The Costco-model, as this Toronto Star article suggests with the help of a couple of retail experts, is the antithesis of what LCBO should endeavour, if profits are the Ontario government’s objective.
The stripped-down, utilitarian model of Costco, offers many categories of products, but with limited selection in each category. For example, if strawberry-banana or cherry or pineapple yogurt is more your cup of tea, you’re out of luck. Costco sells plain, Astro Balkan-style yogurt, while enjoying the yogurt in x-large-tub format shelf to itself with nary a competitive brand in sight. You either buy the Astro tub yogurt, the multi-flavour mini-pak yogurt occupying the next shelf position, or not.
Note that shelf also comes with unparalleled physical space, which creates an uncluttered and simple-to-locate shopping experience.
Costco is in the business of primarily selling staple items, with some discretionary categories, at head-office mandated margins no greater than 14-15 percentage points. Which is why you pay the prices you do at Costco, see minimal advertising and in-store assistance, in a sparse, stripped-down setting.
Now ask yourself how many vodka brands are available on LCBO shelves? In how many flavours? At how many price points? That selection in a single category would never be available at Costco.
For the sake of argument, let’s take that sparse setting, add in the countless selections of beer, or wine, or spirits you have in the LCBO. You’ve created confusing, cluttered shelves difficult to navigate, with few premium priced items in any category, and little customer service to help decipher which wine is best served with which meal. You’ve basically created the private liquor store in the United States. A private liquor store established to sell you products.
LCBO, on the other hand is selling aspirational and experiential discretionary wines, spirits and beer.
The LCBO is selling you an experience. The joy of cooking and drinking with friends, families or colleagues, at gatherings in your home or backyard. They inspire cooks with recipe ideas and suggest wine/food pairings for hosts on their website and in their glossy magazine (more on that later).
They are marketing premium-priced wine, brandy, and spirits, and artfully designed, themed-gift packs as aspirational discretionary items for you to enjoy or gift. These discretionary items, by the way, bring in very healthy margins to its owners, the public. Margins which would not necessarily be maintained in the Costco model, despite what the retail experts mentioned in the same article tell you. Psychology affects purchasing decisions. Including what a consumer is willing to pay in a retail store with minimal dressing as Costco, versus one with the stylized presence LCBO establishes in its stores, similar to The Bay. Which retail outlet do you think would be the destination for $150 plus bottle of wine or fine cognac?
For the record, operating expenses of 16.2% in a retail environment is a reasonable number. As for the suggestion that LCBO reduce its marketing spend, readers should note anytime a retailer like LCBO or Metro or Wal-Mart or Costco produce a flyer or magazine, vendors cover the cost of production, by paying for advertising space. Marketing, in this case, helps communicate the experiences LCBO sells.
If LCBO wanted to improve the returns it provides the Ontario government, it might consider some of these options.
Negotiate With Vendors
The current model of pre-determining the margins, while establishing purchasing price on that margin is a curious choice for any retail entity. Why not leverage your role as one of the largest purchasing entities of liquor in the world to negotiate the best price? You can then decide to either use the difference to lower retail pricing or deliver greater profits to the Ontario government. That’s potentially another $500 million to one billion dollars in our coffers.
Build Relationship with Food Industry
The LCBO’s web site and monthly magazine features wine, spirits and food pairings, with recipes targeted to home cooks. Why not expand that relationship and invite those food producers to run sampling programs with liquor vendors in LCBO stores, similar to Costco’s efforts in food sampling. Shoppers become more familiar with the products being sampled and receive recipe ideas they can try at home, while you charge vendors for the privilege of direct access to your customer base. Sampling efforts also drive incremental sales, anywhere from 10-40% above what those products would have sold without sampling.
I would also suggest working with, for example, the Loblaws Kitchens on a co-branding opportunity, selling a selection of exclusive-to-LCBO premium, gourmet locally produced food items hosts and hostesses could serve their guests. That selection could be refreshed twice annually, complemented by other products such as novel ice-cube trays, swizzle sticks, and serving napkins.
Both retailers could feature this food selection paired with various LCBO liquors (another opportunity to charge participating liquor vendors) in PC Insiders Report, Loblaws website, LCBO’s magazine and web site.
Develop Craft Brewers Segment
Craft beer represents one of the fastest rising segments at LCBO, with Ontario craft brewers alone growing 20-30% annually for several years. Why not duplicate the highly successful Vintages model at LCBO for a store-within-a-store domestic and international craft beers selection? Featured in-store and online, it can drive repeat traffic, sales, and merchandising. It doesn’t compete directly with the Beer Store, which markets mostly value beers, while supporting not only local and international brewers, but higher margin-producing products.
The current merchandising of craft beers as single bottles or cans, often in a haphazard way on-shelf or on the floor can make for a confusing and cumbersome shopping trek. Create an exclusive in store section, encouraging craft brewers to offer packages of a multi-assortment of its beers or as premium-priced singles and you’ll create momentum and destination positioning in the marketplace for beer lovers and aficionados. A little competition for The Beer Store never hurt anyone.
Enhance LCBO Website
Leveraging the aspirational positioning of the LCBO, and in addition to the greater food presence previously mentioned, build a larger interactive presence, with how-to videos on recipes and hosting, including fun facts about featured liquors, including historical storytelling of their origins.
Test on-line ordering options for in-store pickup on case orders of beers, wines and hard liquors.
Sell memberships for exclusive access to select premium wines and spirits not available anywhere else in Canada.
The LCBO can also encourage site visitors to sign up for on-going information updates on new products prior to market launch or special on-line coupons for in-store purchases. With stated permission, LCBO in essence builds a database of its customers (one of the largest sellers of liquor globally), which it can then license to select marketers.
LCBO as Agent or Broker for other Public or Private Liquor Retailers
Why not leverage the buying power and liquor industry acumen of LCBO head office staff, into a brokerage fee it can charge other public liquor retailers, or smaller private liquor entities? If provincial health ministries can negotiate better drug prices through bulk purchases, then there must be a similar opportunity in the liquor market, only in this case, LCBO could charge a fee or take a percentage for services delivered to other liquor retailers.
Some of these ideas may not be feasible within the structuring of the LCBO and provincial laws. The point is, many ideas may be explored to further develop the highly successful and profitable LCBO positioning.
The Costco model, which ironically The Beer Stores encapsulates, strips those possibilities, and likely at a revenue disadvantage to the Ontario government. The Bay model accentuates lifestyles and experiences consumers buy into, at pricing the government relies on to pay for the myriad of public services citizens rely on.