Agriculture Committee on April 18th, 2013

[The Chair, Conservative, Merv Tweed]

Good morning, everyone. Welcome to meeting number 74 of the Standing Committee on Agriculture and Agri-Food. The orders of the day, pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, January 31, 2013, are for the study of the agricultural and agrifood products supply chain (beverage sector). That is where we're at today.

Joining us from the Canadian Vintners Association is Dan Paszkowski, president and chief executive officer. By video conference from Kelowna, British Columbia, is Dave McAnerney, president and chief executive officer of Sun-Rype Products Ltd. Welcome.

Basically we'll open the meeting with presentations by both of you, and then we'll move to the committee for questions.

I'll ask Mr. Paszkowski to start, please.

[Dan Paszkowski, President and Chief Executive Officer, Canadian Vintners Association]

Thank you, Mr. Chair.

Good morning, everybody. As noted, my name is Dan Paszkowski. I'm the president of the Canadian Vintners Association, better known as the CVA.

I'd like to thank you all for the occasion to provide the Canadian wine industry’s perspectives on various issues and challenges facing our sector, and the opportunities to improve our contribution to the Canadian economy, and the role government can play in the development and success of this vibrant industry.

The CVA is the national voice of the Canadian wine industry, representing all scales of production and accounting for more than 90% of the wine produced and sold across Canada. CVA members are engaged in the entire value chain: grape growing, farm management, grape harvesting, wine production, bottling, retail sales, research, and tourism.

The Canadian wine industry produces 100% Canadian and VQA wines as well as International Canadian Blended, ICB, wines. Both are significant economic drivers to the Canadian economy. We recently completed a landmark national economic impact study, which found that 100% Canadian and VQA wines contributed $3.7 billion, including tourism, to the Canadian economy, and wines blended in Canada from imported and domestic content contributed an additional $3.1 billion. This is an impressive figure—$6.8 billion combined—and is the result of 500 grape wineries and 1,300 independent grape growers across the country.

Wine is synonymous with value-added production. Canadian wineries capture greater revenue than most agrifood products, not only by crushing grapes and producing wine but also by packaging, marketing, and sales. From vineyard development and grape cultivation to the final sale, wine is a highly complex process that involves numerous suppliers, distributors, and service providers throughout the value chain, compounding the economic benefits. Our impact extends well beyond direct sales and employment, with strong linkages to tourism, retail sales, bars, and restaurants.

Our recent study, which was quite conservative in its figures, concluded that each bottle of Canadian-produced wine generates an average of $31 in economic impact. This includes more than $1.2 billion in contributions to government revenue through tax and liquor board markups. Furthermore, the domestic wine industry helps support more than 31,000 jobs and is motivation for more than three million tourists visiting Canadian wineries each year. Put into context, this is four times the number of visitors to the Vancouver Olympics.

The number of wineries in Canada has grown by 300% in the last decade, with more than 100 wineries opening in the last five years. Most are small businesses focused on premium wines. The investment made by the wine industry has been a direct response to the growing consumer interest in wine and wine tourism.

Wine is increasingly becoming the beverage of choice in Canada and presently accounts for 30% of the beverage alcohol market, up from 18% in 1995. However, Canadian wine industry sales account for only 30% of total wine sales while our foreign competition commands 70% of our domestic market.

At 30%, Canada has the lowest wine sales market share of any wine-producing country in the world. For example, South Africa owns 100% of its market, Argentina 99%, and the U.S. 68%, to name just a few.

ICB wines represent 25% of domestic wine sales, yet their market share has dropped almost 8% since 2000 while imports have grown 6%.

One hundred per cent Canadian VQA wines have experienced 2% growth in market share over the past decade, yet represents only 6% of total wine sales. Disappointingly, these premium wines represent less than 4% of total wine sales in 10 of 13 jurisdictions across Canada.

More than 200 million bottles of Canadian wine are sold each year in domestic markets, each contributing more than $31 in value to our economy. By comparison, a 2010 KPMG study prepared for the Wine Council of Ontario concludes that the sale of imported wine contributes a mere 67¢ per litre.

According to a 2012 Bank of Montreal report, Canada’s wine industry has experienced 3.1% growth on average since 2005, outpacing the overall economy.

The Canadian wine industry’s objective is to grow domestic wine sales in all available wine sales channels from coast to coast. With additional sales opportunities, the Canadian wine industry will build our market share beyond 30% towards a target of owning 50% of the domestic wine sales market.

This is good for the Canadian wine industry and good for Canada. Based on our economic study, we know that every $1 million increase in Canadian wine sales will lead to a further $3.1 million increase in gross output, including revenues, taxes, jobs, and wages across the wine industry value chain. This is an excellent, savvy investment in our economy.

