implications of privatizing/deregulating alcohol retail sales: projections of alcohol consumption in...
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IMPLICATIONS OF PRIVATIZING/DEREGULATING ALCOHOL
RETAIL SALES:Projections of Alcohol Consumption
in Ontario
MINGHAO HER*NORMAN GIESBRECHT
Center for Addiction and Mental Health, Toronto, Ontario, Canada
ROBIN ROOMStockholm University, Stockholm, Sweden
JUÈ RGEN REHMCenter for Addiction and Mental Health, Toronto, Ontario, Canada
University of Toronto, Toronto, CanadaUniversity of Applied Sciences, Hamburg, Germany
World Health Organization, Geneva, Switzerland
ABSTRACT: Purpose: To project the consequences of privatizing or deregulating
current alcohol retail monopolies in Ontario, Canada. Methods: The projection is
based on a multiplicative model and applied to estimate per capita alcohol
consumption for four hypothetical scenarios, including both partial and complete
privatization for the Province of Ontario, Canada. Those scenarios are mainly
focused on the two dimensions of changes affected by privatization: alcohol
physical availability and economic availability (i.e., retail prices). Various
assumptions involving availability and prices are largely based on the Canadian
and international research literature on deregulation/privatization. Results and
Implications: The study showed that per capita alcohol consumption in the short/
medium term is expected to increase in all four hypothetical scenarios examined,
*Direct all correspondence to: Minghao Her, MA, Social, Prevention and Health Policy Research, Addiction
Research Foundation Division, Center for Addiction and Mental Health, 33 Russell Street, Toronto, Ontario, M5S
2S1, Canada; E-mail: [email protected]
JOURNAL OF SUBSTANCE ABUSE, Volume 10, Number 4, pages 355±373.
Copyright # 1999 by Elsevier Science Inc.
All rights of reproduction in any form reserved.
ISSN: 0899-3289
with the magnitude ranging from 11% to 27%. The sensitivity analysis also revealed
a similar increase in alcohol consumption, even though the magnitude of the
increase would be less for some scenarios. Therefore, any deliberations on
modifying alcohol control policies are well advised to proceed with caution, since
an increase in alcohol consumption is likely to be associated with elevated levels of
drinking-related problems.
INTRODUCTION
Since the 1970s, privatization/deregulation of liquor control Ð or demonopolization Ð
has been discussed in many jurisdictions, and implemented in several (OÈ sterberg, 1992;
Edwards et al., 1994; Holder et al., 1995). In Ontario, the 1995 provincial election
campaign included reference to the options of privatizing provincial liquor stores and
allowing variety grocery stores to sell alcohol. The `̀ natural experiment'' literature
demonstrates that privatization or demonopolization of the alcohol distribution system
associated with an increase in the number and types of retail outlets, in hours of sales, in
advertising, in sales promotions, and changes of alcohol retail prices. In many instances,
this increased access to alcohol may lead to an increase in alcohol consumption and
alcohol- related harm (Her et al., 1999). The intent of this paper is to project the per capital
alcohol consumption rate in Ontario if a partial or complete privatization of the retail sale
of alcohol had been implemented in 1995.
The projection focuses on evaluating two dimensions of alcohol availability that are
commonly affected by privatization: physical availability and alcohol retail prices. All
scenarios and parameter assumptions are based on evidence acquired through international
and Canadian research in the past several decades. Recent drinking patterns among
Ontarians are also incorporated into this projection.
DESCRIPTION OF THE MODEL
In this paper, a multiplicative model developed by Skog (1979, 1991) and Holder et al.
(1995) is used to estimate per capita alcohol consumption, where the changes in
availability and price are assumed to be two factors affecting alcohol consumption. For
the purpose of model testing, we assume that other macro-environmental factors (such as
other alcohol-related regulations, or life style changes) will be either stable or not be
directly affected by dismantling or restructuring the provincial alcohol retail monopoly,
i.e., a ceteris paribus assumption. The formula for estimating per capita alcohol
consumption can be specified as:
Cij � BAbiPeb
bj � WAwiPewwj � SAsiP
essj �A�
Here, Cij denotes the predicted alcohol consumption level in litres of absolute alcohol
per capita, 15 years and older, under availability scenario i and price scenario j. Abi,
Awi, and Asi denote the relative changes in consumption expected for beer, wine and
spirits under availability scenario i; Pbj, Pwj and Psj denote the effect of price changes
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998356
in price scenario j, while reference points are the baseline scenarios of no change. For
example, Aw2 = 0.2 will mean that wine consumption will decrease to 20% of the
present consumption level under availability scenario 2; while Pw2 = 0.5 means the
price of wine is decreased to 50% of the baseline level under price scenario 2. Finally,
B, W and S denote the baseline sales volume of beer, wine, and spirits, in litres of
absolute alcohol per capita 15 years and older; and eb, ew and es denote the price
elasticities. Price elasticity is a standard term used by economists to describe the
responsiveness of the consumer to price changes, which is defined as the ratio of the
percentage change in quantity to the percentage changes in price. If the percentage
change in quantity is less than percentage changes in price, such price elasticity is
considered as `̀ inelastic.'' In other words, elasticity e = 0.5 means that consumption
will decrease by only 10% if price goes up by 20%, and the sign of price elasticity is
assumed to be negative at the theoretical level.
Assumptions on Availability Scenarios
The Ontario alcohol retail distribution system as of 1995 was comprised of 593 Liquor
Control Board of Ontario (LCBO) stores, six LCBO `̀ vintage'' outlets with extensive wine
selections, 94 agency stores acting for the LCBO in less-populated areas, 436 Brewers
Retail Stores and 321 Ontario winery stores. The LCBO is a provincial agency reporting to
the provincial Ministry of Consumer and Commercial Relations. At the retail level, all
spirits and imported wine can be purchased only at LCBO monopoly outlets or Agency
stores, which also sell beer and domestic wine. However most domestic beer and much
imported beer are sold through the Brewers Retail Chain of outlets, and Ontario winery
outlets sell only domestic wine. The latter two private systems are closely regulated by the
province. Thus, Ontario has a partially privatized system of winery retail stores and beer
stores, yet has the limited number of outlets and opening hours, and the LCBO maintains
the biggest market share, in retail dollar values, in the overall retail market (LCBO, 1995).
