A. Overview

In Canada, the beverage industry is a very diverse industry that can be divided into two categories: alcoholic beverages and non-alcoholic beverages. The beverage supply chain includes producers, processors, distributors, commercial partners, consumers and the government. Grape, fruit and grains producers are involved in production. The processing step includes facilities that make juice, carbonated soft drinks and bottled water, as well as wineries, breweries, distilleries, bottlers and packers. The main distributors are provincial liquor boards, retail chains and restaurants.

1. Non-alcoholic beverages in Canada

The non-alcoholic beverage category includes fruit and vegetable juices, fruit drinks, carbonated soft drinks (CSDs), tea, coffee and bottled water. According to the Beverage Marketing Corporation, coffee had the largest market share in 2009, with 16.6%, followed closely by CSDs at 16.3%. Tea came in third with 12.9%, followed by bottled water and other beverages. In 2012, the non-alcoholic beverage sector exported $539 million worth of coffee and tea products, and $155 million worth of soft drinks and bottled water. The industry directly employed nearly 15,000 Canadians in 2012.[75]

The low profit margins for processing plants coupled with stiff competition have led many processing plants to consolidate their operations. Over the last few years, a number of plants have closed or relocated. This has directly impacted agricultural producers. In order to remain competitive, the non-alcoholic beverage industry must innovate and respond to new trends. Aware that consumers are looking for products with health benefits, the industry has developed a range of low-calorie products and products with functional properties.

2. Alcoholic beverages in Canada

A beverage containing 1.1% alcohol by volume (abv) or more is considered an alcoholic beverage and must meet the labelling and compositional requirements found in Division 2 of the Food and Drug Regulations. However, definitions in provincial legislation may vary.[76]

In 2012, the dollar value of alcoholic beverages consumed per capita in Canada was estimated at $317 for beer (80.3 L), $225 for wine (16.9 L), and $182.10 for spirits (7.5 L). Beer had 44% of the market share, while wine had 31% and spirits 25%.[77] For the fiscal year ending on 31 March 2012, nearly $21 billion worth of alcoholic beverages were sold, up 3% from the previous year. Over the same period, the distillery industry exported products valued at $472 million, followed by beer exports at $219 million and wine at $41 million.[78]

One of the unique characteristics of the alcoholic beverage industry is that alcoholic products cannot be shipped across provincial borders. Interprovincial alcohol shipments require approval from the provincial liquor boards. Therefore, the provincial liquor board is responsible for distributing alcoholic beverages, and has a monopoly on selling them. It can be difficult for Canadian products to secure a presence on the shelves of liquor board establishments. That is why a number of companies are turning to other methods to distribute their products, such as wine tourism, which is closely linked to the sale of Canadian products. For example, in order to encourage the consumption of Canadian products, VIA Rail offers Canadian wines exclusively.[79]

B. Marketing and competitiveness

1. Interprovincial barrier

On 28 June 2012, the Importation of Intoxicating Liquors Act was amended, making it possible to import wine across provincial borders for personal use in Canada. While this eliminates the barriers to importing wine at the federal level, witnesses pointed out that provincial governments are not permitting the free movement of wine across provincial borders.

It removed the federal impediment but still left all provincial authorities to regulate and to do whatever they wished in the management of liquor, alcohol, and wine within the province.[80]

Provinces reacted differently to the amendment to the Importation of Intoxicating Liquors Act. Some authorized wine importation for individuals without restrictions, while others set limits to the quantities that could be imported. Manitoba and British Columbia were among the first provinces to authorize individuals to import wine, while Alberta and Ontario expressed reservations about opening provincial borders to wines. Ontario is benefiting by shipping its wine to other provinces, but it has not opened up its own borders.[81] However, despite the amendment to the Act, individuals importing wine across provincial boundaries still face obstacles. Some witnesses said that it was easier to export their wines to another country than to another province. Many breweries and distilleries would like to be able to distribute their products in other provinces as well, just as wineries are now able to do.[82]

Recommendation

The Committee recommends that the Government of Canada amend the Importation of Intoxicating Liquors Act in order to include the interprovincial importation of beer and spirits for personal consumption.

