a strategic review of the future of alcool nb liquor

A STRATEGIC REVIEW OF ALCOOL NB LIQUOR 2011

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New Brunswick Liquor Corporation 2011 Report to Cabinet

A STRATEGIC REVIEW OF THE

FUTURE OF ALCOOL NB LIQUOR

Allain - Smith Report

November 22, 2011

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Fast Facts about Alcool NB Liquor We currently:

employ 456 full time employees, 241 casual employees

carry 1,878 products

offer service at over

We annually :

generate $160M in profits

return on investment of 10.6%

remit over $207M in remittances to

spend $588,000 on social responsibility (public awareness) initiatives

$70+ million to NB companies for products and services

$24.8+ million in salaries

sell 590,000 cases of wine

326,000 cases of spirits

334,000 cases of coolers

12,000,000 cases of beer, 35% of which is produced in NB

divert in excess of 72 million recyclable bottles and cans from the landfills

in excess of 5.2 million

lose less than .02% of annual revenues in retail shortages of all kinds

Annually, ANBL's net income is the equivalent of

• the construction of the following buildings:• 15 Seniors’ residences• 12 Standard size middle schools• 10 Community colleges• 8 Large elementary schools• 2 Medium sized hospitals, or• 6 Two-surface arenas

• 23 days of health care for the citizens of NB• 55 days of the education system for the citizens of NB• 150 to 160 kilometres of road construction

The estimated economic impact of ANBL on the NB economy is $175 million in wages and salaries and $329 million in GDP.

A STRATEGIC REVIEW OF ALCOOL NB LIQUOR

lcool NB Liquor:

456 full time employees, 241 casual employees

1,878 products

over 120 locations

$160M in profits

on investment of 10.6%

over $207M in remittances to governments

000 on social responsibility (public awareness) initiatives

$70+ million to NB companies for products and services

$24.8+ million in salaries

cases of wine

cases of spirits

cases of coolers

12,000,000 cases of beer, 35% of which is produced in NB

in excess of 72 million recyclable bottles and cans from the landfills

in excess of 5.2 million cases of refillable beer bottles from the landfills

less than .02% of annual revenues in retail shortages of all kinds

Annually, ANBL's net income is the equivalent of

the construction of the following buildings: 15 Seniors’ residences

Standard size middle schools 10 Community colleges 8 Large elementary schools 2 Medium sized hospitals, or

surface arenas 23 days of health care for the citizens of NB 55 days of the education system for the citizens of NB

road construction

The estimated economic impact of ANBL on the NB economy is $175 million in wages and salaries and

LIQUOR 2011

in excess of 72 million recyclable bottles and cans from the landfills

cases of refillable beer bottles from the landfills

less than .02% of annual revenues in retail shortages of all kinds

The estimated economic impact of ANBL on the NB economy is $175 million in wages and salaries and


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170 chemin Wilsey Road PO Box / C.P. 20787

Fredericton, NB Canada E3B 5B8

Tel. /tél. :506.452.6826

Fax./téléc.:506.462.2024 www.anbl.com

Honourable Blaine Higgs Minister of Finance Province of New Brunswick Fredericton, NB E3B 5H1 Sir:

November 22, 2011

We are pleased to present the enclosed Strategic Review - 2011 Report to Cabinet. We support management’s effort to define an exciting set of opportunities for the Corporation to continue the growth and development of the business in the challenging environment we all face.

We look for the support of the Minister as we address identified priorities and move toward implementation.

We welcome the opportunity to review the findings of this report in more detail with you.

Yours sincerely,

Ron Lindala Chairman Board of Directors

http://www.anbl.com


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170 chemin Wilsey Road PO Box / C.P. 20787

Fredericton, NB Canada E3B 5B8

Tel. /tél. :506.452.6826

Fax./téléc.:506.462.2024 www.anbl.com

Honourable Blaine Higgs November 22, 2011 Minister of Finance Province of New Brunswick Fredericton, NB E3B 5H1

Sir:

The attached strategic review of Alcool NB Liquor (“ANBL”) reflects the combined efforts of the experienced and capable management team over the past year.

