Building A World Class Ontario Wine Industry

Heres to Ontario!
Building a world-class Ontario wine industry

February 21, 2005
Contact:
Debbie Zimmerman
Grape Growers of Ontario
P.O. Box 100
Vineland Station ON L0R 2E0
Phone: 905.688.0990
Fax: 905.688.3211
2005 Grape Growers of Ontario
Heres to Ontario!
1. EXECUTIVE SUMMARY
A little over a quarter century ago, a few Niagara visionaries began
planting and making wine from vitis vinifera and French hybrid
varieties, grapes that produce the worlds great wines.
The results were dramatic. The new estate wine industry promised a
palatable Ontario option for wine consumers, a new and more
profitable market for Niagara farmers, an additional reason to visit
Niagara, and a new source of pride for Canadians.
Ontario wines
have largely
fulfilled their
early promise.
Recognizing its potential, Ontario governments fostered the industry.

They relaxed the rules for licensing new wineries, subsidized vineyard
conversion, supported industry standards and helped to ballyhoo the
provinces wines around the world.
Ontario wines have largely fulfilled their early promise. They have won
prizes and converts worldwide, drawn millions of visitors to Niagara
and other winemaking areas, and provided direct and indirect
employment for thousands of people.
But increasingly, regulatory decisions, made with the best of intentions
by a succession of Ontario governments, no longer serve the public
interest. In fact, the regulations in place today harm taxpayers, wine
consumers, grape growers, and many smaller wineries.
Regulatory
decisions made
with the best of
intentions no
longer serve the
public interest.
1.1. Creating a world-class wine region

World-class wine regions share certain characteristics. Among them:
Content and labelling rules to require the use of local product
A level playing field for new entrants
A distribution system that lets new wines attract notice
Government policies that promote local wines
A healthy value chain of growers, producers and distributors
As this report will show, Ontarios wine industry has none of these.
Directly as a result of current regulations, a few of our 125 wineries
have prospered while the rest have struggled.
We believe there is a vast difference between being a world-class wine
region and having a couple of successful wineries. Ontarios goal
should be the former. We should settle for nothing less.
There is a vast
difference
between being a
world-class
wine region and
having a couple
of successful
wineries.
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1.2. A vision for all participants

Our wine industry is part of a regulated beverage alcohol system. As
the regulator, we believe the Government of Ontario has an obligation
to provide some measure of fairness for all stakeholdersto ensure
that the ecosystem is healthy. This is a vision all wine industry
participants can support.
To build a world-class Ontario industry, we propose the following:
Use public funds more wisely: Ensure winery retail stores

are used to distribute Ontario product.
Strengthen Ontario wine content rules: Change regulations

that allow wineries to import, bottle and sell foreign product as
Wines of Ontario, pitting Niagara grape growers against
distress sellers and third world producers such as Chile.
Set world-class wine labelling standards: Require Ontario

wine labels to meet the standards of other world-class regions.
Expand distribution options for Ontario wines: Fix the

system that allows a few wineries to clog the regulated
distribution system with product from Chile and elsewhere,
while most Ontario wineries have no hope of gaining retail
distribution beyond their rural on-site outlets.
Focus support on VQA-only wineries: Recognize the greater

contribution VQA wineries make to agricultural viability and
employment, compared with blending wineries.
The Government
of Ontario has
an obligation to
ensure some
measure of
fairness for all
stakeholders.
1.3. The Goal: A world-class wine region in Ontario

Every world-class wine region starts in its own vineyards. Only our
grape lands and people are unique; the rest can be duplicated
anywhere. It seems self-evident: without Ontario grapes, there is no
Ontario wine.
The Grape Growers of Ontario have a strong interest in ensuring the
long-term success of all players our wine industry. Only prosperous
wineries and a fair and open distribution system will guarantee strong
demand and fair prices for our grapes.
The Grape
Growers of
Ontario have a
strong interest
in the long term
success of all
players the
Ontario wine
industry.
The GGO and its predecessor, the Ontario Grape Growers Marketing
Board, have shown great flexibility in working with other stakeholders
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to enable the industry to evolve, especially over the past 25 years. We

intend to continue this partnership into the future.
We are delighted the Government of Ontario is taking a fresh look at
wine industry regulations. We welcome this opportunity to contribute
proposals for a healthier and more sustainable Ontario wine industry
and look forward to exploring them with all stakeholders.
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CONTENTS
1. EXECUTIVE SUMMARY .................................................................................... 2
1.1.
Creating a world-class wine region ................................................. 2
1.2.
A vision for all participants ............................................................ 3
1.3.
The Goal: A world-class wine region in Ontario ................................. 1
2. THE CURRENT SITUATION ............................................................................... 6
2.1.
Participants ................................................................................. 6
2.2.
Retail distribution......................................................................... 6
2.3.
Blending ..................................................................................... 6
2.4.
Standards ................................................................................... 7
2.5.
Labelling Requirements ................................................................. 7
2.6.
Value Chain Relations ................................................................... 8
3. RECOMMENDATIONS FOR A WORLD-CLASS INDUSTRY........................................ 9
3.1.
Use public funds more wisely ......................................................... 9
3.2.
Strengthen Ontario wine content rules ............................................ 1
3.3.
Set world-class wine labelling standards ........................................ 15
3.4.
Expand distribution options for Ontario wines ................................. 16
3.5.
Focus support on VQA-only wineries ............................................. 18
4. SUMMARY AND RECOMMENDATIONS ................................................................ 1
APPENDIX I: History .......................................................................................... 22
Appendix II: LCBO and Winery Retail Store Economics ........................................... 25
Appendix III: Grape Grower Economics ................................................................ 26
APPENDIX IV: References................................................................................... 27
Prepared by Heron & Company for

