Inducements and Tied House Rules
Licensee Retail Stores (LRS) and Liquor Primaries (LP) in British Columbia are governed by various marketing restrictions, two of which some people in industry argue are antiquated and need to change.
Inducements
Under the Liquor Control and Licensing Act, a liquor supplier is prohibited from offering or providing a benefit of any kind to a licensee as an inducement or incentive to buy and promote its products.
Suppliers cannot offer discounts on products in exchange for preferential shelf space or marketing benefits, nor offer volume discounts to licensees.
Licensees must carry a representative selection of brands from a variety of suppliers that are not associated with or connected to each other. They cannot accept discounts on products, nor enter into paid or unpaid marketing agreements to sell a particular supplier’s products. Licensees are also prohibited from selling shelf space or providing preferential product placement to certain suppliers over others.
Challenges with Inducements
Inducement rules can seem confusing and are hard to enforce. They’re also legal and common practice in other industries, like grocery and pharmacy.
“It takes a huge amount of energy and resources on the part of the Liquor and Cannabis Regulation Branch (LCRB) to take enforcement action”, says Mark Hicken, wine lawyer and President at Alca Intelligence.
Licensees know they must comply, but also know their competition could be doing something prohibited to gain a competitive advantage.
“This set of rules and restrictions comes from the post-Prohibition era.”
“I feel for the LCRB on those things,” adds Hicken. “They’ve inherited this set of rules and restrictions that really comes from the post-Prohibition era, but they have been part of our regulatory structure for decades now. It is a thorny problem. There is no unity in the industry on what to do about it.”
There are also concerns that smaller retailers might be disadvantaged by removing inducement rules. Darryl Lamb, Brand Manager of Legacy Liquor Store (BC’s largest privately-owned liquor store) argues that legalizing inducements would, “in the end, see a system put in place that would allow us to put prices down and partner with like-minded corporate and producer entities. We should have the right to negotiate our own wholesale price on any item we want, just like other industries.”
Tied Houses
Tied house relationships are also limited. A tied house is a business that is associated with a liquor manufacturer, whether through financial, familial, or other ties. This rule was created to ensure that liquor manufacturers do not acquire ownership or financial interests in licensed establishments and then use that to limit consumer choice by preventing other manufacturers from entering the marketplace.
Small and medium manufacturers are allowed to have an association with up to three licensed establishments located away from their manufacturing site where their liquor may be sold.
History of Tied Houses
Tied houses have been banned in BC since 1952, when the Liquor Inquiry Commission found that breweries in the province had consolidated and thereby limited competition.
Government has consulted with industry at various points in the past to update tied house rules. In 2010, it passed legislation that would amend the Act. This led to a change in 2013 that allows manufacturers to have ties with up to three offsite licensed establishments.
Challenges with Tied Houses
Many in industry feel tied house rules are antiquated. “I understand why the rule was originally put into place but now there are so many craft breweries,” says Rebecca Hardin, President of Thrive Liquor & Cannabis. “No customer wants one type of beer because it is a fickle customer.”
Dennis Coates, Senior Associate and Lawyer at MJB Lawyers believes the rule is limiting and that government has misinterpreted the original intent of the legislation. “There has actually only been one case to my knowledge about tied house rules, 20 years ago, that involved the Commodore. To some extent, the issue has become irrelevant. For the most part, the big breweries don’t have pubs anymore. Plus, pubs all have at least five to ten taps now. Nobody is going for exclusivity and customers want variety,” he says.
“Enforcing current tied house rules creates significant work.”
Enforcing current tied house rules creates significant work for the LCRB that delves deeply into corporate records to determine whether companies share any common ownership ties. According to BC’s Alliance of Beverage Licensees (ABLE BC), that can lead to months of extra work and tedious delays.
“While there’s no consensus in industry about whether the limit of three should be kept, increased, or repealed, we all agree that the LCRB’s process is too onerous,” says Jeff Guignard, Executive Director of ABLE BC. “Even owning a few non-controlling shares in a business that partly owns another business could put you off-side of the rules, which doesn’t make sense.”
Working Within the Restrictions
Licensees must uphold the terms and conditions of their license type, but there are ways to creatively work with agents and manufacturers within the regulations.
“There are ways to creatively work with agents and manufacturers.”
Hardin emphasizes the importance of customer education. “Retailers can host in-house tastings. A manufacturer can send you a person educated in that product to do the tasting. They have to buy the product from you, and they will facilitate the tasting.”
She acknowledges it can be more work, but she has seen it pay off for her clients. “You can have beautiful displays in your store,” Hardin adds. “Retailers are doing the marketing campaigns and paying for all their own stuff. Manufacturers and agents are giving them the knowledge to convey it in their campaigns. Retailers see longer term gain this way. It takes more time, but is exponentially better in building customer relationships, so they keep shopping with you.”
Future Changes?
The LCRB has recently consulted with industry associations about possible changes to tied house rules, so industry may see some small changes this year. But changes to inducement policies could be a long time coming.
“Everyone agrees there should be changes, but there’s no consensus on what those changes should be exactly,” says Guignard. “While we have those discussions, we should at least streamline the corporate review process to save both businesses and the LCRB time and money.”
Industry will continue to wait and see what government will do next to modernize BC’s at-times still antiquated regulations.