LCBO purchasing practices need upgrade: Ontario auditor general

Report says Ontario liquor agency’s fixed pricing structure means it's not getting lowest price

December 6, 2011
by Purchasing b2b staff

TORONTO: The Liquor Control Board of Ontario’s (LCBO) mandate and fixed pricing structure limit its ability to use its massive buying power to negotiate the lowest possible wholesale prices, Ontario’s auditor general Jim McCarter says in his 2011 Annual Report.

“The LCBO should assess the feasibility of negotiating as low a price as possible with its suppliers,” McCarter said after the report was released. “With retail prices still kept at desired levels, this could result in higher profits for the province while still encouraging responsible consumption.”

The LCBO, a Crown agency, has a mandate to encourage responsible alcohol consumption while operating as a profitable retailer, said the auditor general’s office. Its net income has risen 80 percent in the last 10 years, as have the dividends it pays the province. The agency contributed $1.5 billion to the provincial treasury in the 2010/11 fiscal year.

The LCBO adheres to a fixed pricing structure that bases the wholesale price paid to suppliers on a percentage of the retail price at which it wants to sell a product. The LCBO gives suppliers a price range within which it wants to sell a particular type of product. Suppliers then select a retail price within the LCBO’s range and apply a fixed percentage to set their wholesale price. Sometimes, if suppliers submit significantly lower quotes than the LCBO expects, the LCBO will ask them to raise their wholesale price.

The auditor general said that if instead of using its fixed pricing structure, the LCBO found out the lowest wholesale price the supplier was willing to accept, it could then assess whether that cost could generate increased profits while continuing to meet its retail price objectives. While this would be a significant change from the traditional way of determining the wholesale cost, it might enable the LCBO to take advantage of its buying clout. The LCBO could improve some of its processes related to purchasing and monitoring product performance to better demonstrate that these processes are fair and transparent, said the auditor general.

LCBO spokesperson Karen Mortfield said the agency’s purchasing practices are “well-established” and similar to those of other liquor boards in Canada and abroad. The province’s governments have endorsed the LCBO’s standard mark-up structure for good reasons, Mortfield said, including certainty and transparency for suppliers. “They know exactly how their products will be priced and that the same rules will be applied to everyone,” she said.

The report recommends the LCBO discuss with the Ontario Minstry of Finance the benefits and costs of changing its pricing structure. Mortfield said the agency plans to follow through on that recommendation.

An April 2011 survey indicated that among Canadian provinces, the LCBO had the lowest wine prices and the third-lowest prices for beer and spirits.