As of the mid 1990s in Ontario, a proposed liquor liberalization plan included the
following: partial or complete privatization at the retail level, partial or complete
privatization at the wholesale level and complete privatization of the alcohol distribution
system at all levels (The Toronto Star, July 13, 1995). Selling beer and wine in corner stores
was also suggested. Based on the 1995 Ontario privatization proposal and similar
experiences in other jurisdictions (see Her et al., 1999), four hypothetical scenarios in this
study are developed, to project per adult alcohol consumption. Since each privatization
scenario involves a change in alcohol availabilities, the four privatization scenarios are thus
translated into four corresponding availability scenarios (see Table 1 for additional detail):
A0: No change in availability.
A1: Wine and beer sales are extended to all corner stores, convenience stores, small
and large grocery stores and supermarkets.
A2: Wine and beer are extended to corner stores, convenience stores and small grocery
stores, but not in large grocery stores or supermarkets.
A3: All alcoholic beverages are allowed to be sold only in independent private-
ly-owned liquor retail stores, and liquor board stores, beer stores and Ontario
winery stores are closed.
Privatizing Alcohol Sales, Projections of Changes 357
TA
BL
E1
Sum
mary
of
Hypoth
etic
alO
ff-p
rem
ise
Alc
oholA
vaila
bili
tyS
cenarios
Availa
bili
tyS
cenarios
Liq
uor
Contr
ol
Board
of
Onta
rio
Sto
res
[n=
593
+94
+6]
Bre
wers
Reta
ilS
tore
s[n
=436]
Onta
rio
Win
ery
Sto
res
[n=
321]
Corn
er
Sto
res,
Convenie
nce
and
Sm
all
Independent
Gro
cery
Sto
res
a
[n=
about
5700]
Larg
eG
rocery
and
Superm
ark
ets
a
[n=
about
1500]
Independent
Liq
uor
Reta
ilS
tore
sb
[n=
about
2000]
A0[statusquo]
[n=
1400]
spir
its,
win
e
and
bee
r
do
mes
tic
bee
r
and
som
eim
p.
Onta
rio
win
e
A1
[n=
8000±9000]
spir
its,
win
e
and
bee
r
do
mes
tic
bee
r
and
som
eim
p.
Onta
rio
win
ebee
ran
dw
ine
bee
ran
dw
ine
A2
[n=
7000]
spir
its,
win
e
and
bee
r
do
mes
tic
bee
r
and
som
eim
p.
Onta
rio
win
ebee
ran
dw
ine
A3
[n=
2000]
bee
r,w
ine
and
spir
its
A4
[n=
9000±10,000]
bee
r,w
ine
and
spir
its
bee
r,w
ine
and
spir
its
bee
r,w
ine
and
spir
its
Note
s.a
Ina
Canadia
nG
roce
rm
agaz
ine
surv
eyco
nduct
edin
August
,1994,
the
num
ber
of
that
chai
nco
nven
ience
store
s,co
rner
store
san
dsm
all
indep
enden
tgro
cery
store
sin
Onta
rio
was
esti
mat
edat
5708
(Condon,
1996),
and
the
tota
lnum
ber
of
super
mar
ket
san
dal
l-si
zed
gro
cery
store
sin
cludin
gco
nven
ience
store
sÐ
inO
nta
rio
are
esti
mat
edat
7236.
How
ever
,th
e
actu
alnum
ber
may
be
hig
her
when
takin
gco
nsi
der
atio
nco
rner
store
sth
atm
aynot
hav
ebee
nca
ptu
red
inth
esu
rvey
.T
hus,
7000
to8000
isuse
das
aco
nse
rvat
ive
esti
mat
ion
of
the
tota
l
num
ber
of
pote
nti
alsu
per
mar
ket
san
dgro
cery
store
s.T
he
dif
fere
nce
bet
wee
nth
etw
oes
tim
ates
,ab
out
1500,
isco
nsi
der
edto
be
the
num
ber
of
larg
egro
cery
store
san
dsu
per
mar
ket
s.bA
fter
pri
vat
izat
ion
of
the
liquor
reta
ilsy
stem
inA
lber
ta,
the
num
ber
of
liquor
outl
ets
incr
ease
dby
40%
inth
efi
rst
yea
r(A
LC
B,
1994).
Ifap
ply
ing
the
Alb
erta
model
toO
nta
rio
wer
eto
resu
ltin
asi
mil
arin
crea
sefr
om
the
rece
nt
figure
of
1440
(incl
udin
gL
CB
Ore
tail
store
s,A
gen
cyst
ore
s,O
nta
rio
Win
ery
store
san
dB
rew
ers
reta
ilst
ore
s),
apro
ject
ion
of
2000
is
esti
mat
ed.
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998358
A4: All alcoholic beverages are sold in supermarkets, grocery stores as well as
independent privately-owned liquor retail stores, and liquor board stores, beer
stores and Ontario winery stores are closed.
Assumption of Price Scenarios
The retail prices of all alcoholic beverages are currently regulated and controlled by the
LCBO. The prices are composed of three main components: (1) provincial or federal taxes,
(2) LCBO mark-up and (3) the supplier price. Under proposed de-regulated liquor retail
systems, alcohol retail price would be determined by various factors including the
following: (1) government revenue expectation (which can directly impact on the
provincial wholesale price level), (2) supplier price, (3) sale promotions, (4) competition,
(5) operational costs and (6) profit expectations. Two key assumptions of the models on
factors affecting price are as follows:
(1) Supplier prices are relatively stable in the short run. Higher supplier costs
might result from the privatization of the retail system due to increased adminis-
trative costs and increases in distribution costs from warehousing, delivery and
marketing. However, in the short run, due to the relatively stagnant nature of the
market and the price resistance from both retailers and consumers, it is unlikely that
the supplier price would increase much. Previous experience in Alberta (West, 1997)
indicated that supplier prices remained relatively stable or even declined in the post-
privatization period. We thus assume that the supplier's price would remain stable in
the short run.