2. Distribution and shelf space

Despite the amendment to the Importation of Intoxicating Liquors Act, wine producers cannot freely ship their products to other provinces. Furthermore, the liquor board monopoly at the provincial level restricts the sale of alcoholic beverages in their respective provinces. Points of sale are often limited to the liquor board of the province (e.g., the LCBO in Ontario), the producer’s location and restaurants. In addition to its liquor board, Quebec points of sale also include corner stores and supermarkets. In 1993, Alberta privatized liquor stores. These stores now benefits from lower taxes because the province is not involved in the distribution, and the costs associated with distribution are assumed by the brewers or their distributors.[83]

Distributing alcoholic beverages is a challenge for certain producers. For example, fruit wineries do not have as many points of sale as wine or beer.

In addition, distribution is a key problem for fruit wineries. Fruit wines are not distributed through the LCBO, which controls the sale of wine and spirits in Ontario and is one of the largest single purchasers of beverage alcohol in the world. Farmers are also not allowed to sell their fruit wines or other alcoholic fruit beverages, like cider, at farmers’ markets, so their only outlet is from their licensed facility or premise.[84]

The producers of alcoholic beverages not only have distribution problems, but also have difficulty accessing shelf space, in part due to the cost associated with this space. Canadian wines occupy less shelf space in provincial liquor stores than foreign wines. British Columbia is the possible exception, as British Columbian wines are given considerable shelf space in B.C. Liquor Distribution Branch stores. Furthermore, a number of private liquor stores offer a wide variety of local products. Certain private establishments sell only VQA (Vintners Quality Alliance) wines. This designation means that the wine is made entirely from grapes grown in the province.[85] A number of witnesses suggested that Canadian wines be featured more prominently on liquor store shelves to promote the Canadian wine industry.

Producers who do not have access to liquor store shelf space are often limited to direct sales from their own locations. This makes it difficult for them to expand their sales opportunities. According to Mr. Terry David Mulligan, a radio show host for Tasting Room Radio, if wine producers could sell wine online, they could expand their distribution networks and reach a larger number of consumers across the country. It would also give them the opportunity to increase their market share. However, provincial liquor boards have not yet authorized online sales, which is frustrating to various stakeholders in the wine industry.[86]

In the non-alcoholic beverage industry, expanding into new markets means creating partnerships and expanding the distribution network beyond Canadian borders. Mr. Dave McAnerney, President and CEO of Sun-Rype, said that “growth through acquisitions, innovation, and geographic expansion are all critical to surviving in today’s tough economy.” In 2010 and 2011, Sun-Rype acquired two processing facilities in Washington.

I feel very good about what Sun-Rype has done. I feel very positive about the steps we’re taking to grow into the U.S., but at the end of the day there’s going to be a relentless pursuit of innovation to meet ongoing and changing consumer needs. So anything the government can do to support innovation, whether that’s increasing the amount available through SR and ED credits or by creating employment for students who are focused on innovation, would be number one on the list.[87]

3. Innovation, research and development

A number of witnesses mentioned that investing in innovation and research and development is important to reduce production costs and maintain competitiveness. However, small companies find it difficult to invest in research and development due to limited financial resources.[88]

Recommendation

The Committee recommends that the Government of Canada continue to invest in innovation and research and development to support the Canadian beverages industry.

Witnesses also pointed out the necessity of investing in new tools and production techniques, new methods of pest and disease control, and developing new varieties. However, the beverage industry is concerned that a shortage of people with the required scientific expertise will make the Canadian beverage industry less competitive.

Our industry requires a high level of scientific and technological expertise to develop products and to operate facilities across the country. We’re increasingly facing shortages in this area and are concerned that they are only going to get worse. We’re really lacking in educational training programs that focus on the scientific and technical expertise required to meet skilled labour demands for our industry, and we encourage measures to help meet this demand, including government partnerships with universities and colleges.[89]

4. Growing Forward 2

In order to maintain the competitiveness of the Canadian agricultural sector, the Government of Canada funds various programs under Growing Forward 2 (GF2). GF2 programs emphasize innovation, competitiveness and market development. Groups of agricultural producers greatly appreciated the innovation programs, but they criticized the short duration of the programs. Furthermore, they objected to the fact that five-year programs for innovation are based on a first-come, first-served approach.

Witnesses also emphasized the importance of promoting Canadian products and ensuring Canadians recognize products made in Canada. There are costs associated with promoting products in the domestic market. GF2 programs help producers with their advertising initiatives and provide opportunities for them to build relationships with consumers, restaurants and retailers.