The focus of this report is to create an informed dialogue on the opportunities available to ANBL. We believe there is an array of value enhancing opportunities available to us at this time.

Management recognizes that preserving the historic flow of capital to the province of New Brunswick is critical in this fiscal environment. As we review the organization we have assessed opportunities that preserve and optimize capital flow as priorities for the province at this time. We have nevertheless looked at opportunities to invest further in the business and have also addressed the possibilities related to raising capital.

In evaluating the historic performance and future opportunities of ANBL, we are aware that in addition to flowing capital to the province of New Brunswick, we also have an important economic development mandate in the communities we serve and in the local manufacturers and vendor base that we support.

We know that the business environment in the province is changing. During the recessionary period of the early 1990’s, ANBL net income actually fell, and only in fiscal 1996 did it return to its 1990 level. A similar phenomenon is currently being experienced, as for the first time in a decade; we have seen a dramatic slowdown in revenue growth in the past two years. Management believes that our ability to perpetuate revenue growth with price increases is diminishing, and to continue to grow the flow of capital to the province, we must as an organization become more creative and entrepreneurial. Like the previous experience, reversing this trend is a long-term proposition.

http://www.anbl.com


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One of the significant challenges that ANBL has faced in the past is the consistent turnover in leadership. With an appointed CEO, of which Mr. Allain is the most recent example, the longer term direction can be constantly changing. To establish the foundation for long term performance at ANBL this strategic review recommends governance changes to position the business as a leading retailer.

We look forward to reviewing the capital agenda we have established for ANBL in this report and the implementation priorities with you in further detail.

Yours sincerely,

Daniel Allain

President and Chief Executive Officer

Richard Smith

Senior Vice-President


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Table of Contents Executive summary - evolution of the asset .................................................................................................... 7

1. Background environment ...................................................................................................................... 10

1.1 Overview of ANBL history .............................................................................................................. 10

1.2 Overview of industry current state and future outlook .................................................................. 11

1.3 External factors ............................................................................................................................. 15

1.4 Legislative mandate, governance and constraints .......................................................................... 16

2. Assessment framework based on the capital agenda of ANBL ............................................................... 17

2.1 Framework introduction ................................................................................................................ 17

2.2 Evaluation process ........................................................................................................................ 18

3. Recommendation regarding identified opportunities ............................................................................ 19

3.1 Analysis of identified opportunities ............................................................................................... 20

Opportunity #1—Improve overall customer experience ................................................................ 20

Opportunity #2—Expand and restructure the retail network ......................................................... 24

Opportunity #3—Invest in technology systems to improve the efficiency and security of ANBL ..... 32

Opportunity #4— Develop broad based cost reductions and internal efficiency opportunities ...... 36

Opportunity #5—Review the governance structure of ANBL and drive transformation to a high performance culture with focus on long-term ROI ................................... 38

Opportunity #6—Pursue changes to the legislative environment and improve relationships with other government departments ........................................................................ 45

Opportunity #7—Explore strategic alliances (regional cooperation) with other liquor boards ........ 51

Opportunity #8—Explore monetization of a portion or all of the government of NB’s ownership of ANBL ................................................................................................................ 54

4. Summary of opportunities ..................................................................................................................... 59

5. Conclusion ............................................................................................................................................ 60 Appendix A – Ernst & Young’s involvement Appendix B – Historical net income since incorporation Appendix C – Canadian retail prices for one dozen bottles of beer Appendix D – ANBL beer volumes (in litres) vs. beer revenue ($) Appendix E – Research conducted Appendix F – Agency Store program Appendix G – ANBL strategic plan Appendix H – High-level illustration of value for ANBL Appendix I – ANBL opportunities quadrant (prioritized measures and targets)


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Executive summary - evolution of the asset Introduction

Following the New Brunswick provincial election in September 2010, the management team and Board of Directors of Alcool NB Liquor (“ANBL”) were given the mandate by the Premier to perform a strategic review of ANBL.

