Beer Store owners strike back in brewing battle with province

As Ontario tries to get a grip on the Beer Store, the quasi-monopoly is pushing back — threatening litigation in its negotiation.

The Beer Store’s foreign ownership has raised the prospect of costly lawsuits, or NAFTA trade complaints, if the government dares to dilute their stranglehold on beer retailing across the province, sources say.

After enjoying a quasi-monopoly for decades (delegated under the authority of the LCBO) the Beer Store’s owners have suggested that any move to reduce their privileged position would amount to expropriation — for which they could seek compensation, according to sources with knowledge of their secret talks who spoke on condition they not be named.

The Beer Store did not respond to requests for comment.

Now, with negotiations deadlocked and a March budget deadline looming, both sides must decide how far to push — and push back.

Queen’s Park is pressuring the Beer Store’s owners to start paying a “franchise fee” if it wishes to remain the sole private retailer of beer in Canada’s biggest and most profitable beer market. An expert panel headed by former TD Bank CEO Ed Clark concluded last November that taxpayers should “receive their fair share of the profits from the Beer Store.”

That’s where the tug of war begins.

The Beer Store — owned by brewing giants Labatt, Molson Coors and Sleeman — keeps insisting it’s a break-even operation.

The government counters that if their lucrative monopoly isn’t worth anything, they should relinquish it for nothing. Pay up or give it up.

The Beer Store’s ownership huffs and puffs and bluffs: The government can’t take back what it delegated decades ago without being seen as confiscatory — and potentially liable under the North American Free Trade Agreement or other court actions.

That’s the contradiction in this negotiation: If the big brewers are demanding compensation for any so-called confiscation, then logically there must be a value to those monopoly profits — and the government wants its cut.

Sources say the toughest talk emanates from Labatt, which is owned by AB InBev, headquartered in Belgium. Molson Coors, headquartered in Colorado, has had less to say at the table, while Japanese-owned Sleeman is largely silent. (Labatt owns just under half of the Beer Store, as does Molson Coors; Sleeman owns the small remaining share.)

Asked last year about possible legal action, Beer Store spokesman Jeff Newton declined to comment on the question. He did not respond to requests for comment Wednesday about any possible legal action, nor did Labatt.

The government always expected the Beer Store’s ownership would threaten litigation, and has secured its own legal opinions that suggest Queen’s Park is on solid legal ground. The bigger question is who would win a courtroom showdown, and what are the risks?

Both sides may be misreading the public mood.

Extensive media coverage has moved public opinion, with recent polls showing more people opposed to the Beer Store’s foreign ownership and dominance of the domestic market (it has nearly 80 per cent of the market). While that shift — a Forum Research poll showed 58 per cent in favour of opening things up — is putting pressure on the big brewers, rising expectations have also increased the onus on the government to act.

Yet for all the rhetoric from Premier Kathleen Wynne promising change, she and Clark are reluctant reformers. Their main motivation is to extract additional cash — in the tens of millions of dollars — from the big brewers’ windfall profits. That’s why Clark has rejected the idea of allowing the LCBO to sell beer in more economical cases of 24, where the biggest volumes and greatest cash flow are found.

The Beer Store ownership huffs and puffs, saying Queen’s Park may be liable for changes to deal

Improving access for craft brewers is also a consideration, which is why Clark’s panel is looking at additional retail channels. But there is a limit to how much the government will liberalize beer retailing to improve customer service. Clark doesn’t want to cannibalize the quasi-monopoly — reducing the high profits that flow from its low-cost, rockbottom distribution system — if it means less money left over for the government.

One scenario, long anticipated by government, is that the well-connected Beer Store will fan out to local communities warning about the loss of jobs among its 6,000 unionized workers in 448 stores. The brewers already have a strong ally in the United Food and Commercial Workers (UFCW), which represents those employees and faithfully reproduces most of the Beer Store’s publicity materials via social media. (As the Star reported last December, the Beer Store, its owners and the UFCW contributed more than $525,000 to the three major political parties in 2013 and 2014.)

Now, amid hushed talk of litigation and negotiation, it all comes down to a high stakes game of chicken over the Beer Store. While the government tries to milk it for more money, the big brewers are seeking legal cover to protect their flank. Martin Regg Cohn’s Ontario politics column appears Tuesday, Thursday and Sunday. mcohn@thestar.ca, Twitter: @reggcohn.