The Grape Growers of Ontario
P.O. Box 100
Vineland Station ON L0R 2E0
Phone: 905.688.0990
Fax: 905.688.3211
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2. THE CURRENT SITUATION

Please see Appendix I for a timeline of how the Ontario industry and
regulations evolved. See Appendix IV for a link to the current Wine
Content and Labelling Act and Regulations.
2.1. Participants
The Ontario wine industry is comprised of:
581 Grape growers
125 Wineries
Vintners Quality Alliance of Ontario (VQAO)
Liquor Control Board of Ontario (LCBO)
Grape Growers of Ontario (GGO)
Wine Council of Ontario WCO
2.2. Retail distribution
Wine in the province is sold through two retail channels:
LCBO, the provinces beverage alcohol retail agency, and
Winery retail stores (WRS)
Every winery is allowed one on-site WRS. In addition, pre-1972
wineries were allowed to retain their off-site WRS outlets as part of the
free-trade arrangements in 1989. Together, Vincor and Andres own
265 of the 290 off-site WRS licenses. According to the LCBO, no new
off-site WRS licenses can be granted. See Appendix II: LCBO and WRS
economics.
Distribution through the LCBO is very difficult for Niagara wineries. As
the worlds single largest beverage alcohol buyer, the LCBO dictates
tough listing terms, including low margins and high required volumes,
and makes no concessions to Ontario vendors. Small or new wineries
are restricted to selling through a single on-site WRS, often in a
remote rural location.
This lack of viable distribution options creates a permanent regulated
advantage for Ontarios two largest wineries vis--vis all others.
2.3. Blending
A unique feature of Ontario industry practice is the widespread
blending of foreign and domestic product under the Wine Content and
Labelling Act. The right to blend is not granted equally to all wineries.
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Only Ontario wineries licensed before 1993 can import and blend
foreign wines with domestic product. The ostensible need for this
practice is to improve the Ontario content. Under relentless pressure,
Ontario governments have permitted the allowable percentage of
foreign product to increase from 10% in 1972 to 70%. In fact, because
of crop shortages in 2002 and 2003, the limit is currently 90%. The
WCO has proposed scrapping content requirements altogether.
Current regulations allow foreign content to be used in the
aggregate, which means there is no longer any requirement to
actually blend. As long as a winery adheres to overall ratios, the
offshore stuff can go straight from the tanker to the bottle.
In practice only the two largest wineries import aggressively; most
pre-1993 Ontario wineries focus on producing VQA wines. But we
estimate Vincor imports more than 50% of its needs.
The same wineries that enjoy special distribution privileges also enjoy
regulated blending privileges not available to most wineries. The effect
is to elevate a small number of large wineries to a privileged position
vis--vis the others.
2.4. Standards
In 1999, the VQAO was designated as Ontarios wine authority with
powers to enforce an appellation system for wines made of 100%
Ontario product. Non-VQA wines are governed by the Wine Content
and Labelling Act (see below).
2.5. Labelling Requirements
Ontario wine labelling is regulated by the Ontario Government under
the Wine Content and Labelling Act. Wines may be labelled for sale in
one of three categories:
VQA: VQA designation, managed by the Vintners Quality

Alliance of Ontario (VQAO), is reserved for wines that
contain 100% Ontario grapes and are produced in one of
three designated viticultural areas. These are the wines
that get all the press and are showcased on winery tours
and websites. They account for about 14% by volume of
Ontario wine sold by the LCBO.
Product of Canada: To be labelled Product of Canada, a

wine must contain at least 75% domestic product. This is
an in the bottle not an in the aggregate requirement.
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Cellared in: Cellared in wines must contain at least

30% Ontario product. Half the wines by value sold by
LCBO stores as domestic wines in 2004 were cellared in
and therefore mostly foreign product.
Cellaring is a wine industry term for post fermentation
operations, including racking, filtering, blending and
aging. In fact, imported product is generally ready to
bottle. In Ontario, cellared in is just a good way to avoid
saying Imported from ____ and bottled by _____.
Half the wines

sold in the
Ontario section
of LCBO stores
in 2004 were of
the cellared in
category.
Other jurisdictions: Ontarios labelling requirements are

a sharp departure from those of other wine jurisdictions.
In California, wines must contain 100% product of the
state to carry a California label. Most other US states
require a minimum of 75%
The cellared in label category, and the LCBOs practice of shelving