This strategic review has been mandated to focus on three key areas:

1. Strengthen new retail strategies 2. Increase revenues and profits 3. Determine new ways to change the culture and governance

Approach

Management engaged Ernst & Young LLP to assist with the creation of this report – see Appendix A for details of Ernst & Young’s role. We performed an analysis of the history and current state of ANBL to determine where opportunities may exist to improve the future financial performance of the Company.

A significant number of opportunities were identified related to the three areas described above by completing independent research, assessing alternative business models and the practices of other liquor jurisdictions, and by interviewing various management and operations staff.

Ernst & Young assisted with the development of the framework and prioritization criteria to review the identified opportunities. Management has divided these opportunities into two recommendations.

Recommendation #1 - Opportunities identified in current operations

A summary of these opportunities includes:

1. Strengthen new retail strategies. a. Improve overall customer experience. b. Expand and restructure the retail network.

2. Increase revenues and profits. a. Invest in technology systems to improve the efficiency and security of ANBL. b. Explore cost reductions, internal opportunities and pricing strategies to increase

contributions to the Province. 3. Determine new ways to change the culture and governance.

a. Review the governance structure of ANBL and drive transformation to a high performance culture with focus on long-term Return on Investment (ROI).

b. Pursue changes to the legislative environment and improve relationships with other government departments.

These opportunities exist in the current structure of the business. Management believes these opportunities should be pursued vigorously as part of the business plan. Management further believes the current flow of capital can be preserved with a combination of entrepreneurial retail strategy and cost management.


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Recommendation #2 - Opportunities to partner with third parties

In addition there are a number of ways in which the business model or ownership structure could be changed fundamentally.

1. Strengthen new retail strategies. a. Explore strategic alliances (regional cooperation) with other liquor boards.

2. Increase revenues and profits.

a. Explore the monetization of a portion or all of the government of NB’s ownership of ANBL.

Management has not explored these opportunities directly with third parties as additional research should be performed through a confidential third party process.

Conclusion

ANBL submits this strategic review to fulfill the mandate given by the Premier in late 2010 which focused on the following:


The strategic review identified a significant number of opportunities to address these key areas.

ANBL will pursue recommendation #1 in the short to medium term. Concurrently, further research and investigation should be performed regarding opportunities related to third parties, recommendation #2.

Management has concluded that the implementation of these opportunities will allow ANBL to continue to provide meaningful financial contributions to the province while sustaining a high level of customer and employee satisfaction, and improved service across the province. Although these opportunities will ensure the predictability of cash flows, it should be noted that the forecasted growth rate will be somewhat less than past experience given the challenging economic and demographic reality.

The following figure graphically depicts the current state of ANBL, an overview of the opportunities identified as part of this strategic review, the future state of ANBL when the opportunities are implemented and finally, the opportunities for future value realization by the province of NB.


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Value Progression of ANBL

This report will provide the details of the current state of ANBL, the opportunities available, and the future state of the organization while fulfilling the mandate of the strategic review.

Current state of ANBL(crown corp model)

§ Lack of understanding of customer needs and ineffectiveness of current marketing programs.

§ Business model primarily leverages price and margin control in a monopolistic environment.

§Underutilized and under developed retail network.

§ Lack of integration of IT systems.

§ Lack of succession planning and organizational design to address key management departures.

§Government involvement in the decisions of Management/Board.

§ Ineffective governance processes in place.

§ Advantages to ANBL across provincial departments.

§Minimal flexibility in negotiating with major suppliers.

§Underutilized cooperation with other liquor boards.

§ Politically appointed CEO and Board of Directors.