(2) Under privatization changes, the Government of Ontario would seek to maintain
revenue neutrality, whatever privatization model is adopted. Revenue neutrality means
that the provincial government would ensure that the post-privatization revenue will be
maintained at the pre-privatization levels, whether characterized as using leverages of
taxation, various mark-ups or wholesale prices. The detail of such operational features of
the term can, of course be a matter for political debate. Based on previous experiences,
revenue neutrality is typically built into initial privatization legislation, e.g., Alberta and
Iowa, as part of the calculus of what will prove to be politically acceptable as privatization
legislation. Therefore, we assumed that any deregulation efforts would ensure that the
government would continue to maintain certain wholesale monopoly arrangements where
the level of wholesale prices are determined by the former monopolistic agency's (LCBO)
operational efficiency. A recent LCBO annual report indicated that its operational
expenses are approximately 17% of total net sales (LCBO, 1995). Thus, potential cost
savings associated with the deregulation of LCBO, expressed as a percentage of total
LCBO revenue, is expected to be less than 17%. Thus, in this paper we assume that
wholesale prices of all privatized alcohol beverages would be on average 12% below the
current LCBO prices.
Based on these assumptions, with each privatization scenario (A1±A4), a corresponding
price scenario is proposed;
P0: No change in retail price.
P1: The retail price of beer decreases 5%; the retail price of wine increases 6%; the
retail price of spirits remains constant.
Privatizing Alcohol Sales, Projections of Changes 359
P2: The retail price of beer increases 6%; the retail price of wine decreases 5%; the
retail price of spirits remains constant.
P3: The retail price of beer increases 6%; the retail prices of wine and spirits
increase 14%.
P4: The retail price of beer decreases 5%; the retail price of wine increases 6%; the
retail price of spirits increases 14%.
In the next section, an evaluation and discussion for the four different privatization
scenarios involving assumptions of availability and price are provided. In other words,
parameters Pbj, Pwj, Psj, Abj, Awj, and Asj will be assigned values on the basis of the
Canadian and international research findings.
JUSTIFICATION OF PARAMETER VALUES
Availability Scenarios
A0: Status quo. No change in availability.
A1: Wine and beer sales are extended to all corner stores, convenience stores, small
and large grocery stores and supermarkets.
There are no studies from North America on the effect of deregulation on beer
consumption. However, three studies were conducted in Nordic countries. In 1969, in
Finland, medium-strength beer was introduced to 17,431 grocery stores compared with
prior sales in only 132 state-owned monopoly stores. The consumption of medium-
strength beer in Finland rose 240% within a year and overall alcohol consumption
increased by 50% (OÈ sterberg, 1992). A similar situation in Sweden also resulted in a
increase of 15% in alcohol consumption (Noval and Nilsson, 1984). In 1989, the
ending of beer prohibition in Iceland increased total alcohol consumption by 23%
(Olafsdottir, 1993).
In Ontario, in 1995, people purchased domestic beer from 436 privately-owned
Brewers Retail outlets, as well as from LCBO managed outlets. Thus, if beer sales were
extended to supermarkets and numerous grocery stores of various sizes, possibly 7000 to
8000 new potential outlets (see Table 1) may be expected. There would be an increase in
consumer convenience and `̀ one-stop shopping.'' On the other hand, the level of beer
consumption has been leveling off or slightly decreasing (Her et al., 1996). Thus, by
taking account of literature and overall market performance of beer, the retail demono-
polization of beer may be expected to produce a 30% increase in beer sales (Ab1 = 1.30).
A series of wine privatization studies conducted in North America has indicated that
wine consumption increased dramatically following the introduction of wine into grocery
stores, although some controversies exist with regard to the long term impacts of such
privatization (Her et al., 1999). The magnitude of the effects on wine consumption were
ranged from 15% in New Hampshire to 150% in Idaho (MacDonald, 1986; Wagenaar and
Holder, 1991, 1995). Like other `̀ beer drinking'' countries, wine constituted a low
proportion of overall alcohol consumption in those US states. In Ontario in 1994 (LCBO,
1995), wine constituted 15% of overall consumption. This privatization scenario would
also result in a very dramatic increase in access to wine from about 900 current outlets in
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998360
1995 to as many as 7000 to 8000 new outlets (see Table 1). The medium value of
previous evaluation research suggests that wine consumption has a great potential to
increase Ð as much as 60% (Aw1 = 1.6). Overall, wine retail sales in Ontario are not
considered to be a mature market. Therefore, sales of wine are likely to expand more than
other alcoholic beverages.
In the US, Wagenaar and Holder (1991) found that privatization of table wine produced
a decline of spirits consumption of 5% for Iowa and 13.8% for West Virginia. For Ontario,
the consumption of spirits is projected to decrease 10% on the assumption that the
dramatic increase in retail availability of wine and beer will result in a certain substitution
effect for spirits (As1 = 0.90).
A2: Wine and beer are extended to all corner stores, convenience stores and small
grocery stores, but not in large grocery stores or supermarkets.
This scenario is very similar to the previous one, except that the overall retail density of
beer and wine outlets is smaller by about 1500 outlets (see Table 1). In the US and Quebec,
small grocery retailers use beer as a loss leader to attract consumers. In Ontario, corner
store retailers are likely to adapt a similar marketing strategy for beer sales in order to
attract neighbourhood customers. In addition, due to corner stores' convenient location
and longer hours of operation, the overall convenience of purchasing beer under this
scenario can be expected to be comparable to that under the previous scenario. The
magnitude of increase of beer consumption may therefore be the same as under A1; i.e.,
beer consumption may be expected to increase by 30% (Ab2 = 1.3).