cellared in wines the Ontario section of its stores, create a regulated
advantage for a few large wineries vis--vis all others.
2.6. Value Chain Relations
As a direct result of the distribution, blending and labelling regulations
described above, value chain relations in the Ontario wine industry
have become very difficult.
Annual grape pricing negotiations conducted between the GGO (on
behalf of the growers) and the WCO (on behalf of the wineries) are
constantly overshadowed by the price and availability of wines from
Chile and other regions on depressed world wine market.
Ontario growers have no quarrel with other wine regions. But we
should not be expected to compete with them for product that will be
labelled and sold as Ontario wine. Importing Chilean wine does nothing
to support the Ontario economy; it benefits only the importing winery.
Ontario growers
should not be
expected to
compete with
Chile for
product that will
be labelled and
sold as Ontario
wine.
Under better circumstances, a healthy value chain could grow out of

interdependence and mutual respect among growers, producers and
the LCBO. But, as long as regulations permit foreign wines to be
imported and sold as Wines of Ontario, grape growersand by
extension the viability of agriculture in Niagaras grape landswill be
under constant threat.
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3. RECOMMENDATIONS FOR A WORLD-CLASS INDUSTRY

The Ontario government has an opportunity to create a world-class
wine industry by adjusting policy and regulations to:
Use public funds more wisely
Strengthen Ontario wine content rules
Set world-class wine labelling standards
Expand distribution options for Ontario wines
Focus support on VQA-only wineries
3.1. Use public funds more wisely
Ontario allows wineries to sell their product through company stores.
This privilege gives the winery direct contact with its
customers. In turn, wine consumers get the experience of
learning about, sampling and buying wines where they are
made. WRS sales also permit wineries to keep more of the
retail price than they would on sales through the LCBO.
The difference is substantial. On a $10 bottle, the winery
keeps an additional 35% or $3.50 when selling through a
WRS. This difference has grown since 1990, as the LCBO has
increased its mark-up on Ontario wines from 12.8% to 58%
to eliminate trade preferences. Please see Appendix II for
more on LCBO and WRS economics.
Sold thru
LCBO:
Winery
keeps
40%
Sold thru
WRS:
Winery
keeps
75%
On public policy grounds, WRS sales can be justified as

supporting Ontario wineries and, in turn, the agricultural base
on which they rely. As the engine of winery tours, on-site
WRS sales also support a thriving wine tourism industry in Niagara,
drawing an estimated 500,000 winery visitors annually.
But the WRS policy comes at a price. The cost to Ontario of permitting
WRS sales is lost LCBO profit. Based on WRS sales of $153 million, the
LCBOs dividend to the Ontario government for 2004 was reduced by
about $48 million. (Source: LCBO 2003-04 Annual Report)
Most Ontarians would probably support allowing Ontario wines to be
sold at on-site winery retail stores. But there are two elements of the
current policy that appear unsupportable because they fail the test of
both good economics and fairness:
WRS foreign wine sales
Discriminatory off-site WRS licensing
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a) WRS foreign wine sales

The logic for permitting wineries to operate retail stores breaks
down completely when they use this channel to sell foreign
wines. In the case of WRS sales of foreign wines, the lost LCBO
dividend benefits only the winery. There is no agricultural or
tourism and very little winery employment created; in fact there
is little or no offsetting benefit to Ontarians at all.
b) Discriminatory off-site WRS licensing
Very few wineries are permitted to operate off-site WRS
networks. These stores existed prior to the LCBO monopoly and
were grandfathered as part of free trade arrangements in 1989.
Of the 290 grandfathered off-site WRS licences, just two wineries
own 265. Since no new off-site WRS licenses are being granted,
the remaining Ontario wineries are permanently disadvantaged
vis--vis the two large wineries.
Combined impact: $10.1 million lost to just one winery
The combination of off-site licenses and the use of the licenses to sell
foreign wines costs Ontarians dearly. The table below uses Vincor as
an example. It was compiled from the 2003-04 LCBO Annual Report
and other public sources.
Winery retail store (WRS) sales in Ontario (all $ in millions)
LCBO net revenue as a percentage of sales
Net revenue lost to LCBO on WRS sales ($153.2 x .315)
Percent of all WRS outlets owned by Vincor
Percent of lost revenue directed to Vincor ($48.3 x .42)*
Foreign wines as a percentage of Vincor sales**
Taxpayer subsidy to Vincor on foreign wine sales ($20.3 x .5)
$153.2
31.5
$ 48.3
42
$ 20.3
50
$10.1
* Understated, since Vincors WRS sales are far above industry average.
** Estimated from public sources.
Recommendations:
We recommend that the government ensure WRS sales benefit the
people of Ontario, as originally intended.
1. Allow only VQA wine sales in a WRS: This a logical remedy,
given the original purpose of winery retail stores. It would provide
the best value to Ontario taxpayers and would affect only a handful
of the provinces wineries.
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2. Eliminate the benefit on foreign content: (Less effective than

a. above.) By tying the benefit to the bottle, the government
could recover the subsidy on WRS foreign wine sales. Under this
model, wineries would pay a bottle levy based on foreign content
on WRS sales of blended product.
3. Distribute WRS licenses more fairly: Explore ways to enable
more than a handful of Ontario wineries to benefit from off-site
WRS sales.
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3.2. Strengthen Ontario wine content rules

