Molson-Coors merger makes trip to Beer Store much less patriotic
By ERIC REGULY, GLOBE AND MAIL
Tuesday, Jul 27, 2004
When someone from Ontario goes to Quebec or New York or Michigan, they rave about certain simple joys. Buying beer is one of them. Amazing, they say; you can buy beer in the same places you buy milk, gasoline or groceries. Better yet, the beer is cheaper.
The reason buying beer in Ontario is less convenient, and arguably more expensive, is simple: The Beer Store. The store is a government- sanctioned near monopoly with no private competitors. If you want beer in Ontario, you go to The Beer Store or you pay a bit more and go to the LCBO, the provincially owned liquor outlet.
The Beer Store is about 95 per cent owned by Belgium's Interbrew, owner of Labatt, and Molson (Sleeman, the third-largest brewer, has about 5 per cent). If Molson and Coors merge, the store will be largely owned by non-Canadian interests. Every time you go through the inconvenience of shopping at The Beer Store and paying its prices, you would be making money for investors who live outside of Canada. And wouldn't that make you feel good? One day, post-merger, some smart politician will figure this out and promise to do the patriotic, consumer-friendly thing and kill The Beer Store.
The store, whose official name is still Brewers Retail, is a provincial institution. It was created by the brewers and the province in 1927 and has survived sporadic, although ultimately half-hearted, attempts to break its hold on beer sales. In 1986, the minority Liberal government of David Peterson introduced a bill to allow the sale of beer and wine in corner stores. The NDP, bowing to union pressure, joined the Conservatives to defeat the effort.
Analysts think selling beer in Ontario is among the most profitable beer-selling activities on the planet. How can this be? One reason is that it's a two-tier system. The brewers sell to themselves. In Quebec and most of the United States, it's a three-tier system. The brewers sell to a wholesaler, who takes his cut, who in turn sells to the retailers. Distribution costs are also higher, because there are so many more retail outlets than in Ontario. The Beer Store also uses standard packaging to create efficient handling. You can get about 300 brands in the store, but most of them come in the same type of bottle and case.
Since it's private, The Beer Store does not break out financial information, other than it has annual sales of about $2-billion. Technically, it does not make a profit because it operates on a break- even budget. The retail mark-up is presumably built into the wholesale price.
The lack of a middleman and cheaper distribution costs can't fully explain why selling beer is so profitable in Ontario. The Brewers of Ontario trade group says beer can be cheaper in Quebec and elsewhere because Ontario taxes consume an unusually high 45 per cent of the price. In Ontario, the tax cut for a case of 24 bottles is $5.70. In Quebec, it's $3.30. In some U.S. states, it is well less than a $1 a case.
Still, you can't ignore the fact that there are no private competitors in the Ontario beer market (and some other Canadian markets, such as Saskatchewan and Manitoba). If The Beer Store did not exist, and every corner store were competing for beer sales, you can bet the price would fall. While it's hard to tell precisely how much lack of competition contributes to profits, here's a very rough indication. Molson's EBITDA margin -- earnings before interest, taxes, depreciation and amortization divided by sales -- is 21.3 per cent. Coors' margin is 13.6 per cent. Molson's fatter profitability per case explains why the company has a higher stock market value than Coors, even though Coors, measured by sales, is the larger company.
Coors is a great fan of The Beer Store too. Molson brews Coors Light in Canada, where the beer is one of the best sellers. The Canadian sales alone account for 18 per cent of Coors' pretax profit.
Until the mid-1990s, when The Beer Store was 100 per cent owned by Canadian brewers, every beer sold in Ontario propped up Canadian brewery jobs and every dollar of profit went to (largely) Canadian shareholders. Then Interbrew bought Labatt and The Beer Store lost half its Canadian ownership. If Molson completes its proposed merger with Coors, the Canadian ownership will get diluted again.
Coors, the company, is owned by a famous family of the same name. The family, a founding sponsor of the conservative and powerful Heritage Foundation, is passionately devoted to free enterprise, individual freedom and limited government. Were it American, The Beer Store would make a mockery of their principles. We're sure that Coors would not fight any consumer-led effort to dismantle The Beer Store in the name of greater choice, lower prices and less government intrusion.