The Financial Impact of Expanding the Beverage Alcohol Marketplace in Ontario

Summary

• This report estimates the financial impact to the Province of the decision to expand Ontario’s beverage alcohol marketplace for beer, wine, cider and ready-to-drink alcohol beverages, including the cost to accelerate that expansion to begin in 2024.
• The FAO estimates that the Province’s decision to expand the beverage alcohol marketplace in Ontario, including the decision to accelerate that expansion to begin in 2024, will result in a net cost to the Province of $1.4 billion to December 31, 2030. This cost estimate covers the term of the Early Implementation Agreement, which expires on December 31, 2030, and includes the cost of the provisions in the agreement and other decisions connected with the expansion of the beverage alcohol marketplace in Ontario.
• The projected $1.4 billion net cost consists of:
  • $489 million in industry supports to Ontario’s wine industry and Brewers Retail Inc. (which operates as The Beer Store).
  • $353 million in higher net income from the LCBO, largely resulting from increased wholesale activity to grocery, big-box and convenience stores. The increase in wholesale revenue is mostly offset by: the decline in LCBO retail sales revenue, wholesale discounts provided to retailers, increased Ontario Deposit Return Program recycling fees, the temporary cost of service rebates paid to brewers, and increased operating costs.
  • $1,280 million in lower tax revenues, primarily resulting from a shift in alcohol sales from retailers subject to beer, wine and spirits taxes, to grocery, big-box and convenience stores who are not subject to these taxes.[1]
  • $14 million in other expenses.
• Of the $1.4 billion net financial cost, the FAO estimates that $817 million relates to the planned expansion of the beverage alcohol marketplace starting on January 1, 2026, and $612 million relates to the decision to accelerate that expansion to begin in 2024.
• The actual financial cost to the Province will depend on how retailers and consumers respond to the expansion of the beverage alcohol marketplace. Compared to the FAO’s projection, the financial cost to the Province would be lower if expanding the marketplace results in higher per-capita alcohol consumption. Conversely, the financial cost would be higher if consumers shift their purchases to new retailers more quickly than projected, more grocery and convenience stores enter the beverage alcohol marketplace than anticipated, or new retailers capture a larger than expected market share. After accounting for these and other factors, the FAO estimates that the financial cost to the Province could range from $529 million to $1.9 billion through to December 31, 2030.

Introduction

Background

On December 14, 2023, the Province announced that “beginning no later than January 1, 2026,” the beverage alcohol marketplace for beer, wine, cider and ready-to-drink (RTD) alcohol beverages would be expanded to participating convenience, grocery and big-box stores across Ontario.[2] As part of this announcement, the Province confirmed that the Master Framework Agreement (MFA)[3] with Brewers Retail Inc. (operating as The Beer Store) and Labatt, Molson and Sleeman (the Representative Owners of Brewers Retail Inc.) would not be renewed after it expired on December 31, 2025. The MFA limited the number of retail stores that could be authorized to sell beer.

On May 24, 2024, the Province announced that the beverage alcohol marketplace expansion would occur “earlier than planned” with a phased rollout to begin in 2024.[4] As part of the early marketplace expansion, the Province entered into the Early Implementation Agreement with Brewers Retail Inc. and the Representative Owners.[5]

At the request of a Member of Provincial Parliament, this report estimates the financial impact to the Province of the decision to expand Ontario’s beverage alcohol marketplace, including the cost to accelerate that expansion to begin in 2024.

Report Structure

The report begins with an overview of changes made by the Province to the beverage alcohol marketplace in Ontario starting in 2024. In the following section, the FAO estimates the financial impact to the Province of the changes to the beverage alcohol marketplace, including the cost of the decision to accelerate that expansion to 2024. The report concludes with a discussion of the key uncertainties in the FAO’s cost estimate and provides a range of potential financial impacts given the uncertainties. The Appendix presents detailed financial impact tables.