Ontario is unique among wine regions in allowing foreign product to be
imported and misrepresented as domestic. Currently, Ontario wineries
licensed before 1993 can import and blend up to 70% foreign wine
with Ontario product and sell it through their WRS and the LCBO as
their own cellared in product (See 3.3).
In practice only a few large wineries import aggressively, since most
Ontario wineries focus on producing VQA wines. But we estimate
Vincor, Ontarios largest winery, imports more than 50% of its needs.
Ontario is
unique among
wine regions in
allowing foreign
product to be
imported and
misrepresented
as domestic.
Historically, three arguments have been used by wineries to make the

case for foreign wine imports and the cellared in category:
1: Foreign content is needed to improve quality. Blending
improves some varietal wines, but this can be accomplished
with domestic product. Any Ontario wine that needs more than
25% foreign product to be improved should not have been
made in the first place.
2: Cellared in as an entry to Ontario wines. According to
this logic, drinking Chilean wine while believing it to be Ontario
wine will lead new wine consumers to eventually try real
Ontario wine. We believe this argument is ridiculous on its face.
Certainly there is no evidence that permitting wine imports has
increased demand for Ontario grapes.
3: Shortage of Ontario grapes. This is a circular argument.
Ontario grape production will only increase when prices reflect
a scarcity. Under current regulations, grape supply is always in
balance, because wineries have the option to import foreign
product to fill any shortfall.
In fact, imports are all about reducing winery costs at the expense of
farmers and consumers. The option to buy foreign wines frees wineries
from the need to rely on Ontario grapes, to crush and ferment them,
and to inventory in-process wine. It frees them from reliance on
Ontario farmers or Ontario winery labour (Chileans work for $250 a
month). And it makes a wonderful bargaining chip when negotiating
prices for the Ontario grapes needed to meet their minimums.
Imports are all

about reducing
winery costs at
the expense of
farmers and
consumers.
In the 25 years since 1988, winery purchases of imported product

have soared more than 350%. Meanwhile, to take one example,
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Vincors Ontario grape purchases have grown just 20%and half of

that growth has been for ice wine, a category that didnt exist in 1988.
The GGO believes the use of foreign product is inconsistent with
building a world-class Ontario wine industry. Current regulations
permitting Ontario wineries to import wine:
Erode the industrys agricultural base
Reduce the demand for Ontario winery workers
Confuse consumers
Divert resources that could be invested in developing an
Ontario-based industry
Unfairly advantage certain wineries
Agricultural viability and the Greenbelt Protection Act
Based on grape prices in other prime viticultural areas, Niagaras
tender fruit lands should be in demand for grape production. The soil
and microclimate are ideal, and Ontarios winemakers have turned
Niagara grapes into great wines. But that is not the case, as explained
in Appendix III: Grape Grower Economics.
Instead, Ontario grape farmers are caught in a squeeze between high
land and input costs and falling grape prices. As a result, only about
60% of Niagaras suitable land is currently planted to grapesand
there is little appetite to increase that percentage under current
conditions.
The Government of Ontario has passed the Greenbelt Protection Act,
aimed at protecting agricultural land in an area that includes Niagaras
grape lands. The idea of protecting farmland is commendable.
But it makes little sense to freeze agricultural land, without also
addressing regulations that put growers at a structural disadvantage in
dealing with the wineries that buy their grapes.
It makes little
sense to freeze
agricultural
land, without
also addressing
regulations that
put growers at a
structural
disadvantage in
dealing with the
wineries that
buy their
grapes.
Recommendations:
We recommend changes to require much higher minimums of Ontario
product in Ontario wines. Ontario should join other world-class wine
regions by aligning our regulations with their content requirements.
1. Require 75% Ontario content: Require, as in most U.S. states,
that wines carrying an Ontario label contain at least 75% Ontario
content.
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2. Build two-way flex into content rules: Recognize that wineries

and grape growers are part of the same value chain by requiring
that wineries take up the entire Ontario crop before buying
offshore product in any year.
3. License a cooperative winery: Give Niagara growers the right to
pool their grapes to make and sell VQA wine as a co-op. This would
effectively expand the market for grapes by creating a growerowned winery with enough scale to be efficient and to meet LCBO
listing minimums.
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3.3. Set world-class wine labelling standards

One would expect, on entering an LCBO store and seeing a large area
designated Ontario, that the bottles (and boxes) on the shelves
contain Ontario wine.
And thats the intent, despite those Ontario wines being mostly (and
sometimes all) foreign product. Because Ontario wine drinkers would
ordinarily shun foreign wines bottled in Ontario, blending wineries
created the cellared in category for labelling purposes.
To avoid disclosing the country of origin, these wines are labelled:
Cellared in [Ontario location] from a blend of imported and domestic
wines. This disclosure is typically made in 4 or 6 point type (all caps
and condensed for illegibility) on the back label.
As explained earlier, cellared in wines can contain up to 70% foreign
product in the aggregate. In the aggregate means that an individual
bottle can contain 100% foreign wine, as long as the winery uses at
least 30% Ontario grapes in all its blended products.
We believe its time for Ontario to become up-front in its labelling
regulationsto take its wine labelling regulations as seriously as do
other wine regions. There is no shortage of models to adopt.
As an example, the Wine Trade Group (WTG), an organization of New
World wine industry representatives, is advocating Universal
Mandatory Information (UMI) on wine labels. This includes product
designation, content, volume, percentage alcohol and country of
origin. According to the WTG, the UMI should appear in a single field of
visioni.e. all components should be legible at the same time without
having to turn the container.
The Inniskillin
Canadian
Olympic Series
Chardonnay
(above) is
mostly Chilean
i
Recommendations:
We recommend the government play fair with Ontario wine consumers
by setting world-class wine labelling standards.
1. Require honest wine labelling: Require labelling that is fully
transparent and informative for the customer. We advocate
adoption of the Universal Mandatory Information standard
described above, or some other standard that fully discloses the
percentage and origin of foreign content in Ontario wines.
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3.4. Expand distribution options for Ontario wines

