Uncorking Provincial Borders

Will the long awaited changes resulting from Bill C-311 help BC Wineries thrive?

What is Bill C-311?• The Federal

Importation of Intoxicating Liquors Act (IILA) from 1928 prevents shipment of alcohol between provinces unless it is arranged through provincial liquor agencies

• Bill C-311 is an amendment to the IILA

What Bill C-311 allows

• The importation of wine from a province by an individual for personal consumption– Not for resale or commercial use– “brings the wine, or causes it to be brought

into another province”

• In quantities as permitted by the laws of the destination province

Bill C-311: Where are we at?

• On June 28, Bill C-311 became law

• Federal law now allows individuals to import wine between provinces for personal use

• Subject to law/regulation of the destination province

Dragging the Provinces kicking & screaming

•BC adopting a weak “let’s let the Provincial Liquor Boards work it out” attitude. •Ontario implementing a task force•Wording of Alberta and Manitoba law already allows importation for personal use•See WINELAW.CA for ongoing updates

PROV. LIQUOR BOARDS

BILL C-311

GOVERNMENTMONOPOLY

FREE TRADE BETWEEN PROVINCES

Per capita wine consumption

Wine sales in BC by Origin

The Opportunity

• Canadian per capita wine consumption continues to grow but we are just now approaching the world average

• In BC, sales of BC VQA wine still only represent <20% of all wine sold

• Canadians are drinking more wine and there is room for Canadian wineries to capture more of the growing domestic market

• Because of the IILA, only a small fraction of BC wine labels are currently sold outside BC

Profitability of Dtc sales vs other sales channels

SOURCE: M. Hicken – “FreeTheWine” website (2008)

Out-of Prov. Winery Visitor

Online Customer

Shares with others (word-

of-mouth)

More online orders / Out-of-province

“fans”

More winery visitors

DIRECT TO CONSUMER

DTC (Direct to Consumer) wine sales – US numbers

• DTC sales accounted for 3% of total wine sales for the year ended April 2011

• Breakdown of 3%:– Phone, internet, clubs 40%– Wineshop sales 60%

• DTC more important to smaller wineries• DTC grew by 11.6% - over twice the

overall rate of wine sales growth in the US(SOURCE: ShipCompliant & WinesVines DATA)

What do DTC sales mean for a small to medium sized winery?

• Moss Adams study (no Canadian study available)

• CA, WA & OR wineries

• 2007 & 2008 data• 71% of respondents <

50,000 cases

Findings regarding Sales Channel Strategy

Smaller wineries are more reliant on DTC sales than larger wineries

Wineries that sell more wine DTC tended to have better revenue per case sold

Findings regarding Sales Channel Strategy

Wineries that sell more wine DTC tended to have better margins

Findings regarding Sales Channel Strategy

Findings regarding Sales Channel Strategy

Wineries with a higher proportion of DTC also tended to have higher selling and admin cost

What does DTC growth mean for a BC Winery?

ASSUMPTIONS• $1,500,000 wine sales from 7500 case volume• Retail prices: reds = $26.00; whites = $21.50• Sales mix 58% red; 42% white• Sales channel mix BCLDB 40%; LRS stores

30%; DTC (wineshop) 30%• Margins & balance sheet ratios = StatsCan

2010 data for BC wineries < $5 million in sales

10% shift from BC LDB to DTC

Before

Gross margin = 53%

Pre-tax earnings = $40,000

RONA = 4.0

Interest coverage = 1.62

Net revenue/bottle = $16.67

Valuation* = $945,000

After

Gross Margin = 54.85%

Pre-tax earnings = $81,500

RONA = 5.4

Interest coverage = 2.25

Net revenue/bottle = $17.35

Valuation* = $1,318,500

* Assuming a EBITDA multiple of 9

Worth the Effort?

• An investment of $20,000 generated an after tax return of $35,978; ROI = 180% in first year!

• By shifting sales from government stores to DTC, your winery keeps significantly more of the retail price.

• Incremental costs are fairly minimal, therefore most of the increased margin falls right to the bottom line

• In our example, this one change increased the value of the winery by over $370,000

SUMMARY• Canadians are drinking

more wine• Bill C-311 should make it

easier for BC wineries to sell more wine DTC in other provinces

• The DTC sales channel is the most profitable for BC wineries

• Selling more wine DTC vs. Government stores improves profitability & ultimately value for BC wineries

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