Implementation of opportunities

Recommendation #1§ Improve overall customer

experience.

§Expand and restructure the retail network.

§ Invest in technology systems to improve the efficiency of the Company.

§Explore cost reductions, internal opportunities and pricing strategies to increase contributions to the Province.

§Review the governance structure of ANBL and drive transformation to a high performance culture with focus on long term value of the business franchise.

§Pursue changes to legislative environment and improved relationships with other Government departments.

§Explore strategic alliances (regional cooperation) with other liquor boards.

§ Understand customers’ needs and implement the appropriate marketing mix to maximize sales.

§ Implement a pricing strategy.

§ Maximize retail network and strategy.

§ Deploy leading IT systems to increase integration with various aspects of the business and reduce costs.

§ Review process and staffing to maximize profitability and efficiency.

§ Implement an appropriate governance structure.

§ Implement a long-term comprehensive strategic plan to align the various departments within the business.

Future state(leading retailer model)

Strategic review 18 to 36 Months Long-term

Recommendation #2

§ Retention by Government of NB with optimal returns

§ Privatization of retail network

§ Monetization of a portion or all of ANBL

§ Amalgamation with other liquor boards

Future value realization

Further study required


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1. Background environment

1.1 Overview of ANBL history

ANBL was created in 1976 through the proclamation of the New Brunswick Liquor Corporation Act (“NBLCA”) and was mandated to be responsible for the purchasing, importing, distributing, and retailing of all beverage alcohol in NB. During the 1980s management shifted focus to growth and improving the responsiveness to customer needs. ANBL made significant investments in training employees, modernizing stores and updating technology to remain at the forefront of Canadian liquor retail organizations. This period was significant as it transformed the Corporation into a socially responsible retailer. As ANBL grew, the agency store program was established to service smaller towns and rural communities throughout NB whose volumes could not sustain corporate stores. The agency store network matured by the late 1990s and the focus turned from expansion to service improvement. Today, ANBL has a retail network of 48 corporate stores, 73 agency stores and 14 manufacturer’s agency stores. ANBL is proud to have been one of the first liquor boards in Canada to use a hybrid model, private (agency store network) and public stores, to service its consumers. This model has since been replicated in other liquor jurisdictions within Canada. In fiscal 2011, the Corporation contributed in excess of $162.0 million directly to the general fund of the provincial government. This is comprised of over $159.6 million in payments from net income, $2.1 million in remittances to the Environmental Trust Fund, and over $0.3 million in real property taxes. ANBL contributed $29.7 million in harmonized sales tax and $15.9 million in excise tax and customs duties to the government of Canada.

Using the Market Valuation Approach, ANBL’s value has been estimated at approximately $1.5 billion. Based on its fiscal 2011 earnings of $159.4 million, this equates to an impressive Return on Investment of 10.6%.

ANBL directly contributes approximately $215 per NB citizen; the average for the liquor boards in the remaining provinces in Canada is $198.90.

Throughout its history, the Corporation has provided high quality and consistent service to NB and assisted with the economic development of the province through the support of local business, local suppliers, and the employment of NB citizens.

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1.2 Overview of industry current

To provide context, we have highlighted indicators that compare the NB market to the liquor boards in other jurisdictions across Canada.

Market saturation levels

NB is currently the third least saturated in Canada (third highest number of people per outlet.) The current outlet base could increasubstantially before reaching Canadian averagesThere is an opportunity to increase revenues by closing the gap in market saturation.

7,519 7,1156,352

5,721

3,283

2,4272,065

ON PEI NB NS BC MB AB

Population per outlet


Overview of industry current state and future outlook

To provide context, we have highlighted indicators that compare the NB market to the liquor boards in other jurisdictions across Canada.

aturation levels

Per capita consumption

saturated province highest number of people per

e could increase before reaching Canadian averages.