The number one challenge for small wineries is not making decent
wine, but attracting customers. Ontario wineries face special obstacles.
One is the WRS distribution system in Ontario. Most wine regions
celebrate their home-grown products and help make them easy to
find. In contrast, Ontario restricts nearly all its wineries to selling
through a single on-site WRS. Except for the handful with off-site WRS
privileges, Ontario wineries have little hope for distribution beyond
their rural locations.
The LCBO is not a viable option for most wineries because of its listing
and merchandising practices. The retail monopoly sets minimum
volume requirements most small wineries cant meet. It also allows a
38.5% margin, too low to permit small volume vendors to be
profitable. (In 2001, the George Morris Centre reported that California
wineries, marketing throughout the United States, grossed 52% of the
retail value of their wines.)
Merchandising is another challenge. A few large wineries have clogged
the LCBOs Ontario wines section with cellared-in product from Chile
and elsewhere. This practice does nothing to promote the sales of real
Ontario wines and in fact takes up space that could be devoted to
showcasing the output of smaller wineries.
Despite our recommendations below, we are not hopeful that the LCBO
will ever be an enthusiastic promoter of any but the largest Ontario
wineries. The agencys mission seems clear: to deliver the maximum
possible dividend to the government. There is nothing inappropriate
with revenue generation as a goal. But we believe the agencys current
focus is inconsistent with management practices needed to build a
following for low volume Ontario wineries.
The Government of Ontario can best help new and smaller Ontario
wineries achieve the distribution they need to be successful by opening
new retail channels.
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Recommendations:
Help VQA wineries distribute their product by creating alternative sales
channels and/or by mandating changes in LCBO practices.
1. Regulate VQA wine sales separately: License cooperatives of
VQA-only wineries for off-site retail sales, allow VQA wine sales
though grocery stores on a pre-paid tax basis, or establish VQA
wine stores as BC does for its wineries. The LCBO claims that these
options are not available under NAFTA and other trade
conventions. We do not accept these claims on their face. New
options need to be explored.
2. Reserve the LCBOs Ontario section for Ontario wines: Move
wine that is not at least 75% Ontario product out of the Ontario
section of LCBO stores.
3. Change LCBO merchandising policy: Direct the LCBO to ease
listing requirements and create more shelf space for VQA wines.
Currently the LCBO allocates shelf space according to sales, just
like Loblaws or Wal-Mart. This makes sense in a competitive
marketplace, where customers who cant easily find Crest WhiteStrips on one stores shelf may go elsewhere. But the LCBO is a
monopoly. The wall of Ontario wines, currently clogged with
imported product, could be a rich mosaic of VQA wines, if the
Ontario government so directed. There would be no loss of sales to
the LCBO.
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3.5. Focus support on VQA-only wineries

A sustainable Ontario wine industry depends on wineries committed to
producing the best wine they can with the grapes we grow. This is
self-evident. This commitment exists in every other wine region in the
world. Only an Ontario-based industry will forge strong, mutually
dependent relationships among wineries and growers and maximize
the industrys benefit to the province.
Yet the current set of policies and regulations in Ontario seem
intended to discriminate against this model. Consider:
Content regulations encourage wineries to import foreign wines
instead of using Ontario grapes
Labelling rules permit foreign product to be passed off as
Wines of Ontario
A winery that sells mostly foreign product has exclusive rights
to a private high-margin distribution network
The provinces retail monopoly is unavailable to most small and
new wineries
VQA-only wineries have fewer regulatory incentives and
privileges than blending wineries
Differentiation is the key to success
Successful wine regions choose grape varieties that match the areas
soil and microclimates and have the potential to make wines that can
capture attention and build a reputation for the region. Then they
focus viticulture and winemaking efforts on producing excellent grapes
and wines in these categories, and supporting them with
complementary supply chain, marketing and planting strategies.
Differentiation is the way wine regions from Bordeaux to New Zealand
have carved out reputations for themselves. It is the only basis on
which 98% of Ontarios wineries can achieve sustainable success.
Differentiation
is the only basis
on which 98%
of Ontarios
wineries can
achieve
sustainable
success.
Some steps have already been taken in this direction. Chardonnay,

