Market Competition in the Retail Distribution of Alcohol in Saskatchewan
Most provinces in Canada maintain post-prohibition-era monopolistic controls over the importation and distribution (including pricing) of alcohol.1 Saskatchewan’s alcohol control is facilitated by the Saskatchewan Liquor and Gaming Authority (SLGA), a Treasury Board Crown Corporation. 2 SLGA operates as the primary distributor and sole licensing agent for the sale of beverage alcohol in the province, either through direct operation of its liquor stores, or by rural franchisees operating on its behalf. Despite its monopolistic position in the market, SLGA has shown some interest in fostering market competition, in part by pursuing a public-private retail distribution model. Recent directives from the SaskParty suggest that SLGA will be mandated to pursue more competitive measures. However, the real extent of market competition remains constrained due both to limitations placed on the retail market by SLGA, especially by way of minimum pricing requirements, and because of its ostensible public policy mandate to deter alcohol consumption.
This paper examines the economic costs and benefits of SLGA’s control over the market for alcohol, and the public-private retail distribution model as it currently exists. This paper will set out to determine a balanced policy approach to the retail distribution of alcohol in Saskatchewan. Although the Saskatchewan government’s public policy mandate necessitates some degree of interference in the market, the burden of SLGA’s pricing policies are disproportionately borne by low income consumers. Beyond this cohort, econometric data suggests that SLGA’s policies are unlikely to reduce total consumption because of the relative inelasticity of demand for alcohol. Mark-up pricing may also create negative substitution effects, calling into question the overall effectiveness of the policy. Finally, the supposition that SLGA is necessarily the primary retailer will be examined. It may be the case that SLGA can fulfill its regulatory function while surrendering a measure of control over retail distribution, benefitting consumers and removing market protectionism.
Modern alcohol control in Saskatchewan finds its roots in prohibition-era policies. Calls to temper alcohol consumption in Canada were first advanced by reformers during the mid 1800s as a matter of public health. Temperance was supported by churches and other moral authorities, and rural populations, as well as women’s interest groups (prohibition was closely associated with suffrage). Advocates for prohibition argued that large-scale commercial activities required intervention by governments. Demand for government intervention in the alcohol market was in large part a response to the increasingly capital-intensive industrial production of alcohol. The Temperance Act, 1864, and the Canada Temperance Act, 1878 laid the foundations for the opt-in by provinces to prohibition schemes. In 1915 the Liberal Party instituted prohibition in Saskatchewan. In addition to the abolishment of all bar and club licenses, prohibition saw the provincial government take control of virtually all aspects of the retail market, achieving a monopoly over the increasingly restricted market for alcohol during the prohibition period.
The results of prohibition across Canada were economically destructive. According to economist Mark Thornton, prohibition eliminated a reliable source of government revenue, drove up organized crime by pushing economic activity (production and consumption of alcohol) underground, increased concurrent enforcement costs, and created neither a measurable gain in worker productivity nor reductions in poverty. It also became increasingly unpopular, both because it failed to create any measurable improvements in social welfare, and because it restricted an important component of leisure for many Canadians. By 1925 prohibition policies were repealed across most of Canada, including Saskatchewan. However, Saskatchewan and every other province opted to maintain tight alcohol controls, including restricting the sale of alcohol to minors, and the imposition of mark-up schemes on alcohol for purchase (in addition to various federal taxes). This was achieved primarily through the creation of liquor boards (SLGA in Saskatchewan), which generally continue to maintain monopoly control over the retail distribution of alcohol. Regulations have been relaxed over time, but the current environment is fairly restrictive from a retail standpoint.
Saskatchewan’s current liquor control environment is best described as a public-private retail distribution model. Although SLGA controls pricing on alcoholic beverages across the retail environment it is not the sole retail distributor of alcohol in Saskatchewan. SLGA currently operates 79 retail liquor stores in 64 communities in the province. In order to better serve Saskatchewan’s rural population SLGA allows 185 rural franchises across the province to sell liquor according SLGA’s mark-up pricing model. This ensures rural populations have access to beverage alcohol where operating a public store would not be economically viable.3 The crown corporation also permits 445 off-sale outlets to sell alcohol in the province, as well as one private liquor store in Regina. Although SLGA does not have the authority to directly tax liquor sales, the imposition of a minimum pricing regime on alcohol for sale (ad valorem for wine and spirits, and a flat mark-up for beer) creates an economic tax. Minimum pricing also applies to off-sale outlets, with increases above the minimum price during convenience hours.
