The Ontario wine industry is ‘at a fork in the road’- Part 1

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Every problem, challenge or impediment to the growth in our industry is caused by a complicated web of past government decisions, regulations and legislation. And at the heart of all this complexity is the collection of tax revenue. There has never been an Ontario government view of our industry as an economic growth sector or a cultural jewel. The Ontario Ministry of Finance holds all the cards and therefore, for almost 100 years the Provincial government has regarded the Ontario wine industry as nothing more than a tax opportunity.

We cannot change the future of our industry without changing public and government perspective of our economic and cultural impact and the opportunities for growth.

The Ontario Craft Wineries (OCW) association started January 2020 much as we started 2019 and 2018 – with hope for change. We travelled to Queen’s Park to meet with politicians and bureaucrats, explaining and fighting for change to our archaic regulatory and tax system.

Our ask and message was and is simple:

  • Stop Import Taxing VQA/100% Ontario Grown Wines – VQA wine sales through wholesale channels like the LCBO and Grocery
  • Eliminate the 6.1% Wine Basic Tax (an additional sales tax) that is collected from small wineries on farm gate sales.
  • Unleash the entrepreneurial opportunities for growth of small businesses in the wine industry.

The 2019 Deloitte Wine Industry Survey highlighted that 48% of Ontario Craft Wineries were losing money and were not economically sustainable. Winery owners were going deeper into debt in order to pay their special provincial wine taxes. The government takes their tax first and “off the top” while the small winery owners sink further into debt – their dreams fading.

The elimination of the 6.1% farm gate surtax would bring 45 wineries from not profitable to break even or a small profit. This is so simple to fix. Just eliminate the tax. Just do it. No other industry is taxed like this — in Ontario or anywhere in the world.

As we entered 2020, we were encouraged by the consultations that resulted in the Ken Hughes report presented to Minister Fedeli in May 2019: The Case for Change: Increasing Choice and Expanding Opportunity in Ontario’s Alcohol Sector.

Ken Hughes:

“Ontario has a once in a generation opportunity to make meaningful change that will allow small businesses to flourish and create jobs while providing choice and convenience for the purchase of beverage alcohol.

“Over the past 92 years, successive governments have incrementally allowed rules, loopholes, institutions, and special interests develop a near-monopoly distribution system that primarily benefits a few larger companies.”

However, the budget came and went with no material changes for our industry. The report was put on a shelf and we never heard anything more about it. And then we had a new minister of finance, Rod Phillips, and his staff to brief and start all over again. Groundhog Day.

In Spring 2020 we faced a WTO Australian Trade Challenge. Federal Excise tax escalation was the trigger for the federal level trade challenge but the Provincial Liquor Monopolies and their practices where at the heart of the issue. Australian wines enjoy significant bulk wine and retail wine market share of more than 25% in Canada. Ontario VQA has less than 10% market share in our Ontario market and less in the Canadian market as a whole. Canada does not have any real wine sales in Australia – less than 1% market share. This is an outrageous attack by a “friend.”

Australia provides agricultural subsidies to wine growers and dumps bulk wine into the Ontario marketplace at price levels below production costs. This wine ends up on the shelves of the LCBO as a component of IDB wines or as cheap Australian “critter wines” in bottles. Ontario Craft Wineries were collateral damage in a clash between big politically connected incumbents. Our government gave us no protection.

The outcome of a federal negotiation on this challenge is that starting in 2022 every small winery in Ontario will have to pay a federal excise tax on every litre of wine they produce. This tax cannot be passed on to the consumer via a price increase. This will quite simply put most of the small wineries in Ontario out of business.

In December 2020, U.S. lawmakers passed a bill which provides a full excise refund to all small wineries in America. The EU approved hundreds of millions of Euros in funding to support the marketing efforts of EU wine producers. There is no wine region in the world that treats its domestic wine grower/producers as badly as Ontario and Canada does.

