as a financial analysis of the operating revenues and
expenses of the existing private wine stores, it is evident there is scope for small independent
“boutique-style” wine stores to operate with well-designed business model and supportive
customer base. It is clear that the expansion of the PWSS Program could offer scope for the
development of both “stand-alone” private wine store model as well as a small-scale independent
model using the NSLC supply chain. Expansion of the PWSS Program should be based on a an
attractive and appropriate business model with supporting lines of business (in line with
consumer needs), and a solid understanding of the investment requirement for inventory
warehousing and the capacity to make this investment as well as a careful assessment of the
location (market served).

In summary, while there is no one-size-fits-all successful business model for private wine store
operations, the successful operation must have a clear understanding of the customer base, the
retail and wholesale environment in this industry, the financial requirements for financial success
in this industry, and an optimal business model design to meet changing customer needs. What is
very clear is that the private wine store operator must have both an understanding of the financial
investment required for inventory warehousing as well as the capacity to make this investment.




30
     Please note – these suggested locations are based on preliminary analysis – final results are pending receipt of
     disaggregated data on per capita wine consumption by municipality.



Gardner Pinfold

				
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