Agriculture Committee on April 25th, 2013

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

My question has a provincial flavour to it because we're talking about the LCBO, but on the supply chain I guess I'm looking at it more from the angle of consumer access to your product.

Right now consumers know that if you want to buy spirits, you have to go to the LCBO. If there were another type of distribution chain outside the LCBO, would you expect consumption to go up, or would you simply expect the consumer to say, “Boy, I'm really glad I can go to any store now within a 500-metre distance and not drive two kilometres to the LCBO”?

Do you find that the distribution chain in effect right now is actually inhibiting sales, or are there other factors at play that might be taking sales away? It might be price points. It might be all sorts of things.

[Jan Westcott]

Those all come into play, but they're all related.

Absolutely. Convenience for consumers has become a more and more important factor, and so if you have few places.... I'll give you an example. Quebec has 23% of the Canadian population, 12% of the national spirits sales. Now, they are skewed to wine culturally, and I understand all of that, but do the think the fact there are 18,000 grocery stores, depanneurs, corner stores selling beer and wine has had an effect on the consumer in the last 50 years? You betcha. Absolutely. So convenience plays a very significant role.

Related to that is the cost of some of those systems.

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

Right.

[Jan Westcott]

You know, I'll be honest. Government is not the most efficient operator in many cases. There are some that are better than others, but—

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

So that adds to the price. You're basically saying if there were a more efficient, more effective distribution system, the cost of your product would go down, which means that it would easier for consumers to buy more of it.

[A voice]

Margins.

[Jan Westcott]

I'm not sure the cost would go down, but the margins would improve for the industry. You'd have more money to invest to drive your business forward.

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

In my remaining minute here, could you tell me about how you would exploit an export market? Can you give me an example of an export market and how you would export your product into that market to take full advantage of it?

[Jan Westcott]

As many people here will know, the spirits industry was a strong supporter of the free trade agreement with Colombia. We knew that some of our product was making its way to Colombia—not necessarily through official channels, but it was getting into Colombia. We saw an opportunity, almost as a foothold in South America, for Canadian whisky to do that, and we have companies today—I'm not in a position to tell you which ones—that are working.... Colombia had fairly high or differential taxes on local product versus imported product. Over time, that differential is being decreased—that's what the trade agreement achieved—and we have companies that are actively working to take Canadian whisky into that market.

The other thing that happens is that Canadian whisky becomes recognized as a geographic indication. So there's an ability to protect the reputation and the legitimacy of our product when it goes into that market.

So that would be one example. I would say that in the next three, four, five months, I hope, you'll see announcements of people doing things in that particular market to try to take advantage of it, starting in Colombia, which then becomes a base to look at other potential export countries in South America.

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

You're saying that the industry has the production capacity to be able to address those new markets.

[Jan Westcott]

Yes, absolutely.

[The Chair, Conservative, Merv Tweed]

Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you all for coming today.

Mr. Westcott, I've read your presentation and at one point you say:

Arbitrary and anachronistic regulatory product category definitions used to classify alcohol products for either taxation purposes or for access to various retail sales channels have fueled an increase in these various alternatives to distillation. Many regulators have been slow to react to these market changes.

First, I would like some examples of the slow reactions to market changes other than interprovincial transfers, which we've talked about already.

Second, you say:

...CFIA has [been] shown to be so ineffective in enforcing non-misleading labeling prohibitions that the provinces of Ontario and Quebec adopted their own beverage alcohol labeling standards....

I'm wondering if you can enlighten us a little more on both of those issues, because our goal is actually to come up with recommendations to the minister to make your industry a little more competitive. Could you address those two and give us specific things you would like changed, so we can help you?

[Jan Westcott]

Okay. We all start with fermentation. It doesn't matter whether you're in beer, wine or spirits, you create a fermented beverage. In our case, we take that one step further and distill it to take out some of the essence of the underlying agricultural material, whether it's grapes or grain, or whatever it is.