On the other hand, since wine availability is smaller than under A1, the increase of wine
consumption is projected to increase 50%, which is 10 percentage points lower than in A1
(Aw2 = 1.5). Accordingly, consumption of spirits is projected to decrease by only 5% (As2 =
0.95) on the assumption that the availability of wine and beer in the current scenario is
likely to produce a more modest substitution effects for spirits.
A3: All alcoholic beverages are sold only in independent privately-owned liquor retail
stores, and liquor board stores, beer stores and Ontario winery stores are closed.
In this scenario, the alcohol retail system is completely privatized in the sense that
consumers have equal access to all three alcoholic beverages, both imported and domestic
products in almost 2000 outlets. However, the number of alcohol outlets is expected to be
greater than in the current LCBO system, but much less than in the scenario put forward
under A1 and A2 (see Table 1). In addition, this privatization scenario is expected to
produce substitution effects across all three beverages. In the full privatization in Iowa,
consumers' attention to new products was only focused on one particular product at a time.
However, in our current hypothetical scenario, consumers are exposed to all three
beverages in private retail stores. Consumers do not necessarily focus on one particular
kind of alcoholic beverages in a particular outlet but all three types. Therefore, some
beverages are expected to substitute for other beverages because of simultaneous
availability of all three beverages.
Under scenario A3, the increase in consumption of wine and beer is thus likely to
be smaller, i.e., beer consumption is proposed to increase by 15% (instead of 30%,
Privatizing Alcohol Sales, Projections of Changes 361
i.e. Ab3 = 1.15). Following the same reasoning, the increase in wine consumption is
projected to increase by 40%, which is slightly lower than in the previous scenario
(Aw3 = 1.4). With regard to the impact on consumption of spirits, Holder and Wagenaar
(1990) found such consumption increased by 9.5% after the Iowa government
eliminated its monopoly on the retail sale of spirits. In Ontario, per adult spirits
consumption has steadily declined since the 1980s, and its share of total absolute
alcohol volume was reduced from 38% in the 1980s to 28% in 1994 (see Table 4 in
Her et al., 1996). This implies that a potential exists for an increase, but at a modest
level; spirits consumption is projected to increase by 10% (As3 = 1.10).
A4: All alcoholic beverages are allowed to be sold in supermarkets, grocery stores as
well as independent privately-owned liquor retail stores; and liquor board stores,
beer stores and Ontario winery stores are closed.
Under this scenario, the availability of wine and beer is largely similar to A1 except that
spirits are introduced into private retailing, and LCBO, Brewary Retailing and winery
stores are replaced by independent retail stores. The total number of liquor outlets is
estimated as 9000 to 10,000 (see Table 1 also). Considering the potential substitution
effects expected among the three beverages as discussed in the last scenario, the magnitude
of the impacts of privatization on consumption of beer and wine is assumed to be slightly
smaller than in A1. Beer consumption is projected to increase by 25% (instead of 30% in
A1) and wine consumption may increase by 55% (instead of 60% in A1). The consumption
of spirits is expected to increase slightly more than in A3 due to the dramatic increase in
availability. By considering overall trends in the consumption of spirits exhibited in recent
years, privatization in this scenario may lead to a 15% increase in consumption of spirits.
Price Scenarios
According to the earlier discussion, we assume that all liquor retailers would purchase
privatized liquor beverages at a uniform governmental wholesale price, which is set 12%
below the current LCBO prices. The formula for calculating the change of retail prices
from the status quo is as follows:
Assume:
Retailer's gross margin:
M � �xÿ 8:8�x
100%
Current LCBO monopolistic price: $10.00
LCBO discount price to the retailer: $8.80 (12% reduction from above)
Projected retailer's selling price: $x
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998362
Retailer's selling price:
x � 8:8
1ÿM
Projected percentage change of retailer's price from current LCBO price:
y � xÿ 10
10100% �
8:81ÿMÿ 10
10100% � 10M ÿ 1:2
10�1ÿM� 100% �B�
For example, if the projected retailer's gross margin is 20%, i.e., M = 20%, substituting
into Formula B, then yield y = 10.0%. In other words, the projected retail price of the
alcoholic product would thus increase by 10%, compared with current LCBO mono-
polistic price. The following scenarios (P1, P2, P3 and P4) are the price assumptions under
various availability scenarios.
P0: Status quo. This scenario serves as a reference point and no change in prices is
presumed under this scenario.
P1: Partial privatization scenario A1 (see Table 1), where the retail price of beer
decreases approximately 5%; the retail price of wine increases approximately 6%;
the retail price of spirits remains constant.
Generally speaking, supermarkets are large, low cost, low margin, high volume,
self-service stores that carry a variety of food, plus side items. Supermarkets and
large grocery stores (including chain outlets and independent stores) account for
approximately 80% of the market share (Condon, 1996). Due to their high volume
and high turnover, supermarkets can operate on a low gross margin and mark-up. Thus,
the entry of supermarkets into the retail sale of alcoholic beverages would likely to result
in a large market share in the overall retail market, which would affect the average price
level as a whole, including also other grocery stores and convenience stores. The
average gross margin for supermarkets is approximately 20% (Statistics Canada 1992,
pp. 63±224). However, individual retailers tend to set low mark-ups on fast-selling
items and high mark-ups on items that sell less frequently (McCarthy and Shapiro,1994).
