Not a Hangover, But a Headache

On January 14th, the Chronicle-Herald published the latest from columnist Bill Black, entitled “Drinking local — this party comes with a hangover”, in which he attempts to outline how preferential treatment provided to local producers costs the Province of Nova Scotia millions of dollars each year. As the person who had overall responsibility for this file within the NSLC for over 10 years, I feel the need to respond.

Aside from my disappointment in Mr. Black referring to the NSLC as “the Commission” – a term that hasn’t been correct in over 15 years, ever since it became a Crown corporation with outside Directors in 2001 – perhaps my greatest disdain for his piece was with the simplistic and narrow view of the sector which he puts forward. Some history is in order.

Local small-scale producers are a relatively new thing in Nova Scotia. The first farm-based winery was Grand Pre, which started in the late 1980s. The first craft brewers began in the early to mid 1990s. And the first small-scale distillery, Glenora, began around that same time. In all of these instances, the pioneers had to deal with a provincial  regulatory environment and NSLC policy structure that was ill-suited to their unique type of operation. It was built for an industry that was based on large-scale manufacturing, not one that was producing a comparative trickle of products.

When you are making products in small volumes, each unit costs you more – a lot more, because your ingredients are more expensive, your labor costs are higher, and your overhead gets allocated over a much smaller volume of product. So when you sell it, you have to charge more. If your retailer – and back then, the only liquor retailer in Nova Scotia was the NSLC – marks it up at 80% or 140% or over 200%,  nobody is going to buy your product, no matter how good it is or how much you play up the local aspect of it. That’s just reality. Most people aren’t buying a $30 or $40 bottle of wine to go with Tuesday’s frozen entree dinner.

These new types of producers forced government and the NSLC to make some changes, small ones at first. In the latter half of the 1980s government introduced the Nova Scotia Farm Wine Policy as an agricultural development incentive – for growing grapes – and gave some advantages to wineries that also grew their own grapes locally, namely the ability to sell their products on-site and keep a bigger portion of the markup. In the 1990s the NSLC recognized that high markups on commercial beer meant that they couldn’t sell local craft beer because it would be priced out of range, so that was adjusted downward for those producers, just as every other jurisdiction in Canada eventually did. It only makes sense.

I remember when I had my first visit to a Nova Scotia winery in 2001, something which was totally foreign to me at the time. I visited the Jost Winery in Malagash, met Hans-Christian Jost, and toured around the facility. I was astounded to find such a bustling place in what was otherwise a fairly sleepy spot. People were working there, and lots of  visitors were coming in and spending money. To see that kind of activity in a such a rural part of Nova Scotia was an eye-opener. That kind of economic activity simply would not exist there without the regulatory and policy framework that had been put in place, and Hans-Christian and others in the industry had ideas on how it could be made even better.

A few years later, the Winery Association of Nova Scotia produced its first strategic plan, which called for 1000 acres of vineyard in Nova Scotia by the year 2020 and set a number of priorities for the industry to pursue. The Board of the NSLC at the time was highly supportive of local industry given that it is one of the NSLC’s 4 legislated objectives,  and agreed to help with an economic impact study to determine what the industry added to the provincial economy, which was later updated by staff within government in 2012. A similar study was done for the craft beer industry about 5 years ago. Such studies are sometimes derided for overstating the benefits that arise from whatever the activity under analysis may be. But until someone comes along with something better, they are the best gauge for measuring these effects, and the provincial Department of Finance actually is the custodian of the economic model used.

The results of these studies as they relate to wine made from locally-grown grapes or other produce are eye-opening. Because pretty much everything used in making that kind of wine is from within Nova Scotia, well over 90% of the economic activity generated stays within Nova Scotia. The industry is quite literally rooted in the ground here and unlikely to pull up stakes and go somewhere else. That creates jobs for not only the people growing the grapes and making the wine, but also for the people who make the cases and print the labels and staff the winery outlets and maintain the facilities. The activity from selling a bottle of New Zealand wine here is a mere fraction of that.

In 2007 the Board of the NSLC approved a reduced markup for wines from small regions sold by the NSLC, recognizing the higher wholesale cost that small producers are forced to charge. They also acknowledged that the profit impact was a drop in the bucket compared to the overall return of the NSLC. This let more of those wines start to appear on NSLC shelves and that better distribution combined with increasing awareness of the quality of Nova Scotia products and the broader “buy local” trend let the industry take off. As Mr. Black notes, there are now 21 wineries in this province, all of them in rural Nova Scotia where jobs are scarce. Most of the craft breweries and distilleries are rural as well. The government should be on their knees giving thanks to those entrepreneurs for doing what they do given the state of Nova Scotia’s rural economy.

