Thursday, May 31, 2012

#LiquorLeaks reveals Exel's ContainerWorld strategy

In the May 29 edition of Business in Vancouver, I examine the potential symbiotic relationship between Exel Logistics and ContainerWorld, the largest liquor "pre-distribution" warehouse under contract to the B.C. Liquor Distribution Branch. Read it here. The government's privatization of LDB's warehousing and distribution will phase out the "pre-distribution" program, meaning ContainerWorld may be in trouble.

Or is it?

ContainerWorld hired a lobbyist to oppose any changes to the distribution model. But now it is bidding for the contract. Founder Dennis Chrismas (below) and lobbyist Mike Bailey even went to meet liquor minister Rich Coleman on March 2!

ContainerWorld also has an intriguing business relationship with an arm of the Deutsche Post DHL empire, Giorgio Gori of Italy. Gori is a sister company of Exel. In the Oct. 6, 2009 "Project Last Spike" internal memo, Exel's vice-president Scott Lyons considers what to do about ContainerWorld, which is also connected to the B.C. Liberal Party that is rushing to privatize LDB logistics before the May 14, 2013 election. Exel wants to merge the B.C. LDB warehousing and distribution with Connect Logistics, the monopoly it owns and enjoys in Alberta.

Among the many questions to ponder about this controversial government sell-off: Are ContainerWorld and Exel foes? Or might they really be friends? Read more below, from "Project Last Spike."
Barriers to this Project
- This initiative will mean the services of private bonded warehouses will not be required. As a result, this group will oppose this initiative and they will likely lobby industry and government against any changes. Private bonded warehouses will argue that jobs will be lost, and the government is driving them out of business. They will also contend that costs will be higher because of the BCGEU's higher wages and benefits, and if there are any savings the government will keep them for itself. Lastly, they will make a case for improved service by expanding their participation in the industry
Options to Overcome Barriers
There are three options to overcome the opposition of private bonded warehouses. 
- Convince the government to award the contract to Exel without an RFP. This avoids the risk of losing an RFP. It may also enable the government to realize savings more quickly as time is not lost in the RFP process. It will require a high degree of industry support. Vocal complaints from unions or industry participants could generate public scrutiny and force the process to RFP. This option may require the purchase of ContainerWorld to be successful. 
- Win a competitive bid process. This option does not require the purchase of ContainerWorld, and follows standard government procedures. It does carry the risk the Exel might not win the bid. This risk can be mitigated if Exel can influence the writing of the RFP. Exel would push to include criteria such as previous industry experience, appropriate resources, and a solution incorporating the BCGEU. A likely response from the private bonded warehouses may try and limit the scope of the RFP to not include their activities. Failing this, the private bonded warehouses will use their influence to have the RFP written in their favour.
- Purchase ContainerWorld. It is by far the largest of the approximately 7 private bonded warehouses. Once ContainerWorld is onside the opposition of the remaining private bonded warehouses would be much less. This would enhance the odds that the government does not go to tender or Exel wins a tender. Dennis Christmas (sic) the principal owner of ContainerWorld is a key player in the current BC industry. Treating him fairly and getting him onside will assist bringing the BC government and the industry along. An added benefit of this approach is that ContainerWorld has a brand new 495,000 sq. ft. site that is expandable to 600,000 sq ft. This should meet the needs of this initiative, though Exel requires further analysis to confirm this site is sufficient. Dennis Christmas could be retained as a consultant and public relations specialist. The downside to this option is sharing the economic benefits with ContainerWorld. 
Though it may be possible to amortize the purchase price across a number of years and build the cost in to the operating model. Another consideration is the complex internal approvals required to purchase ContainerWorld. Further details on this option include:
0 ContainerWorld's revenues are estimated at $40M. Exel estimates that $20M is generated from freight forwarding activity, and $20M from distribution activities for BC Wineries and BC Small Brewers. A high level estimated purchase price ContainerWorld's business is $24M assuming a 7.5% margin and paying eight times earnings. This is a dimensional number which needs to be confirmed but supports the premise that an acquisition approach is overall economically viable.
0 The union representing ContainerWorld's employees is the Teamsters. Exel will be represented by the BCGEU. Upon purchasing ContainerWorld, and consolidating operations the BCGEU would take over the Teamsters members. This is not a certainty, but the BCGEU membership is almost two times the size of the Teamsters membership, and the BCGEU collective agreement is more lucrative.
0 Deutsche Post DHL holds a 100% stake in Giorgio Gori. Giorgio Gori does not have an ownership stake in ContainerWorld, but has a long standing relationship where it is understood that at some point they would purchase ContainerWorld. Exel could use this avenue to negotiate a reasonable deal with Dennis Christmas.