Therefore, when beer and wine are introduced into supermarkets, presumably, retailers
would use a small selection of best selling brands of beer and wine as loss leader prices
to attract customers. Thus, overall, the average mark-up is expected to be 5% ±10% for
beer and 15% ±20% for wine. Based on the proposed wholesale price level and a
translated Formula B, the retail price of beer is likely to decrease by approximately 5%
(ranging from 2.2% ±7.4%), while the retail price of wine is expected to increase by
approximately 6% (ranging from 3.5% ±10%).
Privatizing Alcohol Sales, Projections of Changes 363
P2: Partial privatization scenario A2 (see Table 1), where the retail price of
beer increases 6%; the retail price of wine decreases 5%; the retail price of
spirits remains constant.
Convenience stores/corner stores are small stores which are located near residential
areas and carry a limited line of high turnover goods. They tend to offer consumers'
convenience rather than assortment. Thus, convenience comes at the cost of higher prices
to compensate for higher operating costs and lower sales volumes; prices are usually
10% ±20% higher than in supermarkets (McCarthy and Shapiro, 1994). Thus, average
price mark-ups used by corner store retailers are expected to be 30% ± 40%. When the sale
of beer and wine is introduced to corner stores, then presumably operators will use beer as
a loss leader to attract neighborhood customers, which is the price strategy used by Quebec
small grocery store retailers and their US counterparts. Thus, the mark-up for beer can be
expected to be 15% ±20%, which is lower than the average mark-up for other items within
the store. The average mark-up for wine is even lower Ð likely to be 5% ±10% Ð since
competition among corner stores and LCBO outlets would likely result in a lowering of
prices. The assumption made here is that although the number of LCBO outlets will be
much lower than the number of convenience stores, there will be a strong enough market
force to exert a significant influence on the retail price of wine. According to the Formula
B, we project that the final retail price of beer would increase approximately 6% (ranging
from 3.5% ±10%) and the final retail price of wine would decrease approximately 5%
(ranging from 2.2% ±7.4%).
P3: Complete privatization scenario A3 (see Table 1), where the retail price of beer
increases 6%; the retail prices of wine and spirits increase 14%.
Under this scenario, the price margin of these independent outlets would likely be
higher than in supermarkets or large grocery stores because these outlets are specialized in
the sale of liquor and they do not have a large variety of other products to sell at a higher
margin. An examination of general retail business performance in Canada in 1993 showed
that the average gross margin for the retail industry was 27.36% (Statistics Canada 1993,
pp. 63±236); and for supermarkets and grocery stores the margin was 20%, which was
among the lowest categories in all retail industries. Therefore, the independent liquor
outlets in general would be expected to operate on at least a 20% average gross margin in
order to cover their higher operating expenses and longer operating hours. This situation is
particularly true for small liquor outlet operators.
On the other hand, the alcohol market has generally been very stagnant in recent years.
Consequently, if the Alberta model is adapted to Ontario, an increase in the number of
alcohol outlets, though not as many as in Scenarios A1 and A2, would still result in intense
retail competition. Liquor retailers would be forced to minimize costs while at the same
time increasing various promotional activities in order to make a profit. These factors
would ultimately exert pressure on the price retailers could charge for liquor products.
Considered as a whole, a conservative estimate of the average gross margin for
independent liquor retailers would be 15% ±20% for beer and 20%±25% for wine and
spirits. The consequent retail price would likely increase by approximately 6% for beer
(ranging from 3.5%±10%) and 14% for wine and spirits (ranging from 10%±17.3%).
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998364
TA
BL
E2
Estim
ate
sof
Short
/Mediu
m-t
erm
per
Adult
Alc
oholC
onsum
ptio
nU
nder
Diff
ere
nt
Price
and
Availa
bili
tyS
cenarios
P0
(Price)
No
Price
Change
P1
(Price)
Beer,
5%#
Win
e,
6%"
Spirits
,C
onsta
nt
P2
(Price)
Beer,
6%"
Win
e,
5%#
Spirits
,C
onsta
nt
P3
(Price)
Beer,
6%"
Win
e,
14%"
Spirits
,14%"
P4
(Price)
Beer,
5%#
Win
e,
6%"
Spirits
,14%"
A0=
statusquo
7.3
2(s
tatu
squo)
7.3
77.2
77.0
27.1
7
A1=
wineandbeerin
supermarkets
andgrocery
stores
[Ab1=
1.3,A
w1=
1.6,A
s1=
0.9]
9.0
5(2
4%
)9.1
1(2
4.5
%)
9.0
0(2
3.0
%)
8.6
2(1
7.8
%)
8.9
2(2
2.0
%)
A2=
wineandbeerin
corner
convenience
storesandsm
all
grocery
stores
[Ab2=
1.3,A
w2=
1.5,A
s2=
0.95]
9.0
6(2
4%
)9.1
2(2
4.6
%)
9.0
0(2
3.0
%)
8.6
3(1
8.0
%)
8.9
3(2
2.0
%)
A3=
wine,
beerandspiritsin
independentliquorstores
[Ab3=
1.15,A
w3=
1.4,A
s3=
1.1]
8.5
9(1
7.3
%)
8.6
4(1
8.0
%)
8.5
4(1
6.7
%)
8.1
5(1
1.4
%)
8.4
2(1
5.0
%)
A4=
wine,
beerandspiritsin
supermarkets,grocery
stores
andindependentliquorstores
[Ab4=
1.25,A
w4=
1.55,A
s4=
1.15]
9.2
5(2
6.4
%)
9.3
1(2
7.2
%)
9.2
0(2
5.7
%)
8.7
8(2
0.0
%)
9.0
7(2
4.0
%)
Note
s.T
he
calc
ula
tions
are
bas
edon
the
low
esti
mat
esof
pri
ceel
asti
citi
es(B
eer:ÿ0
.3,
Win
e:ÿ0
.6,
Spir
its:ÿ0
.8).
N.B
.:T
he
figure
inpar
enth
eses
repre
sents
the
per
centa
ge
of
incr
ease
from
stat
us
quo.