Many of those same consumer trends related to favoring locally-made products led to the growth in the craft beer and distilling sectors. While initially not tied as closely to local agriculture as the wine sector, most players in those operations recognize the value in doing that and are moving in that direction. We now have a local malting facility in Nova Scotia, and farmers are planting grain crops that can be used in brewing and distilling. The amount of growth seen in both areas locally over the last 5 years is truly remarkable. As the saying goes, it’s all good.

I take issue with what Mr. Black terms a “subsidy” for these operations. A subsidy is defined as a payment made in order to keep an operation going or to reduce the price it charges. The NSLC or the Province are not writing cheques to these businesses, as was the case for the film industry. It is instead helping them to generate sales by not taking as much of a cut on sales the NSLC makes. A fine point but a useful one, since most of those sales likely would not happen if they didn’t do that.

The second, and I think more useful point, is that those sales that are now happening are not totally substitutable, or as economists say, fungible (I love that word). If you’re looking for a bottle of local craft beer, you probably aren’t buying a case of corporate beer if it isn’t on the shelf. That bottle of local Tidal Bay isn’t likely to be replaced by a box of French Cross, or by a bottle of Semillon from France. There is some substitution on the fringes, but it is small. Therefore any figures bandied about as to what it costs the Nova Scotia treasury are questionable at best, and also fail to take into account the revenue all the associated economic activity generated by the manufacture of these items produces in terms of payroll, income, and sales taxes. This kind of simplistic thinking is what the original Nova Scotia Liquor Commission used back in the day to argue against any kind of incentives for local producers, by failing to look at the bigger picture. Yes, the profits taken in from the sale of liquor help fund government services, but they are not the only yardstick. All that economic activity produced by the industry generates taxes and jobs. Import substitution is one of the best things you can do for any economy. It’s like eating your vegetables – it’s hard to do too much of it. Using NSLC profit as your only measuring tool is the best way I know of to kill a burgeoning industry, which compared to the big multinational manufacturers that the NSLC generally deals with, is still miniscule in size.

The most questionable part of Black’s piece is extending the “lost profits” argument from sales made by local producers directly to the public at their retail stores as a loss to the provincial treasury. The reality is that almost none of those sales would exist if those outlets didn’t exist. Most people don’t go to the Benjamin Bridge winery to buy their Nova 7 or to Tatamagouche to buy their Hippie Dippie Pale Ale. Unless you’re a local resident, those sales are made to visitors and tourists, and in the big picture, don’t amount to a lot. Keep in mind that the outlets wouldn’t exist if they had to pay full NSLC markup, because they would be selling those products at a loss. You can’t lose something you don’t have. It is a silly, almost churlish, position to take.

Should there be a transition point where the advantages are reduced as the operation gets large? Perhaps so. But none of our local craft producers are anywhere near that stage as yet. By any standard used within the industry, they are all tiny. Over the years the Province has bent over backwards to provide advantages to the large commercial brewers who have been located here. The one that remains provides a couple of hundred good-paying jobs, which are nothing to sneeze at. But the craft brewing sector employs more people in Nova Scotia now than they do, albeit at not as high a pay scale. By all means, track what the advantages provided by government policy to all industries may be. But don’t think the government can just pocket that money if they stop providing that incentive. In most cases, those industries will eventually just go away, and so will the jobs and tax revenue that goes with them.

The issue here as I see it is that the world has changed. The world that the old NSLC was built to operate within saw the public happy to buy products from Gallo, Constellation, Diageo, InBev, and other large multinational producers. In some cases that was because they had no other choice. The NSLC was a mass-market retailer for the most part. Niche products were largely unknown, and were never a strength of that type of model. But just like in all sorts of other sectors of the economy, the old rules don’t always apply any more. Just ask the newspaper in which Mr. Black’s piece appeared. Trying to save those old ways of thinking by destroying something new is seldom a useful exercise. The NSLC has done a good job in the recent past in embracing – reluctantly at times – our local beverage alcohol industry. In turn the various governments over those years have been happy to wrap themselves in the buy-local flag, especially when it comes to these industries. Nova Scotia is now seen as a leader within all of Canada in terms of how it has helped its local beverage alcohol industry take off. We should be proud of that. Government and NSLC can be a catalyst for it to grow even more if they choose to take on that role. Or they can kick and scream that throwing back to their old ways of thinking will give the treasury more money. It won’t. But it would be a tragic mistake both for them, and for us.