There is an opportunity to increase revenues by

Compared to the other provinces, NBlowest total per capita alcohol consumptionmay be affected by non-ANBL outlet purchases (this is per capita consumption from ANBL outlet purchases). For example, managementthat NB citizens purchase in excess of million of beverage alcohol in Quebec each year.

2,0651,423

783

SK QC

Population per outlet

9.28.4 8.2 8.2 8.0 7.9 7.8

AB NL BC QC NS PEI MB

Total consumptionin litres of absolute alcohol

LIQUOR 2011

To provide context, we have highlighted indicators that compare the NB market to the liquor boards

onsumption

NB has the lowest total per capita alcohol consumption. Values

ANBL outlet purchases (this is per capita consumption from ANBL outlet

anagement estimates excess of $12 to $15

alcohol in Quebec each year.

7.6 7.4 7.0

ON SK NB

Total consumptionin litres of absolute alcohol

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NB has the second lowest operating expenses as a percentage of sales in Canada. This is partially due to the hybrid model (public and privately owned stores) used by ANBL which keeps operating costs low as agency stores are responsible for their own fixed costs.

40.0%BC (gov stores only)PEIONMBNBSK

QCNSNF

Gross margin

7.3%

6.8%

5.7%

PEI

QC

NF

ON

NB

MB

BC (gov stores only)

Salaries and benefits as % of salesNote: NS and SK do not publicly disclose salary and

benefit information


Margin Analysis

Cost Analysis

NB has the second lowest operating expenses as a percentage of sales in Canada. This is partially due to the and privately owned stores) used by ANBL which keeps operating costs low as agency

stores are responsible for their own fixed costs.

40.0%42.3%

48.7%49.1%49.6%50.0%

52.7%53.3%

57.8%

Gross margin

PEIBC (gov stores only)

ONQCNFSK

MBNSNB

13.5%

13.2%

12.6%

9.1%

7.3%

6.8%

Salaries and benefits as % of salesNote: NS and SK do not publicly disclose salary and

8.5%

PEIQCNFONNSSK

MBNB

BC (gov stores only)

Operating expenses as % of sales

LIQUOR 2011

NB has the second lowest operating expenses as a percentage of sales in Canada. This is partially due to the and privately owned stores) used by ANBL which keeps operating costs low as agency

25.7%31.4%

33.9%34.8%

37.5%38.4%39.3%39.6%39.9%

EBITDA margin

21.7%19.9%

19.1%14.8%

13.5%11.6%

10.6%10.3%

8.5%

Operating expenses as % of sales


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ANBL has posted strong financial results over the past 10 years; however the rate at which net income is growing has declined from 10% in F08 to 1% in F11.

Net income growth has largely been fuelled by price increases. See Appendix B for historical net income. The graph below illustrates the portion of sales growth attributable to price increases versus volume increases and shows that prices have continued to increase while volumes have remained flat and have decreased in 2011. Management believes that volumes are decreasing due to demographics (aging population that buys less per capita) and economic pressures. The significant decrease in volumes in 2011 is a clear indication that further aggressive price increases will not support long-term growth in revenue and net income.

Financial Performance

-

20

40

60

80

100

120

140

160

180

2003

2004

2005

2006

2007

2008

2009

2010

2011

Net Income (millions $)F03-F11

-10,000

0

10,000

20,000

30,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

Breakdown of sales increases by price and volumeF03-F11

Sales Price Volume

in 0

00's

of $

3%

8%

3%4%

4%

10%

5%

3%

1%0%

2%

4%

6%

8%

10%

12%

2003

2004

2005

2006

2007

2008

2009

2010

2011

Net income rate of growth (percentages)F03-F11


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To provide further insight on the relationship between price and volume, total sales figures shown above have been broken down into the four main product lines. Beer has been the most impacted within the last 10 years as 99% of sales increases are attributable to price increases and only 1% to volume growth. 85% of spirit sales have been driven by price increases and 15% by volume increases. Wine shows a more balanced growth trend between price and volume to some extent because wine is in the growth phase of its life cycle compared to beer and spirits, whose market is mature in the province.