Scope

This report estimates the direct financial impacts to the Province from the changes made to the beverage alcohol marketplace in Ontario. Any broader impacts of the expansion of the beverage alcohol marketplace on health, social and safety outcomes, and any potential financial costs associated with these impacts, are beyond the scope of this report.

Methodology

This report primarily uses data provided to the FAO by the Ontario Ministry of Finance. The FAO analyzed the Master Framework Agreement, the Early Implementation Agreement (EIA), announcements by the Province, as well as other data provided by the ministry. Costs are estimated to December 31, 2030, the scheduled end of the EIA.

Overview of Changes to Ontario’s Beverage Alcohol Marketplace

Prior to the expansion of Ontario’s beverage alcohol marketplace in 2024, alcohol was sold by retailers, including the Liquor Control Board of Ontario (LCBO), LCBO Convenience Outlets, The Beer Store, licensed grocery stores and Ontario alcohol producers at both on-site and off-site retail locations, and by licensed bars and restaurants. Retailers and licensed bars and restaurants purchased alcohol through various channels, including wholesale from the LCBO and The Beer Store or directly from Ontario alcohol producers. This marketplace was regulated by the Province through legislation, regulations, the Master Framework Agreement (MFA) and other agreements. The MFA, which limited the retail sale of beer, was set to expire on December 31, 2025.

The Province also regulated the return of beverage alcohol containers in Ontario through the Ontario Deposit Return Program (ODRP).[6] The ODRP covered all wine, spirit and RTD containers, as well as beer containers sold outside The Beer Store’s system. Under this return program, The Beer Store accepted eligible containers and received a fee of $0.1081 per container from the LCBO. The ODRP was set to expire on September 30, 2025.

On December 14, 2023, the Province announced that the MFA would not be renewed and indicated that the beverage alcohol marketplace would be expanded “no later than January 1, 2026.” [7] The announcement described the key principles[8] that would characterize the beverage alcohol marketplace in Ontario, including:

• The sale of beer, cider, wine and RTDs would expand to grocery, big-box and convenience stores.
• The LCBO would be the exclusive wholesaler to grocery, big-box and convenience stores and would replace The Beer Store as wholesaler for LCBO Convenience Outlets and licensed bars and restaurants, with limited exceptions.
• The Beer Store would continue its primary role in the distribution of beer to retailers and licensed bars and restaurants.
• The Beer Store would continue to run the Ontario Deposit Return Program until at least the end of 2030.
• Ontario’s wine industry would receive enhanced and extended industry supports, primarily through the Vintners Quality Alliance Wine Support Program, the Wine Marketing Fund, and the Small Cidery and Small Distillery Support Programs.

On May 24, 2024, the Province announced that the expansion of the beverage alcohol marketplace would be accelerated, with a phased expansion rollout initially scheduled to begin on August 1, 2024,[9] but brought forward to July 18, 2024 due to the LCBO strike.[10] Many terms in the May 24, 2024 announcement were similar to those included in the December 14, 2023 announcement, except that they would begin prior to January 1, 2026. The May 24, 2024 announcement also included the following new terms:

• Up to $225 million in industry supports paid to BRI to maintain The Beer Store’s retail footprint until December 31, 2025, and for The Beer Store’s expanded role in the distribution of beverage alcohol to retailers.
• A 10 per cent LCBO wholesale discount to grocery, big-box and convenience stores from September 5, 2024 to December 31, 2025.[11]
• The LCBO will rebate to brewers the in-store cost of service fee applied to beer wholesaled to grocery, big-box and convenience stores from July 22, 2024 to December 31, 2025.
• An increase in the ODRP fee to $0.1672 per container on January 1, 2025 and a two per cent increase each year thereafter.

As part of the accelerated expansion of the beverage alcohol marketplace, the Province, BRI and the Representative Owners signed the Early Implementation Agreement (EIA), which implements many of the terms governing both the acceleration and the expansion of the beverage alcohol marketplace in Ontario. The EIA was signed on May 23, 2024 and continues to December 31, 2030.