SLGA’s mark-up pricing scheme, called social reference pricing, indexes minimum retail prices based on the type of beverage, the size of the product, and, notably, its alcohol content. The mark-up pricing model is designed to protect consumers from low-cost, high alcohol content products whose overconsumption can cause disproportionate individual and social harm. By levying a greater increase in minimum prices on beverages with the highest alcohol content the policy creates a disincentive for purchasing these potentially more harmful products. However, because social reference pricing also increases to an extent prices for inexpensive beverages with lower alcohol content, the pricing model’s effect is to dissuade low income consumers from participating in the market for alcohol. The year following the implementation of social reference pricing, SLGA liquor stores in inner-city communities saw marked reductions in sales of otherwise inexpensive high alcohol content products, recording reductions of 32 percent. This suggests the efficacy of mark-up pricing in discouraging consumption by low income consumers, without remarking on the fairness of the policy.4
SLGA’s social reference pricing also contributes to increases in government revenue from alcohol sales. This is the case because social reference pricing is applied to all beverage types and at every price level.5 Work by Economists Jason Childs and J. Stevens suggests that the demand curve for alcohol in Canada is fairly inelastic, meaning consumers are not overly sensitive to price increases and will not alter consumption behaviour. It is therefore unlikely that social reference pricing will reduce consumption beyond the more elastic portion of the demand curve. Uniform reductions in consumption are even less likely due to strong preferences for alcohol in Saskatchewan. In fact, SLGA has identified a shift in consumer preferences toward speciality and higher priced products, as well as an overall increase in alcohol consumption year-over-year. When combined with low unemployment and other strong economic indicators, the upward trend in consumption suggests that consumers across the inelastic majority of demand curve are not highly responsive to mark-up pricing.
It is difficult to accurately quantify the harm caused by alcohol consumption precisely because much of the harm is external. This paper concedes that the costs of consumption are almost certainly higher than any government revenue generated from economic taxes on alcohol sales. Externalities in alcohol consumption include significant health costs, policing and enforcement costs, and lost productivity. The pathologies of chronic overconsumption are numerous. Although we have established that social reference pricing has a minimal affect on the inelastic demand for alcohol, government revenue from mark-up pricing may help offset at least some of the external costs of consumption.6 Revenue from alcohol sales allows government to sponsor programs promoting socially responsible consumption, functioning as a partial Pigovian tax in offsetting some of the external costs.7 For that reason, social reference pricing may be appropriate for SLGA’s public policy mandate despite its ineffectiveness at reducing consumption across much of the demand curve.
However, it is not clear whether SLGA’s social reference pricing incentivizes low income and at-risk consumers to substitute more harmful intoxicants, such as solvents, industrial-use alcohol, or banned substances. Although research on this topic is disappointingly lacking, an analysis by economists D. Mark Anderson and Daniel Rees concludes that alcohol and marijuana are in fact substitutes. On that basis, it is conceivable that some amount of intoxicant substitution occurs among those consumers effectively priced out of the market for alcohol. In fact, according to the United Nations Office on Drugs and Crime, consumption of solvents and other intoxicants among at-risk groups are in part caused by restricted access to affordable alcohol. Although SLGA is correct that raising the minimum price of high alcohol content beverages reduces consumption among at-risk consumers, restrictive pricing may force consumers to undertake more destructive forms of consumption.8
SLGA has at its disposal another method for affecting consumption: controlling the density of retail locations in the province. According to the World Health Organization (WHO), the most effective way to mitigate the negative health effects of alcohol consumption is to limit the number of retail outlets and their hours of operation. This policy option is somewhat complicated by directives from the government to explore privatization in retailing, as well as SLGA’s revenue generating function. Saskatchewan currently enjoys the highest number of liquor retail outlets per capita in Canada. However, the figure is skewed by the geographical distribution of the population. SLGA has authorized requests for proposal for two new private liquor stores, to be located in under-served neighbourhoods in Regina and Saskatoon. Proponents of monopoly control in retail distribution generally argue that a monopoly authority can better decide the number, size, and location of retail outlets, balancing the potential for revenue generation with the resultant external costs.