Canada is one of the fastest growing wine retail markets in the world, with per capita wine consumption increasing by more than 37% over the past seven years. Supportive federal government policy can assist the domestic wine industry in becoming more competitive and increasing its share of retail wine sales in Canada.

The following three areas should be considered in support of adding further value to Canada’s wine economy.

First is Growing Forward 2. We need to support a domestic market promotion campaign, including major city premier wine tasting events, to build knowledge and relationships with consumers, restaurants, and retailers. We should recognize a national wine week, providing an annual opportunity to celebrate Canadian wines and wine tourism across Canada. Furthermore, we should partner with the Canadian Tourism Commission to build on the synergies between wine and tourism, including studies, marketing, and promotions.

Second is direct-to-consumer delivery. There should be federal engagement with provincial governments to remove interprovincial barriers to wine trade, in support of federal Importation of Intoxicating Liquors Act amendments, the act that passed in June of last year.

Third is tax and regulation. We need to review the tax treatment of Canadian grape content in domestically produced blended wines to support and encourage greater inclusion of domestic ingredients. We should ensure that the proposed repeal of container size regulations takes place to reflect the competitive impacts on the Canadian wine industry. And we should index the small business tax deduction qualifying asset base thresholds to reflect inflation dating back to its origin in 1994, while indexing future asset test thresholds for inflation annually.

In conclusion, Canada’s wine industry is ripe for success. We are a value-added success story, a model for the agricultural sector, with domestic prospects to sustain our growth ambitions and new opportunities for wine country tourism, new jobs, and enhanced government revenues.

We believe that Canadian wine should occupy the majority of the shelf space in our domestic liquor outlets, not because stores are forced to do so but because Canadians prefer Canadian wine and demand it. We've seen VIA Rail shift to 100% Canadian wines on their menus, but our national airline, Air Canada, lacks a policy to guarantee a Canadian wine option on its flights. This is a disgraceful message to send Canadians and international visitors.

The CVA believes that Canadian wine can and should represent at least 50% of wine sales in Canada, but this will require government's concerted support and investment. The return on that investment is exponential for our local communities and national economy.

I'd like to conclude by inviting each one of you to become an ambassador for Canadian wine. So next time you travel, look for Canadian wine and demand it. Request Canadian wine at the meals and special events you attend, offer it to your guests and serve it with pride. Speak with your provincial counterparts about direct-to-consumer regulations to allow for the full implementation of Bill C-311. And finally, support Canadian wineries through tax and regulatory incentives, which, in the end, increase overall tax revenues through gains in market share.

Thank you. I look forward to your questions.

[The Chair, Conservative, Merv Tweed]

Thank you.

I don't want to correct your information, but actually I believe Canada has two national airlines, WestJet and Air Canada.

[Voices]

Oh, oh!

[The Chair, Conservative, Merv Tweed]

Mr. McAnerney.

[Dave McAnerney, President and Chief Executive Officer, Sun-Rype Products Ltd.]

Thank you, Mr. Chair.

Hopefully everyone can hear me all right at that end.

[The Chair, Conservative, Merv Tweed]

Yes, very good. Thank you.

[Dave McAnerney]

I certainly appreciate the opportunity to speak with the standing committee today about our industry. For those of you not from western Canada, I thought I'd take a little bit of time to talk about Sun-Rype. If you're from western Canada, you're probably quite familiar with our brand.

Since 1946 Sun-Rype has been western Canada's leading juice brand, with products that include our “not from concentrate” apple juice, which is the number one juice SKU in the shelf-stable category, a product that supports apple growers in B.C.'s Okanagan fruit-growing region. We rely on fresh apples versus imported concentrates.

We're also known for our leading 100% fruit-snack brands, such as Fruit to Go and FruitSource, which are made using proprietary processes developed at Sun-Rype.

[The Chair, Conservative, Merv Tweed]

Dave, can I interrupt you for one minute, please?

[Dave McAnerney]

When Sun-Rype commercialized this process in the early 1990s, we were the only company globally making 100% pure fruit snacks on a commercial scale.

[The Chair, Conservative, Merv Tweed]

Dave, can I ask you just to stop for—

[Dave McAnerney]

Yes.

[The Chair, Conservative, Merv Tweed]

Because we're interpreting as you go, may I just ask you to pause occasionally and speak a little bit slower to help us out. Thank you.

[Dave McAnerney]

Okay.