Riesling, Cabernet (Franc and Sauvignon), Gamay Noir, Merlot, Vidal,
Seyval Blanc and Baco Noir have been identified as good candidates on
which to focus the industry. The GGO has indicated its eagerness to
work with the industry on a differentiation strategy.
Unfortunately the current industry agenda is being set by wineries that
neednt concern themselves with the hard slog of building a world 2005 Grape Growers of Ontario
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class Ontario wine industry. Thanks to rules from which only they
benefit, their sales are growing nicely using imported wines, sold
through their own private retail networks and in the Ontario sections of
LCBO stores.
VQA-only wineries are the logical foundation of a sustainable Ontariobased wine industry, and the key to agricultural viability in Niagara.
But unless there are distinct advantages to being a VQA-only winery, it
is unlikely they will develop the strategic leadership they need.
Recommendations:
We recommend the government focus support on VQA-only wineries to
create a sustainable Ontario-based wine industry. The aim should be
to provide VQA-only wineries with their own set of strategic priorities.
Although all the recommendations in this report support VQA wineries,
we believe the following is also necessary:
1. Create incentives for VQA-only wineries: Find ways to
encourage VQA wineries to differentiate, including separate
regulation and taxation, if necessary. There is no need to treat
VQA-only and blending wineries equally, as the current regulations
clearly demonstrate.
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4. SUMMARY AND RECOMMENDATIONS

The recommendations contained in this report rest on one guiding
principle: Ontarios wine industry should be based on Ontario product.
This fact should be obvious, but as this report shows, we have drifted
a long way from this ideal.
Ontarios wine
industry should
be based on
Ontario product.
Moving to a home-grown industry will take some adjustment. It will

interfere with planned earnings growth and the established order. It
will certainly take political will. Everyone, including growers, will find
the adjustment difficult. But we believe it is the only route to a
sustainable and world-class Ontario wine industry.
The following are our recommendations:
1. Use public funds more wisely:
a
Allow only VQA wine sales in a WRS: This would provide the
best value to Ontario taxpayers and would affect only a handful
of the provinces 125 wineries.
Eliminate the benefit on foreign content: (Less effective

than a. above.) By tying the benefit to the bottle, the
government could recover the subsidy on WRS foreign wine
sales.
Distribute WRS licenses more fairly: Explore ways to enable

more than a handful of Ontario wineries to benefit from off-site
WRS sales.
2. Encourage Ontario content:

a
Require 75% Ontario content: Require, as in most U.S.

states, that wines carrying an Ontario label contain at least
75% Ontario content.
Build two-way flex into content rules: Recognize that the

wineries and the growers are part of the same value chain by
requiring that wineries take up the entire Ontario grape crop
before buying offshore product.
License a cooperative winery: Give Niagara growers the

right to pool their grapes to make and sell VQA wine as a
cooperative.
Page 20 of 27
Heres to Ontario!
3. Set world-class labelling standards

a
Require honest wine labelling: Require labelling that is fully

transparent and informative for the customer.
4. Expand distribution options for Ontario wines

a
Regulate VQA wine sales separately: License cooperatives

of VQA-only wineries for off-site retail sales, allow VQA wine
sales though grocery stores on a pre-paid tax basis, or
establish VQA wine stores as BC does for its wineries.
Reserve the LCBOs Ontario section for Ontario wines:

Move wine that is not at least 75% Ontario product out of the
Ontario section of LCBO stores.
Change LCBO merchandising policy: Direct the LCBO to

ease listing requirements and create more shelf space for VQA
wines.
5. Focus support on VQA-only wineries:

a
Create incentives for VQA-only wineries: Find ways to

encourage VQA wineries to differentiate, including separate
regulation and taxation, if necessary.
Page 21 of 27
Heres to Ontario!
APPENDIX I: HISTORY
Full Circle: A brief history of the Ontario wine industry and regulations
Before the estate wine industry appeared in the mid-70s, Ontario wineries seemed more
focused on making good money instead of good wine. For a brief period, we appeared to
be getting our priorities right. Today, as a result of government policy and regulation,
we risk coming full circle.
Timeline
PreOntario wineries produce poor product that attracts the customers it
1970s
deserves. The product is sold through the LCBO and company stores.
1970s
The Wine Council of Ontario (WCO) is formed to represent Ontario wineries

in negotiations with grape growers and the government. By 2005, Vincor
and Andres provide 75% of WCO funding.
1972
Wine Content Act allows Ontario wineries to import offshore product equal
to 10% of its Ontario grape purchases and to include up to 25% foreign
product in any one bottle.
1975
Inniskillin secures the provinces first new winery license since 1929.
According to its Web site, Inniskillin was founded upon and dedicated to
the principle of producing and bottling outstanding wines from select wine
grapes grown in the Niagara Peninsula.
1980s
The estate wine industry in Ontario takes off. Inniskillin is joined by

