Leases and logistics will be major factors in whether Ontario retailers can act on pending flexibility to sell beer, wine, cider and ready-to-drink alcohol-infused beverages in grocery and convenience stores. Liberalized rules had been slated to take effect across the province in 2026, but a newly accelerated schedule has advanced that timing to this summer and fall — extending regulatory permissiveness for private-sector operators well beyond the current network of about 450 licensed grocery stores and 225 boutique wine shops.

Eligible retailers will have to secure a license from the Alcohol and Gaming Commission of Ontario (AGCO) and abide by those conditions, but up to 8,500 will be made available. Under the phased rollout, grocery stores that are already licensed to sell wine, beer and cider can begin to offer ready-to-drink beverages and larger-quantity packs holding up to 30 containers as of August 1, 2024. Convenience stores can enter the alcohol sales market on September 6, with the remainder of grocery stores allowed to follow on November 1.

“Our responsible and balanced approach treats Ontario consumers like adults by giving them more choice and convenience,” Ontario Finance Minister Peter Bethlenfalvy said late last month, as the provincial government unveiled the updated schedule.

Given the sudden advancement of the start-date, many newly eligible retailers may be unprepared to jump into the market imminently. Other contractual obligations may also constrain or prevent their ability to do so.

“The legality of it doesn’t necessarily mean that a particular tenant can start selling alcohol,” affirms Marco Gammone, a partner practicing with Aird & Berlis LLP’s real estate and commercial leasing group. “There are typically three things in existing leases that apply and will govern.”

That begins with a use clause, which spells out what a tenant can do within the space. With that, landlords often include a list of general prohibited uses. As well, tenants may have to abide by the exclusive rights landlords have granted to other lease-holders within a facility. For example, a restaurant or anchor tenant may have the exclusive right to sell alcohol within a portion of or an entire mall.

Gammone foresees that convenience stores — defined under the regulation as venues no greater than 4,000 square feet, in which at least 50 per cent of the product space is devoted to food and beverages — will encounter more obstacles than larger food retailers. In contrast, use clauses for major grocery stores tend to be more expansive, allowing for many different kinds of uses and changes in use that are considered consistent with normal grocery store operations.

Compliance parameters and competing interests

Retail strategists point to other potential complications, particularly for small operators with limited shelf and/or storage space. Alcohol sales could bring staffing pressures since anyone handling the product will need to be at least 19 years of age and possess Ontario’s Smart Serve certification. There may also be concerns about security, new insurance costs and energy costs tied to an extra refrigeration load.

“It’s going to take up shelf and storage space so what do they give up in a small store to be able to accommodate the alcohol?” muses Lisa Hutcheson, managing partner with the retail strategy consulting firm, J.C. Williams Group.

“They may have higher-margin goods they’d rather sell,” concurs Alex Edmison, a senior vice president with CBRE who leads its urban retail team in Toronto.

Under the rules, the Liquor Control Board of Ontario (LCBO) will act as the wholesaler for grocery and convenience stores and is mandated to give retailers a 10 per cent discount on its basic retail price until 2026. The provincial government pledges to have a new wholesale price framework after that time, and to consult with stakeholders in devising it.

The pricing of individual products will no longer have to be uniform across Ontario, but it cannot dip below a designated minimum. Nor can retailers engage in marketing programs that offer rewards points or coupons or tie discounts on alcohol to the purchase of other types of products.

Despite a store’s business hours, alcohol can be sold only between 7 a.m. to 11 p.m.; packages of containers cannot be opened up and sold individually; and containers with a volume greater than 5 litres are prohibited. All alcohol merchandise must be delineated by product type and located in one contiguous area of the store, and at least 20 per cent of available beer, cider and ready-to-drink beverages must be from small producers. Allowable alcohol content cannot surpass 7.1 per cent by volume for beer, cider and ready-to-drink beverages or 18 per cent for wine.

Some market segments poised to prosper

Many retailers are expected to find room to manoeuvre profitably within those parameters. While the new retail flexibility is coinciding with what appears to be a general decline in alcohol consumption, it’s in sync with other trends that could serve some market segments, and their landlords, well.

“It’s certainly an interesting opportunity for specialty food businesses, where we’ve really seen a movement occurring.” Hutcheson says. “With people being a little more cash-strapped in the current economy, they’re not going to restaurants quite as much and they’re gravitating to the specialty grocers and the independent grocers. They’re also looking for efficiency and one-stop shopping and this could really align with that.”

Edmison notes that multinational convenience store chains like Circle K and 7-Eleven have a history in American jurisdictions where alcohol retailing has long been allowed, which likely comes with a corporate footprint for launching sales in Ontario. Even so,  rollout won’t necessarily speed up just because the start-date has been reset 16 months earlier than first scheduled.

“They might be trying to expand stores and slightly remerchandise them. The product is physically bulky so they might need a larger physical space,” he speculates. “That takes time to do, although they may have allowed for it in some of their newer stores, based on what they knew was coming.”

Meanwhile, favourable locations are tapped to deliver lucrative paybacks for both big and small players. “With all the convenience store locations that could be available in the province of Ontario, yes, there are going to be winners where alcohol sales are very accretive,” Edmison predicts.

Landlords could see spinoff benefits in increased foot traffic in malls and outdoor shopping centres, financially healthy tenants and potential for rent growth on lease renewal. However, percentage rent deals are not considered an expedient option.

“Landlords should be wary of taking a percentage of profits from revenue streams that they’re not licensed to take,” Gammone cautions. “Taking a cut of the profit generated from a controlled substance comes with some risk if they don’t have the same or a similar license as the retailer.”

Parallels to cannabis expected to be muted

The provincial regulation stipulates that First Nations band councils must pass an approving resolution before the AGCO can issue a license to a grocery or convenience store located on a reserve. Elsewhere, objectors appear to have little leeway to dissuade eligible license-holders if there is nothing in the lease to block them.

Gammone recounts the scenario that arose when some residential condominium corporations were stymied in their efforts to prevent cannabis retailers from establishing businesses in the commercial area of mixed-use buildings. Historic condominium documents that simply prohibited illegal activities became ineffective once cannabis was legal. However, he hypothesizes that past drafters may have had more foresight about potential future alcohol sales.

“The condo documentation didn’t (explicitly) prevent it because 10 or 20 years ago when they were creating these condo docs, nobody thought to prohibit the sale of cannabis. I think more people put their mind to the sale of alcohol in condo documents or leases because it’s a product that has been sold everywhere — in restaurants, the LCBO, the Beer Store, etc. — for a very long time,” Gammone muses.

Unlike the legalization of cannabis, which prompted a wave of leasing to accommodate a new category of single-purpose retail facilities, it’s expected most grocery and convenience store operators will initially begin selling alcohol under an existing lease. With up to 8,500 licenses promised to be available, there’s also less urgency to scramble to get into the market.

“I think retailers may choose to wait to see how it goes and what the competition is like,” Hutcheson says. “It will be interesting to see how some of the big grocery stores execute this. Right now, where it’s offered, it’s really just that boutiquey kind of aisle that’s got a lot of Ontario-based product and the small six-packs of things.”

“I would call it more incremental change than a profound shift in retail, but it’s, on balance, a positive,” Edmison maintains.