Sun-Rype was recently selected as one of three companies to receive a Grant Thornton food industry leadership award, given to companies that embody the spirit of leadership, innovation, and business success.

Innovation is clearly in our DNA and Sun-Rype is aligned with Agriculture and Agri-Food Canada on the importance of innovation. We're also expanding geographically, something that provides both challenges and opportunities.

Sun-Rype made acquisitions in 2010 and 2011, and now own and operate two facilities in Washington State, along with our main facility in Kelowna, British Columbia. We now employ over 320 employees in Canada and 125 employees in the U.S., making a considerable economic impact in both the Okanagan Valley and central Washington.

In 2008, we expanded our distribution in the U.S.A by leveraging relationships with North American retailers such as Costco and Safeway, and we now have over 5,000 points of distribution in the U.S. for our fruit snacks. We're also selling beverage products in selective channels in the U.S.A.

While we believe we have an exciting and differentiated product portfolio, brand awareness is critical to success in new markets, such as the U.S.A, and building awareness is expensive and takes time. Ultimately, growth through acquisitions, innovation, and geographic expansion are all critical to surviving in today's tough economy, as ever contracting margins make growth an absolute requirement.

We operate in a highly competitive North American grocery industry, so despite having a strong brand, leading markets here in our home market, and a track record of leading innovation, Sun-Rype is struggling financially.

A number of factors are challenging our profitability: first, the incredible scale and leverage of major customers who are constantly pushing for lower prices. Second is the scale of our competitors. We compete against multi-billion dollar multinational companies, and in a flat economy these companies are willing to sell at low or no margin in an effort to secure market share and force industry consolidation. Third is commodity prices. In 2010 our key commodity prices in fruit juice concentrates and purees increased over 50%, and given the competitive market conditions we were unable to pass along price increases. Finally is the factor of category declines. The shelf-stable juice category in which we compete has seen significant declines in the last few years. So consumer tastes are changing and innovation is required to address new trends.

The challenge is the cost of innovation. A single stock-keeping unit, or a SKU, now costs over $1 million to launch nationally and the likelihood of success is low, so we need every bit of support our government can offer to small, innovative food companies in Canada. Investment in Canadian food companies capable of growing on a North American and global stage will have a strong payback for Canada in terms of jobs and other revenue streams.

There is a clear consolidation trend going on in our industry that is leading to job loss. The FBC reports that since 2007, more than 85 processing plants have closed and scores of multinationals have moved production south, resulting in increased imports, while exports decrease.

We believe Canada has done many things well to support food companies, including SR and ED credits, which Sun-Rype has taken advantage of over the years. Moreover, the CFIA, which is often criticized, is taking a much more proactive role in joint investigation of food safety concerns and labelling requirements than their U.S. counterparts, such as the FDA. We've found the Kelowna-based personnel to be professional and responsive to both consumer issues and company requirements.

Finally, we want to note that new programs, such as the digital technology adoption pilot program, are appreciated by Sun-Rype. But despite these positive benefits in operating in Canada, small food companies need even more support to remain viable. As such, I ask that our government consider options to improve the ability of small innovative food companies to compete. Options to consider include expanding programs for funding students involved in R and D and marketing of new products, and with respect to capital expenditures, low interest loans and grants to fund capacity expansions and new technologies. At present, we are looking at payback periods of more than six years in a high-risk industry. Such payback periods will ultimately lead to a lack of investment in Canada without government support.

Finally, I ask that we ensure that the standards to which we hold our domestically produced products are held as well for imported products, and this would apply to the level of scrutiny the manufacturing facilities are under, as well as labelling requirements. As an example, just last week I noticed products imported from Poland that had no French on the label, which seemed odd to me.

In closing, I wish to emphasize the importance the small food companies have in creating employment in Canada. We're under immense pressure from local food companies, and without stronger support, Canada will continue to lose jobs to the trend of consolidation.

I thank you for the opportunity to address the standing committee today.

[The Chair, Conservative, Merv Tweed]

Thank you very much.

Go ahead, Madame Raynault.

[Francine Raynault, NDP, Joliette, QC]

Thank you, Mr. Chair.

My question is for the president of the Canadian Vintners Association.

You say that Canadian wine producers hold 30% of market share, which is the smallest in the world. Your objective to attain 50% is commendable, but will our climate allow you to increase production? What are you going to do to reach that objective?

[Dan Paszkowski]

Thank you.

We do have boundaries that we'll be challenged to overcome. We will never be as large a wine-producing country as many others around the world, just based upon our climate and our geography. We believe we can make the 50% target. We do have new opportunities in Quebec for wineries. We have a growing wine industry in Nova Scotia. There still are parts of Ontario and parts of British Columbia that provide new opportunities for growth in grape growing.