Chateau de Charmes, Reif, Hillebrand and many others.
1982
The Ontario government applies a 65 per 750ml handling charge on

foreign wines. Wine exporting countries complain.
1983
The grape growers successfully lobby the LCBO to introduce a floor price of
$5.90 to protect domestic wines from foreign agricultural subsides and
dumping. The floor price replaces the handling charge.
1988
Magnotta uses the new wine regulations to open a winery in the Toronto
area. Domestic and imported wine is aggressively priced and sold only
through its WRS, thus avoiding the LCBOs floor price. Customers flock to
Magnottas Vaughan store. The company applies for more licenses.
1988
Grape growers agree to pull out half of native variety vineyards in

exchange for compensation from the province. As a temporary measure,
Ontario wineries are allowed to import and blend up to 30% foreign juice
or wine, until domestic vinifera and French hybrid vineyards bear quality
fruit.
1989
As part of NAFTA negotiations winery off-site stores are grandfathered. No

new offsite company stores are to be licensed. All new wineries can blend
foreign wines and have one on-site winery retail store (WRS). Wines sold
through the LCBO must not carry lower prices at a WRS.
Page 22 of 27
Heres to Ontario!
Late
1980s
Vincor and Andres decide to become bottlers of foreign wines. The WCO
negotiates permission to import foreign wines for sale in the foreign wine
section of the LCBO. Wine drinkers show little interest in buying French
wine bottled in Ontario. The experiment is quietly abandoned.
1990s
Changing old world consumption patterns and emerging new world sources
create a fundamental worldwide oversupply of wine that continues today.
1990s
The LCBO begins increasing its mark-up on Ontario wines to bring them in
line with margins on foreign wines. The effect is to raise Ontario wine
prices and increase the differential between WRS and LCBO margins.
1991
Inniskillin wins the top prize at Vin Expo for its icewine.
1992
Vincor buys Inniskillin.
1993
After bleeding sales to Magnotta for 5 years, the LCBO changes the rules
to protect its monopoly. Wineries licensed post-93 can sell only 100%
Ontario wine. They can still have one on-site store, but now must locate
adjacent to a vineyard in a VQA-designated viticultural area.
1993
Following winter damage, Niagara growers experience a crop shortfall.

Wineries are allowed temporarily to boost foreign content from 70% to
90%.
1996
Vincor is listed on the TSE.
1999
VQA Ontario is designated as Ontarios wine authority with powers to

enforce an appellation system for wines made of 100% Ontario product.
2000
Labelling rules change to allow wineries to represent blended wines

containing up to 70% foreign content as cellared in Ontario and
represent them in the LCBO as Wines of Ontario.
2000s
Domestic wine listings at the LCBO fall from 536 to 471, even as the
foreign content in Wines of Ontario continues to increase.
2001
The wineries, growers, LCBO and Ontario government all endorse Poised
for Greatness, a cooperative strategy aimed at ensuring the health of the
Ontario wine industry value chain.
2002
WCO promotes its own 20-year strategy calling for half the sales of Wines
of Ontario to be foreign product. The document can be found on the WCO
Web site under the title, Poised for Greatness.
2002
Half of Vincors Ontario production consists of bottling foreign product.
2002
Growers and the WCO meet to develop market-responsive grape pricing.

To the growers, market-responsive means sharing the premium
commanded by fine Ontario wines with the growers who make them
possible. To the WCO, it means Ontario growers meeting the most
distressed price on the world market. The talks go nowhere.
Page 23 of 27
Heres to Ontario!
2003
In the wake of failed negotiations, the WCO proposes scrapping the

minimum Ontario content requirement. The councils reasoning: growers
will be unable to consistently meet prices from producers such as Chile.
2003
Following winter damage, Niagara growers experience a crop shortfall.

Wineries are allowed to boost foreign content from 70% to 90% until
February 2005.
2004
The LCBO makes a $1 billion profit for the first time.
2004
Inniskillin (now part of Vincor) kicks off its Canadian Olympic Series of
wines to celebrate and raise funds for the 2008 Winter Olympics. Among
them: the Olympic Chardonnay, mostly product of Chile.
2005
Vincor announces a 21% increase in annual profits.
2005
The largest players in the Ontario wine industry import and bottle foreign
wines and sell them in the Ontario section of LCBO stores and through
their company stores. Wine drinkers dont object to drinking foreign wine
bottled in Ontario, because they dont know.
Page 24 of 27
Heres to Ontario!
APPENDIX II: LCBO AND WINERY RETAIL STORE ECONOMICS

The right to sell through winery retail stores has become much more
valuable since 1990, the result of higher prices and margin
differentials between LCBO and WRS sales. Two wineries control 265
of Ontarios 290 off-site WRS.
Revenue distribution from a bottle of wine has changed
dramatically since 1990
1990
$7.25
100%
$3.45
$2.75
$1.05
< Average price per bottle >

Share of an LCBO sale
< To the winery >
< To the Ontario Government >
< To the Federal Government >
47.6%
37.9%
14.5%
2005
$10.15
100%
$3.91
$5.21
$1.04
38.5%
51.3%
10.2%
In 2005, a winerys gross margin on a WRS sale is more than

180% of gross margin on a sale through the LCBO.
1990
$3.45
0.335
LCBO PRICE COMPONENTS

< Winery revenue on an LCBO sale >
< Federal excise tax >
3.785
< Total landed cost >
0.72
< Federal Sales Tax @ 19%
4.50
Subtotal
0.577
1.125
0.18
0.045
*
*
$6.437
0.78
0.033
$7.25
5.19
71%
48%
*
*
*
12.8% < LCBO Mark-up > 58%

