Alberta's craft distilling industry has been a shining example of innovation, quality, and a growing economic impact within Alberta. Unfortunately, there hasn't been a comprehensive, holistic look at the framework that regulates liquor for some time. There have been changes in bits and bites, but nothing that addresses the current state. Put simply, the current liquor markup framework in Alberta is putting the craft spirits industry at risk.
At the heart of the problem lies a system that disproportionately affects small producers, stifling their growth potential and placing undue financial burdens on those who are already operating with thin margins. The Alberta Craft Distillers Association (ACDA) believes the solution is clear: a graduated, progressive markup system that reflects the realities of small-scale production and encourages sustainable growth.
Understanding the Current System’s Shortcomings
The current liquor markup framework in Alberta is built on a structure that includes arbitrary brackets based on alcohol-by-volume. This means that the amount of alcohol in a product determines which category it lives in. So, beer is a category, wine is a separate category, spirits in another category, with increasing tax rates, and a significant markup increase once a distiller's production exceeds 140,000-160,000 litres of absolute alcohol (LAA) per year. This threshold effectively penalizes growth, as small producers face an abrupt and substantial increase in costs as soon as they cross this line. For many craft distillers, this disincentive creates a paradox where growing their business beyond a certain point becomes economically unfeasible.
The current system also fails to account for the higher production costs and lower economies of scale that small producers face. Unlike large, industrial-scale operations, craft distillers often operate with limited resources, purchasing ingredients and materials in smaller quantities, which drives up costs. The one-size-fits-all approach of the current markup framework does not take these differences into consideration, placing small producers at a competitive disadvantage.
The Government of Alberta attempted to implement some form of relief when they allowed craft producers to self-distribute their products at a lower markup rate than centralized distribution through the AGLC's distributor, Connect Logistics. On paper it looked like a way for small producers to reduce costs. The problem is, to be truly competitive and grow their businesses, craft distillers need access to distribution. The additional costs of self-distribution - setting up logistics, retailer relationships, hiring drivers, buying vehicles - wipes out any benefit of the lower markup rate, while limiting growth.
The Solution: A Graduated, Progressive Markup System
A graduated, progressive markup system offers a fair and equitable solution that would support the growth and sustainability of Alberta’s craft distilling industry. Under this proposed system, markup rates would be assessed based on the volume of absolute alcohol produced, with lower rates applied to smaller volumes. As production increases, the markup would gradually escalate, providing a more predictable and manageable cost structure for small producers. In addition, craft producers would be able to access centralized distribution at these rates.
This approach mirrors systems already in place in key markets like the United States, where craft distillers are increasingly looking to export their products. By adopting a similar framework, Alberta would not only streamline its current system but also create a more business-friendly environment that encourages investment and expansion within the craft spirits sector.
Benefits of a Graduated Markup System
One of the most significant benefits of a graduated, progressive markup system is that it removes the sharp tax jumps that currently stifle growth. Instead of facing a sudden and prohibitive increase in costs once they surpass 140,000-160,000 LAA, small distillers would experience a more gradual increase in their markup rate as their production scales. This allows them to grow their businesses with greater financial predictability and stability.
Moreover, this system would level the playing field between small and large producers. By applying the same graduated framework to all producers, the system would ensure that larger producers, who benefit from economies of scale, pay higher markup rates as their production increases. This would create a more competitive market that fosters innovation and quality, benefiting consumers and producers alike.
Another key advantage is the simplification of the reporting and compliance process. The current system’s complexity, with different rates for different product categories and ABV-based brackets, creates significant red tape for small producers. A single, progressive markup framework based on production volume would streamline this process, reducing administrative burdens for both producers and the government.
Supporting Alberta’s Craft Distilling Industry
The craft distilling industry in Alberta is more than just a collection of small businesses; it is a vibrant and essential part of the province's economy. Craft distillers contribute to local communities by creating jobs, supporting local agriculture, and attracting tourism. They are also ambassadors for Alberta, showcasing the province's agricultural bounty and entrepreneurial spirit through the world-class products they create.
However, these contributions are at risk if the current liquor markup framework remains unchanged. Without a more equitable and supportive system, many small distillers may find it impossible to grow their businesses, and some may be forced to close their doors altogether. ACDA’s proposed graduated, progressive markup system offers a pathway to sustainable growth, ensuring that Alberta’s craft distilling industry can continue to thrive and contribute to the province’s economic well-being.
The Alberta Craft Distillers Association urges the Government of Alberta to adopt this fairer, more supportive framework. By doing so, they will not only protect the future of Alberta’s craft distillers but also enhance the province’s reputation as the most open, competitive liquor market in Canada. It is time for Alberta to take a bold step forward and implement a graduated, progressive markup system that reflects the true potential of its craft distilling industry.
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