Subtle changes in climate also open up new areas to us, which we haven't been able to plant in before. British Columbia is a case in point. There are small areas now farther north of the Okanagan where planting is successfully taking place, but there will have to be investments made in tilling the land, planting grapes. Grapevines take three to five years to mature, so it's a long-term process.

If we get the support of our liquor boards across Canada, we believe we can meet that 50% target within, say, 2015 to 2020. It's entirely possible. It'll be possibly faster if the liquor boards are willing to support Canadian wines across this country, as I mentioned. It is shocking to see the statistics, to find that 10 of 13 liquor boards sell less than 4% of total wines that are VQA.

We get very, very small opportunities for sales. We work well with the liquor boards, but there are opportunities for greater sales. In the province of Quebec, for example, VQA sales represent less than 1% of total wine sales in that province. I see there being great opportunities in Quebec to sell more Canadian wine products.

[Francine Raynault, NDP, Joliette, QC]

What are you going to do to increase the sales of Canadian wine?

[Dan Paszkowski]

A big part is to win at home. That was an area that I just mentioned in terms of the recommendations. Growing Forward 2 now offers opportunities to promote our wines in our own domestic market, where in the past the funding was only available to grow export markets. The most successful wine-producing jurisdictions around the world have first built their own domestic market. Once they conquered their domestic market, they moved into the export market.

We export about $30 million per year of wine, and we want to build our export markets. But to be successful, we have to win at home, and to win at home we have to be able to compete with our competition. On a regular basis, we see California, Europe, Australia, and New Zealand doing premium wine tastings in major metropolitan areas across the country. Liquor boards love it. We can't do that. We don't have the funding to be able to do it. Federal dollars have not been available up until now with Growing Forward 2. We had a small program called Canada à la Carte back in 2000, which supported the promotion of Canadian wines across the country. That program was cut more than 10 years ago, and we're hoping to revisit that.

Once we're able to show Canadians the quality of our wines, we believe liquor boards will start carrying our wines and we'll be able to increase our sales and move our market share from 30% to 50%. Prior to the free trade agreement, we did have 50% of the market. The world changed and we're starting to grow that back again. We're very confident we can do it, but we need a little bit of support to get there.

[Francine Raynault, NDP, Joliette, QC]

As you know, the Joliette region used to produce a lot of tobacco. Nowadays, many producers are turning toward wine production.

What can we do to further the development of rural communities that have converted to wine production?

[Dan Paszkowski]

You mentioned tobacco. Research and development can support in some ways. For example, some of the tobacco kilns in those regions are now being turned into drying kilns for grapes in order to produce wines in the appassimento style. There are opportunities there for new products, and that's extremely important in new wine-producing regions.

As well, for example, excise tax support of international Canadian blends: these are wines that are blended from domestic and international wines. In some of the areas, the grapes that can be grown would be more conducive towards going into the international Canadian blended wines. There are opportunities there for growth, so research into new grape varietals in cool climate centres would be helpful as well. But I mentioned in my presentation that the tax dilemma we have with international Canadian blended wines is that we don't pay excise tax on 100% Canadian wines, but we do pay excise tax on wines that are not made from 100% Canadian content products.

Twenty-five per cent of wine sales in Canada are international Canadian blends, which can have as much as 40% and 50% Canadian content in those blends, but they don't get the same benefit as 100% Canadian wines even though they're using the same grapes that are grown in Canada. There are opportunities there for growth. If we are able to find a way to exempt the Canadian content from tax, in those wines we'd be able to make greater investments in new regions, in new technologies, and in growing the 100% Canadian side of the market as well.

There are some areas that can be helpful.

[The Chair, Conservative, Merv Tweed]

Thank you.

Mr. Lemieux.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you, Chair.

Just to follow up on that, if 100% Canadian wines aren't taxed as much as Canadian international blends, I would think that's actually a good thing for the Canadian wine industry. I mean, 100% Canadian wines would be a good thing. My understanding with Canadian international blends is that they might go as high as 40% to 50%, but they might go a whole lot lower too. I would actually think that it would be a favourable tax status for 100% Canadian wines and would be more advantageous to our grape growers and to our Canadian homegrown wine industry.

[Dan Paszkowski]

The premium side of our business has to grow. Its history has grown from international Canadian blended wines with the funds up there invested in tourism, to help develop tourism routes and to help new 100% Canadian wineries to develop.

You're absolutely correct. We're not asking for an excise tax exemption or program on the entire content of the international Canadian blends, only on the Canadian content.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Right—