Subsequent announcements by the Province provided more details on the new beverage alcohol marketplace, including a reduction in licence fees for grocery and big-box stores from $7,000 per year to $3,250, and a $500 annual fee for convenience stores.[12]

Financial Impact of Changes to Ontario’s Beverage Alcohol Marketplace

The FAO estimates that the Province’s decision to expand the beverage alcohol marketplace in Ontario, including the decision to accelerate that expansion to begin in 2024, will result in a net cost to the Province of $1,429 million to December 31, 2030. This cost estimate covers the term of the Early Implementation Agreement, which expires on December 31, 2030, and includes the cost of the provisions in the agreement and other decisions connected with the expansion of the beverage alcohol marketplace in Ontario.

The $1,429 million estimated cost is composed of the following:

• $489 million in industry supports, including $225 million in support to BRI, largely to maintain The Beer Stores’s retail footprint until December 31, 2025, and $264 million in increased supports to Ontario’s wine industry.
• $353 million in higher net income from the LCBO, largely resulting from increased wholesale activity to grocery, big-box and convenience stores. The increase in wholesale revenue ($4,108 million) is mostly offset by: the decline in LCBO retail sales revenue (-$2,453 million) resulting from the loss of retail market share, the wholesale discounts provided to retailers (-$522 million), the increased ODRP recycling fees (-$198 million), the temporary cost of service rebates paid to brewers (-$150 million), and increased operating costs (-$431 million), largely associated with more wholesale activity.
• $1,280 million in lower tax revenues resulting from a shift in alcohol sales from retailers subject to beer, wine and spirits taxes (-$1,407 million) to grocery, big-box and convenience stores who are not subject to these taxes.[13] The decrease in beer, wine and spirits taxes is partially offset by increases in other taxes ($128 million), including corporate and personal income taxes as consumers shift alcohol purchases to retailers that pay taxes on income, and sales tax as consumers purchase higher priced items at new retailers (such as beer purchased at grocery stores instead of The Beer Store).
• $14 million in higher other expenses, including $10 million to support social responsibility and public health efforts related to alcohol expansion, as well as $4 million in higher Alcohol and Gaming Commission of Ontario (AGCO) net costs.

Of the $1,429 million net financial cost, the FAO estimates that $817 million relates to the planned expansion of the beverage alcohol marketplace starting on January 1, 2026, and $612 million relates to the decision to accelerate that expansion to begin in 2024.

The $612 million estimated cost to accelerate the expansion of the beverage alcohol marketplace in Ontario results from:

• $225 million in industry supports paid to BRI largely to maintain The Beer Store’s retail footprint until December 31, 2025, including maintaining a minimum of 386 retail stores until July 1, 2025 and 300 stores until December 31, 2025.
• $172 million in lower LCBO net income as the increase in wholesale revenue ($1,108 million) is more than offset by the decline in LCBO retail revenue (-$812 million), the wholesale discounts provided to retailers (-$192 million), the cost of service rebates paid to brewers (-$150 million), higher operating expenses (-$105 million) and higher ODRP recycling fees (-$22 million). The lower LCBO net income includes the direct financial cost of the LCBO strike in July 2024.[14]
• $215 million in lower tax revenues resulting from the shift in alcohol sales from retailers subject to beer, wine and spirits taxes (-$245 million), to grocery, big-box and convenience stores who are not subject to these taxes. The decrease in beer, wine and spirits taxes is partially offset by increases in other taxes ($30 million).
• $1 million in other expenses related to higher AGCO net costs.

Uncertainty and Range of Potential Financial Impacts

The financial cost to the Province of the decision to expand the beverage alcohol marketplace in Ontario will depend on numerous factors, including the number of new retailers entering the beverage alcohol marketplace, the rate at which consumers shift from existing retailers to new retailers, how alcohol consumption will respond to expanded access, and how new retailers will price alcohol. Broader factors, including population growth and inflation, as well as trends in alcohol consumption will also affect the financial impact.[15]

Compared to the FAO’s projection, the financial cost to the Province of expanding the beverage alcohol marketplace would be lower if expansion results in higher per-capita alcohol consumption. This would generate additional LCBO wholesale revenues without the offsetting costs of lower alcohol tax revenue or lower LCBO retail revenue.

