Canadian whisky makers are getting worked over by government greed and regulations
CROWNED AND TARNISHED
Photos and video by Laura Pedersen
Canadian whisky was an integral part of Canadian life and it’s rare I run across a person who knows that story
“I spent 37 years at Chrysler in Windsor, building vans,” says LaRoye as Kristy Fregonese, in grain operations at Hiram Walker, lowers a stick to probe the humidity of his corn. With a roar, the fat orange kernels of corn pour from his truck into a hatch. Conveyor belts move the corn up into the distillery’s towering grain elevators. “I retired and started helping my neighbour haul his beans and corn. I’m going back to my childhood. Used to do this when I was 17, 18 years old — hauling corn to Hiram Walker.”
Hiram Walker is a mainstay in Windsor, which has been struggling for years as the manufacturing industry dries up, leaving it with Canada’s highest unemployment rate. But the booze industry, which arrived here long before automobile assembly, remains strong. Like their forefathers, workers here ferment Canadian corn, barley and rye in pure Canadian water to make J.P. Wiser’s and Canadian Club whiskies. Nine years before Confederation, in 1858, Hiram Walker, a grocer in Detroit, opened his distillery across the river in Upper Canada, which at the time had a more accommodating legal climate. Walker commuted by ferry and sold his spirits in both countries. The company remains the largest booze production plant in North America.
Movies such as The Untouchables and TV shows like Boardwalk Empire teach us that Americans gained their taste for Canadian whisky during Prohibition in the 1920s. But they began swilling our hooch much earlier, during their civil war, when the U.S. south stopped selling whisky to the north, and the Yanks and Confederates conscripted their distilleries to make weapons. By 1900, Canada was the world’s biggest whisky maker. Even up to the 1960s, the world’s two biggest distillers remained Canadian: Hiram Walker and Joseph Seagram & Sons Ltd.
Americans still love Canadian hooch. Texans alone drink 1.5 million cases of Canadian whisky per year. Crown Royal, which Diageo PLC makes at a distillery in Gimli, Man., is a huge U.S. brand, too. All told, Americans drink $700-million worth of the stuff every year. But Canada is not what it once was. It has slipped to No. 4 among the world’s whisky exporters, eclipsed by Scotland, the U.S. and even Ireland. Here at home, imported whisky grew its market share last year faster than domestic brands. “We don’t tell our story,” says Don Livermore, master blender at Hiram Walker. “We have such a rich heritage, Canadian whisky was an integral part of Canadian life, and it’s rare I run across a person who knows that story.”
In part, blame global consolidation. Canada’s nine big distilleries are foreign-owned; boards that make investment decisions sit far away in London, Paris and Chicago. Even more challenging is Canada’s tax regime. Taxes across Canada are so punishing on distilleries that they barely make ends meet on products they sell in Canada. Simply put, a winery in Ontario keeps about 80 per cent of the money a consumer spends on a bottle while a brewer keeps about half. A distiller keeps about a fifth of the purchase price of a bottle of whisky, with the rest going to the province and Ottawa.
To make matters worse, Ontario announced last year it will permit grocers to sell beer and wine, but not spirits. To determine the effect of this policy change, the Quebec experience is telling. In the 35 years since Quebec began permitting sales of wine and beer (but not spirits) in grocery stores, spirits plummeted to around 12 per cent of alcohol consumed from 40 per cent, while wine’s share grew ninefold to about 45 per cent. (Sources say that at a meeting awhile back, the spirits industry was shocked when Ontario Premier Kathleen Wynne referred to their category as “hard liquor,” a dated phrase that carries a negative connotation.)
The challenges for Canada’s whisky industry come at a time when the world is abuzz with excitement about what the industry calls “brown spirits.” Aficionados peruse thick glossy magazines such as Whisky (U.K.) and Whisky Advocate (U.S.), and hundreds of new distilleries have opened in the U.S., Scotland and Ireland. But connoisseurs had pretty much written off Canadian whisky until a demure lab worker in the suburbs of Montreal, Joanna Scandella, mixed together a whisky called Crown Royal Northern Harvest Rye that Jim Murray, one of the world’s pre-eminent whisky experts, pronounced his World Whisky of the Year for 2016.