Richmond East Liberal MLA "Linda (Reid) pictured with Dennis Chrismas (left) while touring a local Richmond East business" 01/06/2010
Check out ContainerWorld's $36,261 donations since 2007 to the B.C. Liberals (including $500 to Rich Coleman's 2009 re-election campaign) via the Elections BC website. Chrismas gave an additional $1,300 under his own name in 2007 and 2010.

Compare that to the $85,704 donated to the Liberals by Gordon Campbell and Christy Clark's friend and (until March 30) Exel lobbyist Patrick Kinsella, and $57,500.50 donated by his right-hand man, Exel lobbyist Mark Jiles. Exel vice-president Scott Lyons donated $433.08 to the NDP before the 2009 election and $3,500 in 2011 to the Liberals, according to his disclosure.
ContainerWorld's Richmond warehouse on Port Metro Vancouver's Fraserport logistics campus.

Tuesday, May 29, 2012

#LiquorLeaks reveals Exel Pursuit Plan

In April 2008, executives of Exel Logistics, DHL Express, DHL Global Forwarding and since-sold ETS huddled for a corporate strategy workshop and decided that they would "leverage the capabilities" of Deutsche Post DHL companies. One of the strategies to achieve that goal was to import beverage alcohol goods into Canada, according to the Oct. 6, 2009, "Project Last Spike" internal memo:

Expanding the LDB mandate to offer importing and consolidation services for products destined to other provinces in Canada is a major step in executing this strategy. It combines the service offerings of DHL Global Forwarding, Exel and ETS.

The Last Spike memo, written by Exel vice-president Scott Lyons, includes two key pages on the Pursuit Plan and Owners. It is, essentially, a shopping list of things to do and a timeline. There are 11 references to "Rich Coleman" and "Rich," who was then and is now the BC Liberals' minister responsible for liquor. Key members of the Pursuit Team include Lyons and Mark Jiles, who is Kinsella's right-hand man in the Progressive Group lobbying firm. Read about the Pursuit Team here and see the two-page Pursuit Plan and Owners below.

Ultimately, Exel wanted to start the new fiscal year on April 1, 2010, with a 10-year contract to privatize the Liquor Distribution Branch's warehousing and distribution. For reasons not yet clear, the government of Premier Gordon Campbell did not go ahead with the LDB privatization as proposed, promoted and desired by Exel.

That changed when Christy Clark became premier in February 2011 and Coleman regained the liquor portfolio in February 2012. Clark's successful leadership campaign was backed by Exel lobbyist Patrick Kinsella, who was all smiles at the new premier's March 14, 2011 swearing-in ceremony. Kinsella de-registered on March 30, 2012 -- exactly a month before the Distribution of Liquor Project negotiated request for proposals was issued.

The government has published no business case or cost/benefit analysis for this privatization. Only two heavily censored Cabinet documents, obtained via Freedom of Information, that include a diagram oddly similar to one in the Exel memo.

Exel Logistics Pursuit Plan

Monday, May 28, 2012

#LiquorLeaks Privatization Primer

A pause to refresh and compile a list of links to media coverage and news releases about the controversial move by the British Columbia government to privatize the Liquor Distribution Branch's warehousing and distribution. 

Finance Minister Kevin Falcon revealed the plan in the Feb. 21 budget. Rich Coleman, whose portfolio includes gambling and liquor, launched a negotiated request for proposals on April 30. Deadline for bids is June 29 and a shortlist, that could be as small as one company, is expected July 20. 