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.[90]

C. Regulations

1. Approval process

While these programs allow Canadian businesses to innovate and introduce new products to the market, there are a number of regulatory obstacles. Often, these businesses have difficulty obtaining approval for new products in a timely manner. Several witnesses pointed out that the approval process in Canada takes much longer than in other countries, which puts Canada at a competitive disadvantage. Registering a product or obtaining approval from Health Canada for a product can take, on average, five years longer in Canada than the approval process takes in the United States.[91]

Health-conscious consumers want the non-alcoholic beverage industry to use healthier ingredients and to promote certain characteristics that are beneficial for health. Stevia, a plant-based low-calorie sweetener, seems to meet these requirements. Health Canada only recently approved its use, even though it has been approved for years in all Western countries, Europe, the United States. Regulatory measures such as market authorization and Incorporation by Reference were used to ensure that stevia was approved for use in Canada. In order to accelerate the approval process for new products without compromising the health and safety of Canadians, Canada should rely on the expertise of other countries with similar regulatory measures.[92]

2. Pest Management Regulatory Agency

A number of witnesses pointed out that harmonizing regulations between countries and making regulatory measures more efficient would allow Canadian businesses to develop and grow. Regulatory measures should keep pace with technological change.

Because Canada does not have a commercial hops industry, the pest management tools approved for use on hops have not kept pace with innovations and technological advancements made in hops-producing countries. As a result, maximum residue limits (MRLs), measured in parts per million, have not been established in Canada. Canadian brewers therefore face higher sourcing and compliance costs compared with the costs of their counterparts in other beer-producing countries. Furthermore, the process and cost of domestic registration is excessive and uneconomical in many cases.[93]

The Brewers Association of Canada recommends harmonizing regulations with the United States, including establishing an import MRL for hops similar to the one set in the United States. Having a MRL similar to that of the United States will ensure that Canadian brewers have a steady and competitively priced supply of hops. The Ontario Fruit and Vegetable Growers’ Association also recommends harmonizing regulations with the United States.

We recommend harmonization of crop protection materials. Canadian farmers currently pay 56% more for the same products farmers in the United States are using, even when we’re allowed to use them here. That is the difference on the U.S.-Canadian side. Harmonization of crop protection products would mean having the same products at the same cost, available on both sides of the border. This would lower production costs and put Canadian farmers on a more equal playing field with those in the U.S.[94]

3. Compositional standards

Many witnesses mentioned that the Canadian beverage industry is subject to a wide variety of very strict regulations, particularly the alcoholic beverage industry.

I could give you a list of the acts. There are about eight of them. In fact, we would say that alcohol manufacturers are the most heavily regulated industry in Canada at both the federal and provincial levels.[95]

While the alcoholic beverage industry is highly regulated for food safety reasons, a number of witnesses pointed out that these regulations do not always keep pace with changing markets. According to the testimony from the Brewers Association of Canada, the compositional standard for beer outlined in the Food and Drug Regulations, Part B, Division 2, has not been reviewed since the 1980s. Today there are many new styles of beer on the market. The Brewers Association of Canada would like the beer standard to be reviewed, as the current regulations are outdated and do not take these new styles into account. In fact, the Brewers Association of Canada has taken the initiative of drafting a new beer standard and is currently undertaking consultations with the appropriate authorities with a view to amending the regulations on the compositional standard for beer.[96]

Spirits Canada also called for an updated definition of spirits, as an unclear definition has resulted in various interpretations. The production of spirits must meet various criteria. Spirits are made from grains, and the fermented alcohol is then distilled. However, new secondary manufacturing processes similar to distillation are used in the production of beer, wine and cider, which has blurred the line between these products and spirits. To clearly distinguish between the various categories for excise duty purposes, the Department of Finance now classifies all malt-based beverages with an alcohol content above 11.9% abv as a spirit.[97] A number of witnesses believe that the compositional standard for the various alcoholic beverages must be updated in order to allow the industry to innovate and remain competitive.

Recommendation

The Committee recommends that the Government of Canada update the compositional standards for the various types of alcoholic beverages such as beer to keep pace with the changing market.

4. Labelling

Various witnesses pointed out that the rigid and outdated compositional standards for alcoholic beverages do not encourage product development and may lead to labelling issues.