The financial cost to the Province would be higher if consumers shift their purchases to new retailers more quickly than projected, more new retailers enter the beverage alcohol marketplace than anticipated, or new retailers capture a larger than expected market share. This would reduce tax revenues more than LCBO net income would increase.[16]

After accounting for these factors, the FAO estimates that the total financial cost to the Province could range from $529 million to $1,944 million through to December 31, 2030. The financial impact related to the planned expansion of the beverage alcohol marketplace starting on January 1, 2026, ranges from -$21 million to ‑$1,053 million, while the impact of the decision to accelerate the expansion of the beverage alcohol marketplace beginning in 2024, ranges from -$508 million to -$891 million.

Finally, the estimated financial impacts would also be affected by any future policy changes. For example, the Province has announced its intention to conduct a review of the LCBO’s pricing structure, which could impact LCBO net income.

Appendix

Footnotes

[1] Sales of beverage alcohol at grocery, big-box and convenience stores instead generate revenue for the Province through LCBO wholesale activity.

[2] Province of Ontario, Ontario Consumers Will be Able to Buy Beer, Cider, Wine and Low-Alcohol Ready-to-Drink Beverages at Convenience, Grocery and Big Box Stores, December 14, 2023.

[3] Master Framework Agreement, September 22, 2015.

[4] Province of Ontario, Ontario Delivering Choice and Convenience by Expanding the Sale of Alcoholic Beverages Starting this Summer, May 24, 2024.

[5] Early Implementation Agreement, May 23, 2024.

[6] Province of Ontario, Ontario Deposit Return Program Agreement, March 21, 2022.

[7] Province of Ontario, Ontario Consumers Will be Able to Buy Beer, Cider, Wine and Low-Alcohol Ready-to-Drink Beverages at Convenience, Grocery and Big Box Stores, December 14, 2023.

[8] Province of Ontario, Improving Choice and Convenience Through a Modernized Marketplace for the Retailing and Distribution of Beer and Recycling in Ontario, December 14, 2023.

[9] Province of Ontario, Ontario Delivering Choice and Convenience by Expanding the Sale of Alcoholic Beverages Starting this Summer, May 24, 2024.

[10] Province of Ontario, Ready-to-Drink Beverages and Large Beer Pack Sizes Available in Grocery Stores Sooner Than Planned, July 15, 2024.

[11] The FAO assumes that after December 31, 2025, grocery, big-box and convenience stores will receive a 2.5 per cent wholesale discount.

[12] Alcohol and Gaming Commission of Ontario, Fees & Payment.

[13] Sales of beverage alcohol at grocery, big-box and convenience stores instead generate revenue for the Province through LCBO wholesale activity.

[14] Based on FAO analysis of information provided by the Province, the FAO has included a $102 million net cost from the strike. The strike resulted in lower retail revenue, higher wholesale revenue and lower expenses over the duration of the strike. See the 2024 Ontario Economic Outlook and Fiscal Review, p. 101.

[15] The FAO’s projection assumes that 40 per cent of grocery and big-box stores and 85 per cent of convenience stores receive licences, and that consumers shift to these new retailers over a three-year period. This results in 75 per cent of alcohol sales going through the LCBO network by 2026, slightly lower than the 77 per cent share projected by the Province (see the 2024 Ontario Economic Outlook and Fiscal Review, p. 101). The FAO’s projection also assumes that average alcohol prices at grocery, big-box and convenience stores will not differ significantly from LCBO prices, and that increased access to alcohol does not impact the decline in per capita alcohol consumption observed over the last several decades.

[16] These factors also limit the increase in LCBO net income due to the temporary measures associated with acceleration, including the temporary 10 per cent LCBO wholesale discount to grocery, big-box and convenience stores and the cost of service rebates paid to brewers.