To increase revenues, there is a need to expand the customer base and drive volumes by optimizing the access points and by focusing on customer needs and buying patterns.

The trend related to beer sales is not only occurring in NB. As shown in Appendix C beer pricing across the country has experienced similar patterns, with the exception of Quebec. Appendix D further demonstrates the historical disconnect between beer prices and volumes sold.

The declining number of retail transactions in the corporate stores over the past five fiscal years further supports ANBL’s need to focus on increasing the volume of beverage alcohol sold. The following table summarizes the transaction numbers since fiscal 2007.

Fiscal year ended March 31

# of transactions in ANBL corporate stores

Year over year change

2007 11,014,409 Not available 2008 10,972,950 -0.4% 2009 10,780,301 -1.8% 2010 11,107,664 3.0% 2011 10,994,048 -1.0%

This downward trend has continued in fiscal 2012 as the customer count has dropped 9.7% over the same period in fiscal 2011 (April to October).

Price99%

Beer sales increasesF03-Budget F12

Volume 1%

Wine sales increasesF03-Budget F12

Volume 55%Price 45%

Other beverage sales increases

F03-Budget F12Volume 26%

Price 74%

Spirits sales increasesF03-Budget F12

Volume 15%

Price 85%


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The reduced customer count has had a negative impact on the net income of ANBL; net income is currently projected below historical trend and, in some models, it actually begins to decline going forward. 1.3 External factors

A slower than expected global recovery from the recession of 2009/2010 has governments worldwide faced with fiscal challenges and slow to moderate economic growth. The Canadian economy as a whole is expected to experience moderate growth in the short term. As shown below, all provinces across Canada have made a downward adjustment in their growth forecasts in September 2011.

New Brunswick faces similar challenges. The New Brunswick Department of Finance projected that real GDP growth will slow down to 1.5% in 2011 down from 2.0% in 2010.1 A further decline to 1.4% is forecasted for 2012 before real GDP returns to a positive growth trend in 2013.2

Declining employment is an ongoing problem in the province. With the weak economic recovery in the United States, the manufacturing and export industries have experienced a slowdown in growth, and job losses. It is expected however, that increases in service sector jobs will offset the downward trend in employment although New Brunswick will still remain behind most of the other provinces in terms of job creation.

Increased pressure on disposal income is already starting to slow consumer spending3. Retail trade at the end of 2011 is forecasted at an annual average percentage change of 4.0% down from 4.1% in 2010.

1 2011-2012 Economic Outlook, Province of New Brunswick, Department of Finance, 22 March 2011 2 Statistics Canada, Economic Accounts Key Indicators 3 TD Economics Provincial Economic Update 22 September 2011

0

1

2

3

4

5

6

CAN NL PE NS NB QC ON MB SK AB BC

Downward Revisions Made to All Provincial Growth Forecasts in 2011

September 2011 Forecast

June 2011 Forecast

Annual % change in real GDP

-0.5

0

0.5

1

1.5

2

2.5

3

1995-09 2009 2010E 2011F 2012F 2013F

New Brunswick Growth History and Forecast

Annual % change in real GDP

E-Estimate F-Forecast


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The 2012 forecast has retail trade at 2.7%. With consumers’ discretionary income decreasing, ANBL is now increasingly competing for fewer available dollars.

1.4 Legislative mandate, governance and constraints

ANBL is mandated by the NBLCA to carry out the general business of manufacturing, buying, importing and selling liquor of every kind and description.

ANBL’s vision, mission, and values are as follows:

Vision: To be a leading retailer, driven by customer experience.

Mission: To responsibly manage a profitable liquor business for New Brunswick.