Full coverage in Business in Vancouver

NDP blasts liquor privatization process

The Tyee: Exel's long march to control B.C.'s liquor distribution 


Reveals Exel's expansion strategy

Reveals Exel's contract terms 

Glacier newspapers' Keith Baldrey: Liquor sale smells fishy 

Shaw TV's Sean Leslie: This Week in B.C. 

Global TV's Marisa Thomas: Are liquor prices set to get higher? 

B.C. Craft Brewers Association news release -- B.C. Craft Brewers Guild opposes privatization of B.C. Liquor warehouse  

Canadian Restaurant and Foodservices Association news release -- CRFA applauds intention to privatize Liquor Distribution Branch  

Note: CFRA cites the 2005 Ontario government's Lacey Report and a Montreal think-tank's 2005 report, both recommending an increased private role in the liquor industry. Neither, however, offer in-depth analysis of the supply chain and its costs. The B.C. government did no such study before embarking on the distribution and warehousing privatization.

Note: In 2007, the Alberta government was reeling from 2006 supply chain chaos at Connect Logistics, the Exel-owned company that became the private monopoly in 1994. The labour shortage and management of the warehousing and trucking created a perfect storm of trouble for the industry. 

PricewaterhouseCoopers report for Alberta Gaming and Liquor Commission: Liquor Warehousing and Distribution in Alberta Supply Chain Analysis

CFRA's key comments are on page 23: 
"AGLC and CLS (Connect Logistics Services) must do a better job forecasting demand and planning for spikes in volume. There must be performance incentives in CLS' contract to ensure service levels are maintained and delivery times are guaranteed during busy peak times. Given the monopoly CLS enjoys there is no risk of losing market share due to poor service. Why would CLS increase their costs by providing more staff to ensure service levels are maintained when there is no risk of losing customers? In the absense of competition AGLC must ensure CLS maintains service and delivery standards without passing on additional service costs to retailers and licensees."


All evidence so far shows that the privatization tender in B.C. is driven by one company, Exel, and its B.C. Liberal-connected lobbyists. There are serious questions about the integrity of the bidding process, but my repeated requests to interview Minister Rich Coleman have been denied. 

Did the government learn any lessons from the tainted BC Rail sale? This is a process governed by a hard deadline of March 1, 2013. The next scheduled election is May 14, 2013. The cash-strapped government desperate to hold onto power is hungry to cut costs and increase revenue by any means necessary. 

There is no business plan or cost/benefit analysis and the government does not want to show you or me what's hidden in the cabinet documents. If the idea to privatize liquor logistics is solid, if there is data to back it up and if it will benefit the province, why does the government refuse to show us proof? 

The sale of alcohol is a major revenue generator and contributor to our economy and I'm among many proud supporters of B.C. wines and microbrews. LDB poured $890.4 million of profits into provincial coffers in 2010-2011. Some of those dollars helped fund the operation of schools and hospitals. The government wants more, so it's opening up a new sales channel via movie theatres. Cineplex hired lobbyist and Liberal insider Marko Dekovic to arrange a meeting with liquor minister Rich Coleman.

In the rush to wring more revenue out of the taps, is the government neglecting the social side of the equation? Alcohol is a legalized drug that is addictive. Visit any Provincial courthouse on any weekday and you will be shocked at how frequent the misuse or abuse of alcohol is in the foreground or background of trials. You will see sad, broken people from disintegrated families. They are the opposite of the smiling, young people having fun in beer ads. Maybe you know someone who has battled alcoholism?

The Centre for Addictions Research of B.C. study called Alcohol Pricing and Public Health in Canada: Issues and Opportunities is worth a read. The pricing and taxation of booze, it says, "is arguably the single most important issue to tackle when addressing alcohol misuse from a public health perspective. It is also the hardest to engage because of the multitude of interests involved." Among its many recommendations are tying alcohol taxes and markups to the rate of inflation and simplifying alcohol volume and strength-based taxation to encourage the consumption of lower-alcohol drinks. 

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