Available evidence suggests that when public authorities open up the market to private interests the number of retail outlets grows at a higher rate relative to population growth. In British Columbia’s public-private retail environment almost all of the increases in retail outlets since 1992 have accrued to non-public stores. A more comprehensive survey of physical availability of alcohol conducted by The Canadian Centre for Policy Alternatives shows that during the period 2002 to 2011 the number of retail outlets in British Columba and Alberta increased 57 and 72 percent, respectively. By contrast, Saskatchewan actually saw an 11 percent contraction in retail density during the period. Despite these changes in retail density among the three provinces, there does not appear to be any observable impact on per capita consumption of absolute alcohol over the time horizon. This is unsurprising because controlling retail density deters at-risk consumption; it should not reduce consumption across the rest of the demand curve.
Much of the policy research in favour of public monopolies argues that control over the retail environment cannot be sufficiently replicated through public regulation imposed on private retail. Concern is not unwarranted. By working to increase consumer convenience and locational efficiency private retail expansion tends to over-serve the market. Studies in several jurisdictions have revealed a positive correlation between alcohol retail density and crime. Private retailers in BC and Alberta have demonstrated lower rates of compliance with age restrictions than their public-sector counterparts. The loss of control over listing policies is also a concern, since private retailers may be motivated to target low income consumers by stocking lower priced high alcohol volume products (even after social reference pricing is applied). This motivation could be reinforced by attempts to compete with SLGA’s economies of scale. All of these factors raise the potential for external harm. If SLGA’s prerogative is to reduce consumption in the name of public health it should consider maintaining or tightly controlling the number of retail outlets in the province.
However, there is also an opportunity for SLGA to continue to foster competition in the retail market without compromising its public health goals. Private competition tends to produce lower prices and deliver a greater number of goods to the market. Although SLGA’s regulatory enforcement would impede much of the benefit typically achieved through privatization, it does offer certain benefits to consumers without necessarily increasing social harm. For example, private liquor stores would be incentivized to identify underserved beverage alcohol preferences in the market, such as emerging demand for craft beers, and better deliver those products (e.g. through improved storage and refrigeration). SLGA has made a concerted effort to improve its retail efficiency by reducing labor and capital costs in its stores. Despite these efforts, econometric analysis suggests that private retailers can provide better returns to government. This is the case because private retailers are better positioned to manage their retail operations, and because mark-up pricing is applied at the wholesale level.
A more competitive market can also disrupt some of the protectionism that persists from post-prohibition market restrictions. For instance, SLGA’s wholesale monopoly prevents off-sale retailers from purchasing alcohol through other avenues (and at discount prices). This creates two connected market effects: SLGA’s position as the primary retailer is entrenched, and off-sale retailers are forced to raise prices well above mark-up at convenience hours, passing burdensome retail prices onto customers.9 Off-sale retailers have also enjoyed their own form of market protectionism in the form of restrictions on qualifying sellers. In a bid to increase convenience, SLGA now allows any liquor-permitted establishment to enter the off-sale permit bidding process. SLGA has also relaxed retail density restrictions in part to addressed under-served communities. This policy may improve convenience, but it risks inducing social harm. Generally, these relaxations demonstrate the inherent difficulty for SLGA in fostering market competition without compromising its commitment to mitigating social costs.
An evaluation of the history of alcohol control in Canada reinforces the need for a balanced policy approach to addressing the external costs of consumption. Calls for temperance originated from a genuine desire to mitigate observable social harm. However, the move to ban alcohol, despite its initial popularity, proved to be an economically destructive policy that, aside from failing to address any of the negative externalities of consumption, created its own problems by reducing government revenue and creating underground economic activity. Alcohol is an important aspect of Canadian society; prohibition is a step too far. Despite the failure of prohibition, modern retail distribution in Saskatchewan is largely a by-product of the market control seized during the prohibition-era. Alcohol remains highly controlled, its importation is managed by liquor boards, revenue accrues to governments in the form of mark-up pricing ostensibly to curb consumption, and the public remains divided on questions concerning the introduction of private competition in the market.10
A continued commitment to the public-private retail distribution model is best equipped to serve customers while mitigating some of the negative externalities of consumption. The relative inelasticity of demand for alcohol means that mark-up pricing may have limited effects on consumption. It may also create negative substitution effects. More research is necessary to assess the overall effectiveness of mark-up pricing on the low end of the demand curve (it may be appropriate to lower mark-up rates if those rates are shown to produce outsized external harm through substitution). However, the contribution by social reference pricing to government revenue should not be overlooked. Revenue generated from the scheme can be (and is being) used for social outreach, and health care and enforcement funding, in order to offset some of the external costs. SLGA should better disclose the implicit offsetting effects of mark-up pricing. Higher prices paid by consumers for beverage alcohol may be more palatable if those prices are shown to reduce external costs.