Values: 1. Service excellence

2. Our people

3. Corporate citizenship

The NBLCA calls for the Corporation to be administered on a commercial basis, and stipulates that all business decisions and actions are to be based on sound business practices. The future of ANBL is highly dependent on evolving the focus to operating on a full commercial basis in order to achieve future growth in revenue and profitability. This requires a shift in governance practices that will enable this change and to fully transform the culture of ANBL to a high-performance organization.

In early 2011, the Board of Directors approved a revamped and thorough governance manual whose implementation is important to the success of the initiatives outlined in this report. Successful implementation of the governance processes requires full support from management, the Board and the government. ANBL will be engaging these three stakeholders in the governance processes to ensure alignment.

Opportunities have been identified related to governance which if implemented will allow ANBL to be able to compete with leading Canadian retailers.


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2. Assessment framework based on the capital agenda of ANBL

2.1 Framework introduction

Management has undertaken a strategic review of ANBL to ensure that the returns on capital to the government of NB are maximized. This strategic review has focused on the various classifications of capital utilization.

There are four key classifications to the capital agenda, namely, how ANBL preserves, optimizes, invests and raises capital. These classifications are further described below.

Capital agenda classifications:

Ernst & Young LLP was engaged to provide the framework in which the opportunities were reviewed and examined. See Appendix A for an outline of Ernst & Young’s role in the creation of this report.

Investing – Strengthening investment value and execution methods so that value can be realized while managing increased risk from opportunities.

The Capital Agenda

Preserving – Reshaping the operational and capital base to reflect the risks and realities of the current state of the operating environment.

Optimizing – Driving cash and working capital, managing the portfolio of core

and non-core assets to improve efficiencies and accelerate return on

capital to the shareholders.

Raising – Assessing future capital requirements and

determining how funding sources can be diversified to increase options.

The Capital Agenda


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2.2 Evaluation process

Management used the capital agenda described above to identify and categorize the broad range of opportunities, which are further assessed and analyzed using the following framework:

Opportunity title

Opportunity # Detailed opportunity title Capital Agenda Classification

Background information

Provides the general context and applicable historical information on the opportunity identified.

Opportunity description

Provides a detailed definition of the identified opportunity.

Objectives (results upon implementation)

Identifies the desired results and benefits of implementing the identified opportunity.

Risks and constraints Outlines the barriers and risks to achieving the objectives.

Prioritization The identified opportunities were prioritized using criteria that are reflective of the mandate and objectives of the organization.

Prioritization criteria

Preservation of the short-term contributions to the province

Yes or No

Preservation of the long-term contributions to the province Yes or No

Compliance with ANBL’s social responsibility mandate Yes or No

Promoting the economic development of the province Yes or No

Prioritization rating Low, Medium, or High

The following section of the report will analyze the items that were identified as ANBL opportunities using the framework described above.


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3. Recommendation regarding identified opportunities

As previously discussed, following the New Brunswick provincial election in September 2010, the management team and Board of Directors of ANBL were given the mandate by the Premier to perform a strategic review of ANBL.

This strategic review has been mandated to focus on three key areas:


As part of the strategic review, management identified over 50 opportunities through independent research, assessing alternative business models, the practices of other liquor jurisdictions, and by interviewing various management and operations staff.

See Appendix E for the scope of the research conducted.

This list of 50+ opportunities was further refined to remove operational and low priority items. The remaining opportunities identified as part of this strategic review are summarized below and discussed in greater detail within this section of the report. Management has divided these opportunities into two recommendations: 1) opportunities that will be implemented in the short to medium term, and 2) opportunities related to third parties that required further research and investigation.

Recommendation # 1 - Opportunities identified in current operations

A summary of these opportunities includes:

1. Strengthen new retail strategies. a. Improve overall customer experience. b. Expand and restructure the retail network.

2. Increase revenues and profits. a. Invest in technology systems to improve the efficiency and security of ANBL. b. Explore cost reductions, internal opportunities and pricing strategies to increase

contributions to the Province. 3. Determine new ways to change the culture and governance.

a. Review the governance structure of ANBL and drive transformation to a high performance culture with focus on long-term ROI.

b. Pursue changes to the legislative environment and improve relationships with other government departments.