There may be hope for Canada’s whisky makers after all. But the spirits industry says any true renaissance in Canadian whisky will require regulatory changes that governments just don’t seem prepared to make.
Making Canadian Whisky
Don Livermore, born in tiny Fordwich in southern Ontario’s agricultural heartland, earned a BSc in microbiology from the University of Waterloo and joined Hiram Walker 20 years ago. The company then helped him earn a PhD in brewing and distilling from Heriot-Watt University in Edinburgh, Scotland, a school some call the font of whisky knowledge. Along with his title as master blender, Livermore, 43, a tall gentleman with a winning smile and a keen nose, is a master raconteur. As we ascend many flights of stairs to the fermentation area at the Hiram Walker distillery in Windsor (the elevator is under repair), he spins stories of the roots of whisky in Canada.
“Canada was built on whisky,” Livermore says, standing in a vast room ringed with windows and a floor punctuated by dozens of steel bubbles, each the scale of a moving van. Thee bubbles are the lids of the fermenters. Workers mix milled corn, barley or rye with water and cook the mash in these gargantuan tanks. He lowers a tin cup into a fermenter’s hatch and brings up a steaming mixture that resembles cornbread batter. “If you look back in history, in the year 1900, the No. 1 taxpayer in Canada was Gooderham & Worts, No. 2 was Hiram Walker, No. 3 was J.P. Wiser, and No. 4 was Henry Corby. Each of these whisky barons were involved in politics. They shaped Canada.”
This was long before Canada in 1917 first imposed an income tax. Today, Ottawa and the provinces have dozens of sources of revenue aside from income taxes, including GST, HST, gas taxes and so on, yet every province remains hooked on booze as a key source of revenue. For instance, the Liquor Control Board of Ontario (No. 85 on the FP500) raked in more than $5.2 billion in sales in 2015 and Société des alcools du Québec (No. 138) pulled in over $3 billion.
Other liquor sellers across the country also made the FP500 ranking. Depending on your view, the Maritime provinces are the greediest when it comes to relying on booze sales, marking up a bottle of spirits by 200 per cent; Alberta is the least usurious, extracting just 103 per cent (though the province does not distribute or retail spirits).
Perhaps other provinces should follow Alberta’s lead and then some. Patrick O’Driscoll is CEO of Corby Spirit and Wine Ltd., which is 51 per cent owned by Hiram Walker & Sons Ltd., itself 100 per cent owned by Paris-based Pernod Ricard SA. On top of marketing Canadian whisky, Corby imports whiskies such as Chivas Regal, Glenlivet and Jameson. A native of England, he can’t fathom why we don’t sell spirits in grocery stores in Canada.
“For me the economics makes no sense,” he says. “The government raises a significant amount of revenue from sales of alcohol, and that funds health care or whatever, and the most profitable part of the category is spirits. And yet through not allowing access, or an even playing field, you are encouraging the consumer to shift to categories (like beer and wine) that are less profitable in terms of revenue.”
O’Driscoll says taxes discourage his parent company from investing in its Canadian division. “If I compare it to the capital expenditure being made in the Jameson distillery in Ireland or the Glenlivet distillery in Scotland, where they are literally building additional stills, the investment that is coming into the Canadian organization would be a lot more modest.”
Two young lawyers, Jesse Razaqpur and Charles Benoit, two years ago opened The Toronto Distillery Co. Ltd., the first new distillery in Toronto since 1933. They quickly realized why no one else has opened a distillery: with the punishing taxes, they cannot make a buck. So they went to court. In January, Toronto Distillery’s lawyer told a Superior Court judge that Ontario is ultra vires — beyond one’s legal power or authority — of the Constitution Act of 1867 when it allows them to keep just $13.83 of a bottle they sell for $33.34 at their distillery. It’s a tax they say Ontario’s legislature never put to a vote.