In 1970 the total land under grapevine in Ontario was 14,000 acres (mostly Concord, Labrusca and hybrids) and there were six wineries in the Province. Common wisdom was that higher value vinifera grapes could not be consistently grown in Ontario due to harsh winters and a short growing season. In 1978 and 1979 brave Ontario winemakers: Karl Kaiser, Donald Ziraldo, Paul Bosc in Niagara-on-the-Lake, Cave Spring in Beamsville and Weis/Vineland Estates in Vineland began planting vinifera grapes. Viticulture practices have evolved and vinifera varietals are doing well. Conventional wisdom has been proven wrong.

 

By 2019, Ontario had 17,000 acres in grapes for wine and 180 wineries. Vineyards were planted in roughly 40% hybrids and 60% vinifera. VQA includes both Vinifera and Hybrids. Ontario VQA wineries sold 2 million cases of VQA wine at an average net price of $8 per bottle. That’s roughly $192 million per year in revenue from 17,000 acres.

In Oregon in 1970 there were five wineries and 35 acres of vines.

By 2016, Oregon had 30,500 acres of vineyards planted to almost 100% vinifera and 725 wineries. Over 30 years, significant capital investment flowed into the wine region centred in the Willamette Valley: Investment in land, vines, equipment, buildings and people. In 2016 Oregon wineries sold 3.4 million cases of wines at an average retail price of $30 per bottle. Roughly $US1.2 billion per year in revenue from 30,500 acres. And created an additional $US300 million annually in direct wine tourism spend.

Planting or re-planting a vineyard is an exercise in patience and having a long-term view on return on investment. It takes four years for a new vinifera vine to produce grapes. And it takes longer than that to get the best grapes from those vines.

Ontario Craft Wineries make great wine. Our pricing offerings range from value priced to ultra premium wines at higher price range. Ontario Craft Wines VQA wines are winning international acclaim and prestigious recognition. The prestigious Decanter International Wine Awards awarded over 300 medals to Ontario Craft Winery wines in 2020 alone. Our wines are consistently competing and winning against wines from everywhere in the world. And yet … We struggle to break through 10% domestic market share and we are barely present on the wine lists of GTA restaurants and hotels.

Oregon continues to see an inflow of capital investment in vineyards and wineries because there is an economic reason for doing so. In Ontario, we do not have an economically viable business model for attracting investment.

Oregon is a high cost of production area like Ontario. Labour rates are similar to Ontario. Land values are higher. Taxes across the board are lower in Oregon.   Oregon wineries can sell and ship their wines anywhere in the U.S. Provincial Liquor Boards prevent the easy flow of shipments of wine from Ontario to other provinces. Oregon wineries can sell their wines directly to consumers anywhere in the U.S. and ship to the consumers anywhere in the U.S. They are now exporting a growing amount of their wines.

Oregon wineries can sell their wines at wholesale prices (based on volume purchases) directly to big box retailers or small independent wine shops in any state in the U.S. as they wish at whatever price the market and consumer dictates for their product.   There is no State Liquor Store.

In Oregon wineries pay local municipal taxes at lower agricultural rates. Their buildings are taxed as farm buildings. In Ontario, small craft wineries that are located on agricultural land are taxed at commercial and industrial tax rates on their buildings.

The Direct-to-Consumer (DTC) channel now represents 10% of all wine sales in the U.S. and is growing at more than 10% per year. This is the channel with the highest profit margin for wineries. In the U.S., virtual wine brokers have entered the market to put selected offerings from different wineries in Direct-to-Consumer offerings. Ontario consumers are pre-conditioned to buy their alcohol from the LCBO. Buying direct from wineries in Ontario is a growing trend and this was accelerated with the COVID crisis, however, it still represents less than 1% of the 10% VQA of the total wine sold in Ontario. And Ontario Craft Wineries suffer from a lack of free inter-provincial trade.

Oregon does not produce high volume, low value bulk grapes on their premium land. They do not produce bulk wine for blending with imported wines to produce international/imported blends. They focus on Pinot Noir, Chardonnay and Pinot Gris as single vinifera varietals that grow well in their climate and soil and that produce wines that consumers love.

Part 2 will look at the way forward for Ontario’s Craft Wineries.

Carolyn Hurst was approached by Wines In Niagara to offer her thoughts on behalf of the Ontario Craft Wineries Association on the state of the industry as we head into 2021. She is also co-owner of Westcott Vineyards with her husband Grant Westcott.

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