Privatizing Alcohol Sales, Projections of Changes 365
TA
BL
E3
AS
ensiti
vity
Analy
sis
on
Estim
ate
sof
Short
/Mediu
m-t
erm
per
Adult
Alc
oholC
onsum
ptio
nunder
Alte
rnativ
eV
alu
es
of
Availa
bili
tyP
ara
mete
rs
P0
(Price)
No
Price
Change
P1
(Price)
Beer,
5%#
Win
e,
6%"
Spirits
,C
onsta
nt
P2
(Price)
Beer,
6%"
Win
e,
5%#
Spirits
,C
onsta
nt
P3
(Price)
Beer,
6%"
Win
e,
14%"
Spirits
,14%"
P4
(Price)
Beer,
5%#
Win
e,
6%"
Spirits
,14%"
A0=
statusquo
7.3
2(s
tatu
squo)
7.3
77.2
77.0
27.1
7
A1=
wineandbeerin
supermarkets
andgrocery
stores
[Ab1=
1.15,A
w1=
1.3,A
s1=
0.9]
8.0
7(1
0.2
%)
8.1
3(1
1%
)8.0
2(9
.5%
)7.6
8(4
.1%
)7.9
4(8
.5%
)
A2=
wineandbeerin
corner
stores,convenience
stores
andsm
allgrocery
stores
[Ab2=
1.15,A
w2=
1.25,A
s2=
0.925]
8.0
7(1
0.2
%)
8.1
2(1
1%
)8.0
1(9
.5%
)7.6
8(4
.1%
)7.9
4(8
.5%
)
A3=
wine,
beerandspiritsin
independentliquorstores
[Ab3=
1.075,A
w3=
1.2,A
s3=
1.05]
7.9
5(8
.6%
)8.0
0(9
.2%
)7.9
0(7
.9%
)7.5
4(3
%)
7.8
9(7
.8%
)
A4=
wine,
beerandspiritsin
supermarkets,grocery
storesand
independentliquorstores
[Ab4=
1.125,A
w4=
1.275,A
s4=
1.075
8.2
9(1
3.2
%)
8.3
5(1
4.6
%)
8.2
4(1
2.6
%)
7.8
7(7
.5%
)8.1
2(1
0.9
%)
Note
s.T
he
calc
ula
tions
are
bas
edon
the
low
esti
mat
esof
pri
ceel
asti
citi
es(B
eer:ÿ0
.3,
Win
e:ÿ0
.6,
Spir
its:ÿ0
.8).
N.B
.:T
he
figure
inpar
enth
eses
repre
sents
the
per
centa
ge
of
incr
ease
from
stat
us
quo.
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998366
TA
BL
E4
AS
ensiti
vity
Analy
sis
of
Estim
ate
sof
Short
/Mediu
m-t
erm
per
Adult
Alc
oholC
onsum
ptio
nunder
Alte
rnativ
eV
alu
es
of
Price
Ela
stic
ity
P0
(Price)
No
Price
Change
P1
(Price)
Beer,
5%#
Win
e,
6%"
Spirits
,C
onsta
nt
P2
(Price)
Beer,
6%"
Win
e,
5%#
Spirits
,C
onsta
nt
P3
(Price)
Beer,
6%"
Win
e,
14%"
Spirits
,14%"
P4
(Price)
Beer,
5%#
Win
e,
6%"
Spirits
,14%"
A0=
statusquo
7.3
2(s
tatu
squo)
7.3
47.2
96.7
46.9
7
A1=
wineandbeerin
supermarkets
andgrocery
stores
[Ab1=
1.3,A
w1=
1.6,A
s1=
0.9]
9.0
5(2
4%
)9.0
6(2
4.0
%)
9.0
3(2
3.4
%)
8.4
0(1
4.8
%)
8.7
3(1
9.3
%)
A2=
wineandbeerin
corner
stores,convenience
storesand
smallgrocery
stores
[Ab2=
1.3,A
w2=
1.5,A
s2=
0.95]
9.0
6(2
4%
)9.0
7(2
4.0
%)
9.0
3(2
3.4
%)
8.4
1(1
4.8
%)
8.7
2(1
9.1
%)
A3=
wine,
beerandspiritsin
independentliquorstores
[Ab3=
1.15,A
w3=
1.4,A
s3=
1.1]
8.5
9(1
7.3
%)
8.6
0(1
7.5
%)
8.5
7(1
7.1
%)
7.9
1(8
.1%
)8.1
9(1
1.9
%)
A4=
wine,
beerandspiritsin
supermarkets,grocery
storesand
independentliquorstores
[Ab4=
1.25,A
w4=
1.55,A
s4=
1.15]
9.2
5(2
6.4
%)
9.2
6(2
6.5
%)
9.2
3(2
6.1
%)
8.5
3(1
6.5
%)
8.8
4(2
1.0
%)
Note
s.T
he
calc
ula
tions
are
bas
edon
hig
her
esti
mat
esof
pri
ceel
asti
citi
es(B
eer:ÿ0
.3,
Win
e:ÿ1
.0,
Spir
its:ÿ1
.5).
The
figure
inpar
enth
eses
repre
sents
the
per
centa
ge
of
incr
ease
from
stat
us
quo.
Privatizing Alcohol Sales, Projections of Changes 367
P4: Complete privatization scenario A4 (see Table 1), where the retail price of
beer decreases 5%; the retail price of wine increases 6%; the retail price of spirits
increases 14%.
It is assumed that supermarkets and grocery stores will likely sell a wide selection of
high volume, low priced beer and wine products, while independent liquor retailers are
expected to concentrate more on selling spirits and exclusive lines of wine and beers.
Following reasoning similar to that discussed in previous scenarios, the gross margin for
beer is projected to range from 5% ±10%; the gross margin for wine would range from
15% ±20% and the gross margin for spirits would range from 20% ±25%. Therefore, the
retail price of beer is likely to decrease by approximately 5%, while the retail prices of
wine and spirits are expected to increase by approximately 6% and 14%, respectively.