People in Nova Scotia have no idea how badly they are being ripped off
Margaret Jill Dougherty, a lawyer for the Liquor Control Board of Ontario, told the court Ontario keeps the price of booze high to protect the health of its citizens. “There are health risks associated with higher alcohol content which don’t exist with wine and beer,” she told the judge, who upheld the government’s view. “Government policy does not want to proliferate spirits distilleries.” Yet it’s perfectly happy to actively encourage having more wineries and breweries.
When Jan Westcott, the fearsome, excitable spokesman for Canada’s nine big distillers, read Dougherty’s words in his morning newspaper, he lost his composure. “That went around the world like shit through a goose,” Westcott, CEO at Spirits Canada, told me when we met at his public relations firm, Jessop, in Toronto. “I am trying hard not to believe that the government wants to impair the spirits business.”
Ontario, which marks up a bottle of whisky 163 per cent, is actually one of the lesser tax-grab offenders. Nova Scotia marks up whisky 200 per cent and British Columbia marks it up 196 per cent. “They are like banana republics,” Westcott says. “They do this because they can, because they are monopolies. Not only are they harming our business, they are also gouging their own customers. People in Nova Scotia have no idea how badly they are being ripped off.”
Yet despite Westcott’s gloom and doom, there are glimmers of hope in craft distilling across Canada. Ten years ago, Patrick Evans bought a 400-acre farm on central Vancouver Island from the University of British Columbia. In 2010, he opened Shelter Point Distillery and now grows 250 acres of barley. Workers at Shelter Point harvest the barley, mill it, then ferment, distil, age and package the spirits. Running full tilt, they make 150,000 litres of alcohol per year. For Evans, the sky is the limit.
“Scotland is 30,000 square miles and exports $4-billion worth of spirits,” he says. “Vancouver Island is 10,000 square miles, and exports zero spirits. Why can’t we export $1-billion worth of spirits? I say we can do it. Canadian products are clean and pristine and we have a great global image. We are distilling today and we are filling casks.”
Under Canada’s rules, distillers must age spirits for at least three years in a wooden barrel to call it whisky. In May, Shelter Point will bottle its first whisky, and, Evans says, export it to China. “We don’t want to sell in Canada,” he says. “We got the federal government pounding on ya, you got the province… might as well export.”
On the other side of the country, Glenora Distillers opened in 1990 on Cape Breton Island. In 2000, Glenora began to sell whisky, and became cashflow positive in 2006. This is a premium product; not long ago Glenora produced 750 bottles of its Glen Breton Rare Jardine Reserve 25-year-old whisky. Price tag: $750 a bottle. The owner, Lauchie MacLean, says this is not an industry for those wanting to turn a quick buck. “You have to plan out 20 years,” he says. “The whisky industry is like building a cottage on this great lake but you’re not going to use it until you retire.”
In 2009, Barry Bernstein and Barry Stein opened Still Waters Distillery in an industrial mall in Concord, north of Toronto, between a tooling company and an automotive supplies shop. Shelves here hold 250 barrels of maturing whisky; nearby stand the still, the mash tun and skids of Ontario rye. They are running out of space. “We will increase our fermenter capacity and buy a second still,” Bernstein says. It is slow going. “This year, we finally expect to be in a positive balance sheet situation.” Its Stalk & Barrel single malt whisky, 61.4 per cent alcohol, retails for $69.95 for 750 ml.
Like all whisky makers who spoke for this story, Bernstein says he distils whisky out of love, since it is near impossible to make a buck.
“Even if they drop the federal excise tax by a couple of points, it would allow us to hire more people, use more grain. If we had to open up again, we would drive down the road and open up in Buffalo, because we would get to keep 80 per cent, instead of one third. Canadian whisky has been left behind.”