There is also an opportunity for the government to introduce more competition in the market. Saskatchewan’s population distribution means that retail density can be increased. However, controlling the availability of alcohol through retail density is necessary in order to stem some of the external costs of consumption. Requests for proposals for private stores should take into consideration existing retail density, local socio-economic conditions, and how increased convenience might affect consumption. SLGA should still impose some listing policies on private retailers, in order to deter those retailers from targeting at-risk consumers with low-cost high alcohol content products. However, private retailers still have opportunities to satisfy changing preferences for specialty and higher-priced products (including through better storage and refrigeration). More importantly, allowing private retailers to bear capital costs can generate more government revenue, and might allow SLGA to direct more of its resources to effecting regulation and compliance. A renewed emphasis on its regulatory commitment should allow SLGA to continue to meet its obligation to satisfy consumer demand for beverage alcohol while promoting its socially responsible consumption.
- There are many prohibition-era regulations that impede competition in the brewing market, specifically. Most of these regulations now exist as either market protectionism for entrenched participants, or to protect government revenue. It is not the focus of this paper to explore these issues in detail, but it is worth noting that SLGA’s regulatory prerogative – although it has been changing over time – contributes to some of the stagnation in the market for beverage alcohol. ↩
- Under The Alcohol and Gaming Regulation Act, 1997, SLGA is responsible for alcohol importation and distribution in Saskatchewan. In effect, this means that SLGA, operating as the sole wholesaler, controls the supply chain for the retail distribution of alcohol in the province. Although SLGA is not a true monopoly, its control over importation, pricing, and much of the distribution of alcohol gives the crown corporation a high degree of market control. For the purposes of this paper, this position in the market will be considered the monopoly position. ↩
- It is not economical for SLGA to operate in these localities because the volume of beverage alcohol sales would not cover the capital costs associated with running a retail operation. ↩
- It is worth considering whether it is fair to impose social referencing on low income consumers. While these groups may be the most susceptible to harm from overconsumption, one wonders whether denying access to low priced alcohol is the fairest method of discouraging overconsumption. ↩
- According to Jim Engel, Vice President of SLGA’s Corporate Services Division, ad valorem percentage mark-up for spirits and wine diminish as the wholesale price of the beverages increases. For example, while the lowest-cost spirits are marked up at 167% of the landed cost, higher priced spirits are marked up at an effectively lower percentage. Beer is currently marked up at a flat rate per litre. This was effected in order to maintain revenue when beer prices declined in the 1990s. It is also marked-up on a differential model, where the size of the brewer is taken into account in the mark-up scheme. This benefits smaller brewers, and reflects a change in SLGA’s prerogative about breweries in Saskatchewan. ↩
- SLGA’s 2012-13 annual report shows $232.2 million in net income from stores, franchises, off-sale retailers, and permitted establishments in the province. ↩
- In addition to minimum purchasing age laws, SLGA enforces a “Check 25” program in order to better prevent underage alcohol purchases. The Saskatchewan government also promotes responsible consumption including Fetal Alcohol Spectrum Disorder initiatives, the Report Impaired Drivers (RID) program, and cooperation with Mothers Against Drunk Driving (MADD) and other social outreach organizations. These programs are important because under the current regulatory regime there are no barriers to overconsumption should customers be so inclined to purchase a retail outlet in bulk. ↩
- More research is required to determine whether this trade-off in fact raises social benefit. It is likely that only a portion of consumers excluded from the market will substitute other intoxicants and banned substances; however, until more research on this topic has been undertaken we cannot draw a definitive conclusion about the total efficacy of social reference pricing. It is also worth noting that substitution can be more destructive not necessarily for health reasons but because of enforcement and legal consequences. ↩
- Because off-sale retailers sell alcohol above the social reference price, the argument cannot be made that these prices reduce social harm. Rather, raised prices during convenience hours should be interpreted as an implicit tax imposed on much of the demand curve. ↩
- A poll of Saskatchewan residents recently conducted by the Leader-Post shows a surprising split on the question of privatization in the retail market for beverage alcohol. 26% of respondents said liquor stores should remain public, while 23% said they should be privatized. Interestingly, 34% of respondents said that public stores should be maintained, but any future stores should be privatized. This opinion seems to fall in line with the public-private retail model. ↩