Modern technology is now allowing people to do other things—not distillation, but very similar things—to products to take out the original flavours and some aspects of the original grains. So you have things like reverse osmosis, centrifugation, ion exchange, ultra filtration, crystallization, which essentially take wine and beer and strip it down to get almost to the same type of thing. You get a very clean liquid, with no or very few congeners in the liquid that's left, then present that to consumers as if it were a spirit.

Here is the famous example. The law in Canada, the Food and Drugs Act, says that to meet the definition of a vodka in Canada, it has to be odourless, colourless and tasteless. We had a company that was essentially a brewer that was producing material, calling it vodka—the bottle said vodka on the label—and when we went to the CFIA, the CFIA said, “We can't really do anything about that because it's vodka flavoured”. We were sitting there saying, “Excuse me. It's what? Did you not see in the Food and Drug Act...? They're buying a flavour ingredient from a flavour company, claiming that it's a vodka flavour. So it's obscene, it's obscene.

[Frank Valeriote, Liberal, Guelph, ON]

So that was one.

[Jan Westcott]

That was one. Sorry, could you just refresh me—

[Frank Valeriote, Liberal, Guelph, ON]

In the first question, we were talking about the regulators being slow to react to market changes.

[Jan Westcott]

I think the best example is whisky. Whiskies around the world have to meet a couple of tests. One, it can only be made from grain. Two, it has to be distilled. If you distill it all the way, you get vodka because you take all the grain essence out. Three, it has to be matured in wooden casks. If it doesn't meet those things, it's not whisky. And it has to be 40% alcohol.

We had to sue a previous federal government in Federal Court to get the government and, to a certain extent, the CFIA to change the legal definition of Canadian whisky so that it said it had to be made in Canada, that it had to be aged in Canada, and that it had to be 40% alcohol. We had to sue the government to get that change.

The reason we needed that change was that when it goes to other countries, we don't decide what scotch whisky is in Canada. Canada refers to the rules in the U.K. for what defines scotch whisky, and if you meet those rules you can call it scotch whisky in Canada, or Irish whisky or bourbon, or those kinds of things. So we needed clear Canadian regulation that would say that this is what Canadian whisky is, so that when we go to Japan the Japanese government can differentiate between real Canadian products and fake Canadian products.

[Frank Valeriote, Liberal, Guelph, ON]

Along that same line, I know that in the agricultural industry there's a certain harmonization that we're seeking or working toward between, say, American regulations on food production and Canadian one, so that we're competitive and not allowing products into Canada that meet lower standards, frankly, than our own farmers meet.

Do we have any of that happening with respect to your industry insofar as its content, or anything like that, puts us at a disadvantage?

[A voice]

[Inaudible--Editor].

[Jan Westcott]

No. As C.J. says, liquor boards police that pretty effectively. They have very sophisticated labs. I think Ontario and Quebec probably have amongst the most sophisticated beverage alcohol laboratories in the world. That's not really a factor. As for Canada-U.S., we're relatively seamless. As I say, we continue to be the largest-selling whisky in the United States, so—

[The Chair, Conservative, Merv Tweed]

I have to stop you there.

Mr. Storseth.

[Brian Storseth, Conservative, Westlock—St. Paul, AB]

Thank you very much, Mr. Chair.

Witnesses, as always, it's good to see you. We've had some very good information today, some of it a little more disturbing than the rest.

Ms. George, I'd first like to talk you. Your comments about Alberta surprise me. This is a province that is reliant on trade, enterprise, and entrepreneurship. From where are you experiencing the resistance at a certain level? Is it in the bureaucracies? Is it political?

[Shirley-Ann George]

My understanding is that the association that represents Canadian liquor retailers has some people engaged there who are former members of the Alberta government and have stepped up and said they don't want the competition.

[Brian Storseth, Conservative, Westlock—St. Paul, AB]

Thank you.

Mr. Westcott, as always, it's good to see you. This has been very interesting.

One of the things that I've found interesting about this study is the history. We had some of beer guys here with the history of the beer industry in Canada, and we're had the history of your industry in Canada.

Really, it's quite rich and quite deep. It's something that sometimes I think penalizes you, because some of the legislation that affects you comes from that long history and sometimes doesn't get updated. Would you say that's part of the problem with some of your current issues?