O’Driscoll says a thriving craft spirits industry would help Canada’s distilling industry just as the craft beer and wine makers are fuelling their respective industries. “It would be extremely stimulating for industry to have new stuff, new ideas,” he says. To be sure, even the big players have entered the “craft” whisky category. Hiram Walker produces three niche whiskies: Gooderham & Worts, Pike Creek and Lot 40. Recently, Corbys sought to enter the U.S. market with these brands, and its flagship J.P. Wiser’s (Canada’s favourite whisky). But conquering a new market requires investment. “The funding of the U.S. venture has to come from our domestic market and, unfortunately, the structure of Canadian markets makes it one of the least profitable spirits markets in the world,” O’Driscoll says.
Liquor boards in Alberta, Ontario and Quebec insist they do their best to promote Canadian whisky. Alberta is home to three whisky distilleries. Alain Maisonneuve, in charge of liquor services at the Alberta Gaming and Liquor Commission (No. 93), says his group is trying “to equate our markup to the content of alcohol,” rather than unfairly burdening spirits. Linda Bouchard, a spokeswoman for the Sociéte des alcools du Québec, noted that sales of Canadian whisky have risen 11 per cent in Quebec in the past year, and the SAQ has added 10 Canadian whiskies to its shelves in the same period.
Strangely, she forwards a whisky article from SAQ’s magazine Cellier that mentions only scotch. Christine Bujold, a spokeswoman for the LCBO, says, “We give Canadian whisky a greater number of end aisle displays than its share of sales. As an example, when Northern Harvest Rye won the award, we moved it onto the end aisle to help promote it.”
The example is bizarre; the success of this rye (which has been sold out across Canada for months) comes from the international accolade it won, not any promotional effort by the LCBO. Still, Bujold insists, “we promote Canadian whisky because it’s good for the local economy.”
There was one small glimmer of hope in Ontario this year: the Liberal government increased taxes on beer and wine, but left spirits taxes alone. “What Ontario did is very positive,” Westcott says. “But I mean, I am running around cheering like a princess because they didn’t tax us. For what I do, that’s a big win. But one of my guys said to me the other day, ‘Calm down Jan, this is really good, but nothing in my business changed. It’s not getting any easier, I’m not selling more. They didn’t hurt us.’”
As a symptom of the self-effacing attitude of Canada’s distillers, it is impossible to take a tour or buy a bottle of whisky at the continent’s biggest distillery. In one building at Hiram Walker, an electrician on a ladder installs vintage lighting. Livermore wants to open a visitor centre and retail shop here (though O’Driscoll says financial constraints mean that could take years). “It’s been a decade since we’ve done tours,” Livermore says. “One of my strategic bets is to tell the Canadian whisky story. That’s our plan, to have tours and to get them to believe. Belief is a powerful emotion.”
Canadians have got to stop apologizing for their whiskies. We make great quality spirits. We undervalue it and we just don’t stand up and shout.
Livermore leads the way to the facility they call “drain and fill.” Machines on an assembly line plunge thick straws into oak barrels and suck out nine-year-old whisky, headed by pipe to the bottling plant. Within minutes, pumps refill the barrels with new distillate, and the barrels roll down the line. At day’s end Livermore drives 20 kilometres west to Pike Creek, where 16 hangars house 1.6 million barrels of whisky, aging slowly, ringed by forests. In summer, when workers open the huge sliding doors, the alcohol vapour is so strong that an employee can’t cross a warehouse without passing out, staff say. Distillers call the evaporating whisky “the angels’ share.”
Donald Campbell, the supervisor for maturation, notes that when he started here eight years ago, Pike Creek held just 1.3 million barrels; the increase is a vote of faith in the future of the whisky industry.
A worker rolls a barrel into an open spot, removes the wooden bung, and with a hand pump sucks amber liquid into a bottle. Livermore pours glasses for the assembled, announcing that this whisky is 20 years old. “Today is the 20th anniversary of when I started as a whisky distiller,” Livermore says. “I thought we could toast it. Canadians have got to stop apologizing for their whiskies. We make great quality spirits. We undervalue it and we just don’t stand up and shout. We all make good stuff.”
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