In laying out these four scenarios for changes from the status quo we have tried to
project the most likely consequences for retail prices for each particular privatization
scenario. In Table 2, which follows, the projected results for these scenarios are shown on
the diagonal. However, in this table we have also included projected results for scenarios
which involve other combinations of an A-value (availability scenarios) and P-value (price
change profiles), to give a sense of how the projected alcohol consumption changes with
price profile changes and separately also with availability scenario changes (see also
Tables 3±5.)
RESULTS
Per adult alcohol consumption (see Table 2) is projected by applying model Formula A
and substituting those parameter assumptions with low price elasticity (see Her et al.,
1996). Note that the left-hand corner of the table (no price change, no availability
change) is the actual per adult alcohol consumption value for 1994±1995 in Ontario and
TABLE 5Estimates of Long-term per Adult Alcohol Consumption under Full Privatization Scenarios
P0 (Price)No PriceChange
P1 (Price)Beer, 5%#Wine, 5%#
Spirits, 10%#
P2 (Price)Beer, 10%#Wine, 10%#Spirits, 20%#
A0 = no change 7.32 (status quo) 7.62 7.94
A3 = wine, beer and spirits in
independent liquor stores
[Ab3 = 1.15, Aw3 = 1.4, As3 = 1.1]
8.59 (17.3%) 8.94 (22.1%) 9.30 (27.0%)
A4 = wine, beer and spirits in
supermarkets, grocery stores
and independent liquor stores
[Ab4 = 1.25, Aw4 = 1.55, As4 = 1.15]
9.25 (26.4%) 9.62 (31.4%) 10.00 (37.0%)
Notes. The calculations are based on the low estimates of price elasticities (Beer: ÿ0.3, Wine: ÿ0.6, Spirits: ÿ0.8).
N.B: The figure in parentheses represents the percentage of increase from status quo.
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998368
the area below the first row (A0) contains the short/medium-projections for different
privatization scenarios.
As can be seen in the model in Table 2, in general an increase in availability is projected
to produce an increase in alcohol consumption. This is seen by comparing scenarios (A1,
P1) and (A4, P1) where alcohol consumption rises from 9.11 to 9.31 l. Here, A1 represents
partial privatization with beer and wine introduced into supermarkets and various grocery
stores, and A4 is the complete privatization scenario where all alcoholic beverages may be
sold in independent liquor stores in addition to supermarkets and grocery stores.
Furthermore, even within the same privatization scheme, different degrees of privatization
may result in different levels of alcohol consumption. In scenario A4, privatization is more
liberal, and alcohol consumption increases to 9.31 in A4 from 8.64 in A3. The table also
shows that an increase in price may result in a reduction of alcohol consumption as
observed in scenarios (A4, P2) and (A4, P3).
Considering a partial privatization scenario (A2, P2), in which the sale of beer and wine
is confined to corner stores, convenience stores and small grocery stores, but not
supermarkets or large grocery stores, while wine and spirits continue to be sold in LCBO
stores, per capita consumption of alcohol is likely to increase by approximately the same
magnitude as in scenario (A1, P1). This similarity might be due partly to the relative
similarity of the consumer convenience in those two availability scenarios and partly to
consumers' low price sensitivities towards beer and wine.
For a conservative full privatization scenario (A3, P3), the initial Alberta model may be
used as a reference for constructing Ontario privatization plan in the early phase. Under
this assumption, all three alcoholic beverages are permitted to be sold only in independent
liquor stores and the prices of all alcoholic beverages increase by about 6%±14%. In this
scenario, per capita alcohol consumption is estimated to increase by 11.4%. Considering a
more liberal full privatization scenario (A4, P4), in which alcohol availability is higher and
prices are lower, per capita alcohol consumption is projected to increase by 24% and its
magnitude is 10% higher than in the conservative scenario. Thus, the results of our
analyses indicate that the greater the combination of increased physical and pricing access,
the greater is the projected increase in alcohol consumption.
An exception is found through a comparison of scenarios (A1, P1) and (A4, P4). Here A1
is partial privatization and A4 is the comparable, more liberal version of complete
privatization. Projections reveal that the impact of privatization on alcohol consumption
in A4 is slightly lower than in A1. This result is explainable because the effects of increased
availability in A4 are partly counterbalanced by the increased prices in that scenario.
Another likely contributing factor is the substitution effect caused by the simultaneous
introduction of all three types of beverages into the private retail market.
SENSITIVITY ANALYSES AND LONG-TERM SCENARIOS
The estimates of the change in consumption levels for different availability scenarios are a
relatively conservative reflection of the findings in the empirical literature. But there is
considerable variation in those findings, and room for debate about the applicability of the
literature to Ontario. Previous research shows that the effects of increased availability are
strongest for wine, but several of the studies are for jurisdictions where wine was a smaller
Privatizing Alcohol Sales, Projections of Changes 369
segment of the alcohol market than in present-day Ontario. While wine does not
predominate among alcoholic beverages in Ontario, the wine market here is relatively
mature, so the response to greater availability may be somewhat dampened. Studies of the
effects of increases in the availability of beer are all from Scandinavian countries, and
represent changes from a relatively low initial consumption level for beer. The Ontario
market may not react as strongly to an increase in availability.
We then conducted a sensitivity analysis where the parameters estimating effects were
varied, to examine the sensitivity of the end results of the statistical model to the values of
the parameters. In this analysis, we halved the estimates of the effects for the four
availability models (A1±A4) used in Table 2. The results shown in Table 3 are obtained.