In the last couple of years we’ve seen a lot of innovation with Belgian-style beers coming on to the market—they use spices, for example. Spices aren’t specifically listed within the beer standard, so if you put on your label somewhere that it’s made with malt, barley, hops, and spices, all of a sudden that is no longer a beer, and that has issues for distribution, taxation, and all kinds of things.[98]

Furthermore, the current labels can be misleading, and they do not allow consumers to make informed choices. For example, to meet the requirements of the Food and Drug Regulations, vodka must be odourless, colourless and tasteless. And yet some beer labels use the term vodka.[99] Spirits Canada appealed to the Canadian Food Inspection Agency (CFIA) to prevent brewers from using this designation, as it is misleading to consumers. However, the CFIA considers it acceptable for beers to be advertised as “vodka flavoured,” as long as it is clearly communicated to consumers, is not false or misleading, and does not create an erroneous impression regarding the composition of the product.[100]

Many witnesses agreed that unclear labelling does not clearly inform consumers about the products they are purchasing. For example, the designation “Cellared in Canada” does not tell consumers whether the product is truly Canadian or not. In Ontario, a number of wines made from 70% to 99% foreign grapes fall into the “Cellared in Canada” category. According to Mr. Arthur Smith, Chief Executive Officer of the Ontario Fruit and Vegetable Growers’ Association, Canada is the only wine-producing country that allows a product with less than 75% domestic content to be considered a product of that country. When consumers unfamiliar with the wine industry see a product labelled “Cellared in Canada,” they can be easily misled into thinking it is a Canadian product when that is not the case. The Ontario grape and wine industry believes that the designation “Cellared in Canada” is misleading and suggests that this category be eliminated.[101]

In order to prevent misleading labelling, the Government of Canada published guidelines in 2008 on “Product of Canada” and “Made in Canada” claims. “Product of Canada” can be used if at least 98% of the ingredients are produced in Canada. If the criteria for “Product of Canada” cannot be met, a product may be designated “Made in Canada,” provided that most of the transformation of the product occurred in Canada. There are also a number of other designations that food manufacturers can use to label their products.

Many of the witnesses felt that it is important to encourage consumers to buy Canadian products. According to Ms. Hillary Dawson, President of the Wine Council of Ontario, each bottle of wine, blended and 100% Canadian wines combined, generates an economic impact of $39, while a bottle of 100% Canadian wine has an economic impact of $89.[102] Although the wine industry would like to supply the market with more Canadian products, it is not always possible to provide consumers with products of 100% Canadian origin. When there are crop failures, producers must rely on imports and blend Canadian and foreign wine or they will lose the market.[103]

Whether a wine is blended or 100% Canadian, the label must include clear information so that consumers know what they are buying. However, it was pointed out that labels do not always include correct information, giving consumers false impressions.

It is challenging for us when the customer realizes that some bottles labelled Canadian that are in a lot of liquor boards under a giant sign that says “Canada”, contain little to no Canadian content. That hurts our business because then they start to question what’s on our labels.[104]

Before a product can be labelled “Canadian,” the product must actually contain an ingredient of Canadian origin. Several witnesses suggested that there should be a minimum percentage of Canadian content for a product to qualify as “Canadian.” The Grape Growers of Ontario and the Wine Council of Ontario have asked the CFIA to impose a minimum of 25% Canadian content in blended wines labelled “blended from international and Canadian wines.” As well, the country of origin is a significant piece of information that consumers look for on the label, according to Canadians’ Views on Domestic Origin Labelling: Canadian Wines and Blended Wines, a survey prepared by Nanos Research for the CFIA.[105]

Recommendation

The Committee recommends that the Government of Canada review the labelling standard for the various types of alcoholic beverages to keep pace with the changing market and to ensure that labelling is meaningful to consumers and not misleading.

5. Excise tax

In addition to placing importance on the stated country of origin, consumers demand that the label clearly identify the type of product, whether it be wine, beer or spirits. The applicable excise tax rate varies by category of alcoholic beverage. Many producers see excise taxes as a substantial burden. In the brewing industry, the federal excise tax is $31.22 per hectolitre, which works out to 10.6¢ per bottle of beer. By the time beer is sold to the consumer, a range of other taxes are charged, making up half the retail price.[106] For their part, Canadian wines made with 100% Canadian agricultural product have enjoyed an excise exemption since 2006.[107] However, Canadian and foreign wine blends have the excise tax applied. In fact, the excise tax on foreign products applies to the total content of blended wine, regardless of the Canadian to foreign content ratio. Once a bottle contains as little as 1% imported content, it is subject to the full foreign excise tax.[108] In the spirits industry, this tax is nearly 20¢ per standard drink, versus 10¢ on a bottle of beer.[109]

In order to promote growth and prosperity in the alcoholic drinks industry, witnesses recommend a reduction in the excise tax.

