On one level, Ontario liquor and wine consumers live in a perfect monopoly world. A stroll through a Liquor Control Board of Ontario (LCBO) store these days reveals a Taj Mahal of booze. Richly finished oak wine hutches abound, easy listening music wafts down from ceiling mounted speakers and some stores even feature chi-chi demonstration kitchens. Indeed, a modern day LCBO outlet -- which can represent an investment of more than $4-million -- looks as though it has been designed by Martha Stewart and stocked by Saint Nick. It's a radical departure from decades ago when the average Ontario liquor store had all the ambiance of a nuclear fallout shelter. All told, in the past six years, the LCBO has spent more than $300-million of taxpayer money to give its stores the Armani treatment.

The LCBO's annual report, released last week, has the same high-gloss patina. "Our eighth straight record year," boasts the cover. With annual revenue now in excess of $3-billion, and net profit reportedly exceeding $1-billlion a year, the Ontario Crown portrays itself as a model corporation, cranking out big profits and better consumer and investor vibes than Sears, Canadian Tire and Home Depot combined.

But don't raise a toast to monopoly just yet. The LCBO's financials -- much like its opulent flagship stores -- only look pretty on the surface. An analysis of LCBO by the Brewers of Canada shows the Ontario liquor and wine monopoly to be ripping off everyone, from consumers to taxpayers, while protecting itself and its 3,362 unionized employees from attack and criticism.

In "Optimizing Beverage Alcohol Retailing," a pre-budget submission to the Ontario government, the Brewers show the LCBO's "profits" to be a conceptual sham. In its latest annual report, delivered more than 365 days after the end of its fiscal 2002-3 fiscal year, the LCBO claims "net income" of $939-million on sales of $3.1-billion, based on shareholders equity of just $248-million. That's a profit margin of 30% and return on equity (ROE) of 353%. It also claims to have paid out of its profits a dividend to the province of $975-million.

Professor Donald N. Thompson, professor of marketing at the Schulich School of Business at York University, says he knows of "no other retail [tax-collecting] business in Canada (or indeed the world) that calculates ROE this way." The dividend, he says, is in fact a tax the LCBO charges consumers and remits to the province. To the LCBO's chief executive, Andrew Brandt, this tax, which has grown steadily over the years, demonstrates LCBO's powerful financial performance and the great value of maintaining a monopoly. The corporation's unions also tout the annual dividend as evidence that the last thing Ontario needs is competition in the liquor and wine distribution and retailing.

In fact, the LCBO lost money last year. After paying the $975-million tax, the corporation lost $35-million for the 2002-3 fiscal year, forcing it to dip into retained earnings.

The LCBO issues no regular financial reports, but it can project its dividend with uncanny accuracy. Last February, almost two months before the March end of its 2003-'04 fiscal year, the LCBO issued a statement giving advance notice that it "will deliver a ninth straight year record dividend transfer to the Ontario government of $1.035-billion."

The billion-dollar payoff announcement came conveniently as the new Ontario Liberal government was reportedly looking at privatization and other schemes that might generate more revenue. The message from Mr. Brandt: Tamper with us and you could lose $1-billion.

Above all, the cash pass-through helps stave off questions about the board's management, operations and financial performance. The LCBO's real financial returns, after taxes, are all but non-existent. In 2001-'02, it earned $19-million in net income, a feeble 0.9% of net sales after the tax. Its income that year as a percentage of equity worked out to 6.7%, not much better than Canada Savings Bonds. Then it lost money in 2002-'03.

The LCBO has had carte blanche to do its own thing for several years now, and under CEO Bob Peter, former CEO of the Bay and a flamboyant marketer, LCBO's operating costs have increased an average 6.7% a year during the last eight years, to $523-million a year, or $210-million more per year than in 1994-'95. Annual capital expenditures have increased from a low of $19-million in 1996 to an estimated $60-million in 2003. Other public institutions, meanwhile, endured harsh austerity measures. The provincial treasury could have gained $44-million in new revenues simply by freezing the LCBO's annual operating expenditures.

Increasingly, it seems that the unspoken strategy of the LCBO spending spree has been to thwart privatization. Indeed, so many stranded assets have been created of late that it is unlikely the LCBO could be privatized anytime in the near future. After all, the booze bureaucrats have stealthily sunk hundreds of millions of dollars into capital investments and long-term leases in some of the priciest retail locations in the nation.

On average, more than 50% of the price of a bottle of booze is made up of various government liquor taxes and markups. The LCBO loves price increases. In August, 2003, and again on March 1, 2004, the LCBO advised suppliers of distilled spirits that it was increasing the minimum retail price at which it would sell their products. If any supplier were selling a product at the minimum price, it would have to increase its price, whether it wanted to or not. Suppliers selling at prices above the floor were also advised that they could increase their prices if they wished -- no questions asked. Can you imagine the likes of Wal-Mart and or Costco requesting price increases from suppliers?

The LCBO now is motivated to lobby the government to increase alcohol taxes, because while higher prices mean its unit sales may fall (or its sales increase will be lower) and its real profit lower, the higher taxes will mean that its reported profit plus tax collected -- will increase," says Prof. Thompson.

What can be done to make this odious monopoly behave. At the very least, the LCBO's ministerial masters must put the brakes on the liquor board's outrageous spending. One way or another, it all boils down to political will -- a commodity that has been noticeably lacking of late when it comes to Ontario's out-of-control liquor control board.

David Menzies is a freelance writer.

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