The first row (A0) of Table 3, of course, is the same as the first row of Table 2. Varying the
assumptions about availability effects does result in substantial differences in the estimated
change in consumption; the projected rise in consumption is reduced to one-half of the
projected increase in Table 2, and for some scenarios is reduced closer to one-third of the
projected rise in Table 2. For all scenarios with new parameters, projected alcohol
consumption rises, but the rise varies with the scenario from 3.0% to 14.6%. Table 4,
on the other hand, showed the effects of using the higher end of the estimated elasticities:
ÿ0.3 again for beer, but ÿ1.0 for wine and ÿ1.5 for spirits. For the majority of other
scenarios, there is less projected change from the current situation with the higher price
elasticities. Overall, however, we conclude that our models are not very sensitive to
variation in wine and spirits price elasticities.
The current projections can be regarded as either short-term or medium-term.
However, in the long run, political and economic environments may change and have
a direct or indirect impact on the alcohol retail market. For example, private retailers
may put political pressure on the government to lower alcohol excise taxes or
wholesale mark-up (as happened in Iowa). As well, if the private retail system results
in aggravated smuggling activities, the private sector may again push the government
to lower taxes on spirits. Also, the new retail system would gradually gain the
economy of scale, which will likely further reduce costs of distribution and promotion.
Considering these factors, we proposed two long-term price scenarios and conducted a
similar analysis for both full privatization scenarios. Our results (Table 5) indicate that
in the long term, if beer, wine and spirits are available in supermarkets, grocery stores
and independent liquor stores, per capita alcohol consumption can be expected to
increase by 26%±37%, while in the short- or medium-term, the corresponding figure is
11% to 27% (see Table 4 as well). Thus, the long-term impact of full privatization of
alcohol sales may be an even greater rise in consumption.
DISCUSSION AND IMPLICATIONS
Results from our main analysis, using the best available estimates of parameters in the
short or medium-term, showed that in all four of the privatization scenarios examined, the
per adult alcohol consumption could be expected to increase, the magnitude ranging from
11% to 27%. Hence, this study suggests that liberalizing access to alcohol is likely to result
in an increased consumption of alcohol, even if some of the availability effects might be
counterbalanced by increased price. It is noteworthy that with the same model, the
JOURNAL OF SUBSTANCE ABUSE Vol. 10/No. 4/1998370
magnitudes of projections in Nordic countries (Holder et al., 1995) are much greater than
they are for Ontario. The variations are largely attributed to differential assumptions on
alcohol prices in the post-privatization period, since alcohol retail privatization in Nordic
countries is likely to result in substantial price reductions.
Unlike other privatization studies which predominately use a time-series design, we
have taken into account price changes, which could also have an impact on alcohol
consumption. Based on a series of assumptions and the research evidence on alcohol
availability policies, we project that an increase in alcohol availability, as outlined in four
scenarios, could result in an increase in alcohol consumption while an increase in price
may result in a decrease in alcohol consumption. When changes in availability and price
occur simultaneously, as might be expected with major deregulation scenarios, the effects
on consumption are more ambiguous, especially when the increase in availability is
accompanied by a rise in price (projected in hypothetical privatization scenarios provided
above). In this study, these interactive factors are examined using a multiplicative model
and we found that dramatic increase in availability has a stronger influence on consump-
tion levels than price. In other words, even with an increase in prices as a outcome of
privatization, a very substantial increase in physical availability of alcohol (i.e., new types
of outlets and increased geographic density) is still likely result in a net increase in alcohol
consumption.
Since the research evidence has shown some divergent results (Her et. al., 1999), the
main analysis was also complemented with a series of analyses in which the assumptions of
the analysis were systematically varied. Using higher rather than lower estimates of the
price elasticities for wine and spirits, we found projected results for some scenarios are
slightly reduced while for others they are slightly raised. Arbitrarily halving the estimated
effects of increases in availability produced substantially lower projections of increased
consumption. On the other hand, projections from the most likely scenarios for long-term
effects produced substantially higher projections of increased consumption. However, for
all scenarios examined, some increase in alcohol consumption was projected.
The research literature is clear about the implications for public health and public order
of an increase in alcohol consumption. With regards to the potential impacts of the recent
privatization deliberation in Nordic countries, Holder et al. (1995) projected that 1 l
increase in the consumption volume per adult was expected to result in a 9.5% increase in
alcohol-related mortality in Sweden and a 9.7% increase in Norway, with alcohol-related
assaults expected to increase by 9% in Sweden and 9.6% in Norway. For Ontario, the
projected increase of 10%±25% in the per adult consumption rate, would involve an
increase of about 0.9 to 2.25 l of absolute alcohol per adult. Based on Ontario's current
level of alcohol consumption, we may expect that an increase in consumption, all else
being equal, will result in increased rates of chronic disease, of alcohol dependence, traffic
and other casualties and violence and social problems (Bruun et al., 1975; Single, Morgan
and de Lint, 1981; Edwards et al., 1994). Therefore, any deliberations on modifying
alcohol control policies are well advised to proceed with caution.
ACKNOWLEDGMENTS: Preparation of this paper was supported in part by the funding from the
Ministry of Health, Government of Ontario, Canada. The authors would like to thank a number of
persons for their comments on an earlier document in developing this paper: Susan Bondy, Philip
Cook, Perry Kendall, Harold Mulford, Gerald Fitzgerald, Jussi Simpura, Kalervo Leppanen, Eric
Privatizing Alcohol Sales, Projections of Changes 371
Single, Tim Stockwell and Douglas West. The authors would also like to thank Rowland Dunning,
Rob Hinrichsen, Christiane Dini and Alexander Wagenaar for discussions of the issues related to the
topic of this paper. The views and opinions are those of the authors and do not necessarily reflect the
policies of the institutions with which they are affiliated or the perspectives of persons who provided
advice. An earlier version of this paper, by the same authors, appeared as part of the following
document: ARF Research Document Series No. 128 (1996), `̀ Projected Effects on Alcohol
Consumption Resulting from Privatization/Deregulation of Liquor Control in Ontario.''
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Privatizing Alcohol Sales, Projections of Changes 373