As members will be aware, the excise duty on Canadian wine was eliminated in its entirety in 2006, this despite the fact that these drinks, whether they’re spirits, beer, or wine, all contain exactly the same amount of alcohol…. The impact of these changes is that, despite representing less than 30% of the beverage alcohol market, spirits’ share of excise payments has gone from 38% in 2006 to nearly 45% over the last six years.… Our excise duties are $11.69 per proof litre—so that’s a litre of actual alcohol. That went up by sixty cents in 2006. What we're asking the government to do is reduce that by a dollar.… That would take that twenty cents of excise down to about eighteen and a half cents. So a pretty modest reduction.[110]

This would free up funds to invest and improve facilities and to develop new international markets. Some witnesses also recommend applying an excise tax exemption to the Canadian portion of blended wines. An “International Canadian Blends” wine containing up to 75% imported wine could have the excise tax exemption apply to the 25% Canadian content. According to Mr. Patrick Gedge, Chief Executive Officer of the Winery and Grower Alliance of Ontario, this exemption would continue to increase demand for Canadian grapes and help expand the wine industry.[111]

However, the Grape Growers of Ontario and the Wine Council of Ontario do not believe that an excise tax exemption on only 25% Canadian content of a blended wine would encourage an increase in Canadian content or help grow the wine market.

We believe in growing the 100% Canadian domestic market. We will never get there if 25% in the bottle of a blended bottle of wine is incented with excise tax relief.…

We don’t see that as growing the marketplace. We see it as stalling the marketplace. If they really want to show that the bottle of wine has growth, then go to 50%. Give it 50% federal excise relief; at least incent it upwards, not backwards, because that’s currently what we see.

We’re not supporting 25% excise tax relief. When the federal government came out with the 100% federal excise tax relief, we felt that was such a strengthening of the industry, because it put the focus on Canadians. It put the focus on jobs.[112]

Recommendation

The Committee recommends that the Government of Canada consult with stakeholders regarding excise tax exemption on Canadian alcoholic beverages in order to promote the development of Canadian alcoholic beverages industry.

With regard to the non-alcoholic beverage industry, advocates of healthy eating would prefer to see taxes on certain foods, such as soft drinks. The soft drink industry is often blamed for high obesity rates, to which it responds that obesity is a complex issue. Taxing soft drinks would not eliminate the obesity problem. As well, countries that have gone this route have not ended up with reduced obesity rates. West Virginia has had a tax on soft drinks for many years, and yet it ranks in the top 5% of states with the highest rates of obesity.[113]

6. Container sizes

In the 2012 Budget, the Government of Canada announced the deregulation of the standard weight and size of container. Witness reaction to this is mixed. The Canadian Beverage Association has long called for the elimination of container size requirements, which it considers onerous. This deregulation will allow it to provide consumers with a greater choice of product sizes.[114] Other witnesses believe that doing away with standard sizes may drive up costs and put them at a competitive disadvantage.

However, if [the regulations] are repealed, we are very, very concerned, being a small wine-producing country, that larger producers can come in with large box-size formats, for example, with economies of scale and be able to undercut the Canadian wine industry.[115]

Some witnesses said that doing away with standard sizes may have a particular impact on fruit and vegetable processors, resulting in closures. Other witnesses do not believe that changing the regulations on container sizes would have much of a negative impact on the beverage industry. There would certainly be some impact, but it should not be all that significant. If the regulations on container sizes were repealed immediately, wine industry stakeholders said that the industry would be put at a disadvantage. It would need time to adjust and make the transition.

There has been a lot of debate on whether we allow time for phase-in or supporting retooling for these plants. Some CEOs or plant managers would tell you that if they were given a few years and some money to support retooling they’d be fine. Others would tell you that wouldn’t even help, that this change alone would destroy their businesses.[116]

The Committee’s study has illustrated the complexity of the food supply chain, which is made up of several different players. The three sectors studied (red meat, grains and oilseeds, and beverages) have their own unique characteristics and face different challenges. However, they do have some issues in common: in addition to facing several challenges involving consumer demands and market changes, the food supply chain must comply with the regulatory framework. During this study, the Committee heard from a number of witnesses who said that, in order for the food supply chain to be successful, various stakeholders in the chain need to work closely together. Modernizing the regulatory framework would lead to greater provincial/federal coordination, and regulatory co-operation with the United States would certainly benefit the entire food supply chain. As well, the Committee recognizes that research and innovation contributes to the success of the agricultural sector. The Committee expects to focus on other sectors as part of this study.