< Flat tax / Wine levy >
< Levy / Bottle levy >
< Environmental tax / fee >>
Subtotal
G.S.T. @ 7% >
< Ontario Retail sales tax @12 >
Rounding to nearest nickel
Less: Fees paid on WRS sales (approx.) >
< Price to the consumer >
< Winery revenue on WRS sale >
< Gross margin on WRS sale >
< Gross Margin on LCBO sale >
2005
$4.10
0.39
4.49
4.49
2.605
1.125
0.218
0.089
$8.527
0.597
1.023
.003
-0.40
$10.15
7.43
73%
40%
*
*
*
*
*
*
*
* Components of selling price retained by winery on a WRS sale.
Page 25 of 27
Heres to Ontario!
APPENDIX III: GRAPE GROWER ECONOMICS

Based on grape prices in other prime viticultural areas, Niagaras
tender fruit lands should be in demand for grape production. Instead,
Ontario grape farmers are caught in a squeeze between high land and
input costs and falling real grape prices.
Facts:
Cost of grape land in Niagara: As much as $20K per acre.
Grape prices (with few exceptions) have fallen since 1998.
Operating and vineyard replacement costs continue to rise.
Impact of Blended Wine Regulations:
Regulations allowing wineries to produce blends containing 70%
foreign wine have a triple impact on grape grower revenue.
1. They reduce domestic requirements from 100% of total wines
sales (VQA) to 30% (blended).
2. They increase the demand for lower quality varieties at the
expense of the vinifera varieties needed to support Niagara
land prices and to build a world-class wine region.
3. Foreign wine is used as a stick to depress domestic wine prices.
Together, these impacts effectively wipe out the agricultural benefit of
Ontarios wine industry as the chart below demonstrates.
Yield per tonne of grapes in bottles of wine
VQA
900
Price per tonne of vinifera grapes (e.g. Merlot VQA)

Ontario value per bottle of VQA wine ($1800/900)
$1800
$2.00
Price per tonne of blending grapes (e.g. Seyval, Vidal)

Percent of Ontario juice in a bottle of blended wine
Ontario value per bottle of blended wine ($500/900 x .30)
$500
30
$0.16
70/30
Bottom Line:
Ontario cannot build a sustainable wine industry on blended wines.
Page 26 of 27
Heres to Ontario!
APPENDIX IV: REFERENCES

Alcohol Gaming Commission of Ontario
http://www.agco.on.ca/en/a.about/a.about.html#vision
Andres Wines
http://www.andreswines.com/
Chile: Report on minimum wage
http://64.233.161.104/search?q=cache:fGlpzsy6KlMJ:www.ilo.org/public/english
/employment/strat/download/ep52.pdf+Chile+%22minimum+wage%22&hl=en
Grape Growers of Ontario
http://www.grapegrowersofontario.com/
Inniskillin Winery
http://www.inniskillin.com/en/default.asp
LCBO Annual Report 2003-2004
http://www.lcbo.com/aboutlcbo/annualreport2004.shtml
Napa Valley VintnersAmerican wine labelling rules
http://www.napavintners.com/wines/label.html
Vintners Quality Alliance
http://www.vqaontario.com/
Vincor International
http://www.vincorinternational.com/
Wine Council of Ontario
http://winesofontario.org/
Wine Content and Labelling Act:
http://www.e-laws.gov.on.ca/DBLaws/Statutes/English/00w26_e.htm
Page 27 of 27

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Heres to Ontario!

Building a world-class Ontario wine industry

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

Recognizing its potential, Ontario governments fostered the industry.

1.1. Creating a world-class wine region

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

1.2. A vision for all participants

Use public funds more wisely: Ensure winery retail stores

Strengthen Ontario wine content rules: Change regulations

Set world-class wine labelling standards: Require Ontario

Expand distribution options for Ontario wines: Fix the

Focus support on VQA-only wineries: Recognize the greater

1.3. The Goal: A world-class wine region in Ontario

Building a world-class Ontario wine industry

to enable the industry to evolve, especially over the past 25 years. We

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

Prepared by Heron & Company for

2005 Grape Growers of Ontario

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

2. THE CURRENT SITUATION

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

VQA: VQA designation, managed by the Vintners Quality

Product of Canada: To be labelled Product of Canada, a

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

Cellared in: Cellared in wines must contain at least

Half the wines

Other jurisdictions: Ontarios labelling requirements are

The cellared in label category, and the LCBOs practice of shelving

Under better circumstances, a healthy value chain could grow out of

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

3. RECOMMENDATIONS FOR A WORLD-CLASS INDUSTRY

On public policy grounds, WRS sales can be justified as

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

a) WRS foreign wine sales

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

2. Eliminate the benefit on foreign content: (Less effective than

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

3.2. Strengthen Ontario wine content rules

Historically, three arguments have been used by wineries to make the

Imports are all

In the 25 years since 1988, winery purchases of imported product

Building a world-class Ontario wine industry

Vincors Ontario grape purchases have grown just 20%and half of

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

2. Build two-way flex into content rules: Recognize that wineries

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

3.3. Set world-class wine labelling standards

2005 Grape Growers of Ontario

Building a world-class Ontario wine industry

3.4. Expand distribution options for Ontario wines

2005 Grape Growers of Ontario