Recommendation #2 - Opportunities to partner with third parties

In addition, there are a number of ways in which the business model or ownership structure could be changed fundamentally.

1. Strengthen new retail strategies. a. Explore strategic alliances (regional cooperation) with other liquor boards.


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2. Increase revenues and profits. a. Explore the monetization of a portion or all of the government of NB’s ownership of

ANBL.

3.1 Analysis of identified opportunities

Opportunity #1—Improve overall customer experience

Given the monopolistic environment in which ANBL operates, historically ANBL has not focussed on competing with other retailers in the market place. ANBL could improve its revenue and profitability by modelling its operations after some of the world’s leading retailers. This would include gaining a better understanding of who its customers are, what they would like to purchase, their spending patterns, etc. By having the appropriate information ANBL can target its marketing strategy to improving the overall customer experience.


Opportunity 1.1 Conduct customer research to better understand market trends and growth opportunities

Optimizing and preserving capital


Historically, consumer research has not been a focus of ANBL’s marketing department. However, this extremely important part of the marketing mix is vital for not only current marketing successes but also for future indication of market trends and growth opportunities. Without an ongoing understanding of the target audience, including buying patterns, demographics, psychographics and other relevant consumer indicators and information, ANBL will not have the requisite understanding it needs to provide relevant and timely programmes for the NB consumer.


By conducting research on the following, ANBL will be in a position to improve revenues and spend marketing/advertising dollars more effectively. This includes gathering information on:

• Public opinion of ANBL and its services provided to the province of NB.

• In-store experience of customers.

• Types of customers (products purchased, purchaser behaviour, etc.).

There are a variety of ways to conduct the aforementioned research, including:

• Focus groups.

• In-store intercepts.

• Online surveys.

• Use of suppliers’ databases and knowledge.

Any research conducted must be statistically significant and focused on the NB marketplace and ANBL’s customers.

Research should also be conducted on the pricing of ANBL products. Management recommends completing a survey of customers close to cross-border locations to better understand how the revenue leakage could be eliminated. For example, it is estimated that approximately $12 to $15 million of annual revenue is lost by NB citizens purchasing beverage alcohol in Quebec.


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With the appropriate market knowledge, ANBL will have the ability to provide relevant and timely programmes for the NB consumer, leading to an increase in revenue and net income.

Risks and constraints

• The estimated cost to complete the required research is $100,000.

• Inability to create a unique identity for products in the marketplace and the ANBL brand.

• Inability to effectively drive marketing efforts to stimulate demand for high margin products.

• Inability to optimize pricing strategy to achieve higher margins.

Prioritization Prioritization criteria

Preservation of the short-term contributions to the province X

Preservation of the long-term contributions to the province X

Compliance with ANBL’s social responsibility mandate -

Promoting the economic development of the province -

Prioritization rating Medium


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Opportunity 1.2 Create a marketing brand strategy Optimizing capital


ANBL does not currently have a market brand communication strategy in place.


ANBL will develop a brand strategy to ensure consistency in communications to customers and the public. A marketing agency should be hired to complete a review of ANBL branding and communications. An effective brand strategy will draw customers into the stores and allow the highly skilled staff to focus on sales.


• ANBL’s brand strategy would be used to develop a multi-pronged, consistent approach to communications to attract customers into the store.

• This communication strategy incorporates social responsibility.


• There is a risk of incorrect communication, messaging and media mix causing marketing dollars to be wasted.

• Advertising message may be inconsistent with brand image, creating brand confusion among customers.

• Without a clearly articulated marketing strategic direction, advertising firms may fail to deliver ANBL’s advertisements according to strategy.




Compliance with ANBL’s social responsibility mandate X




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Opportunity 1.3 Initiate proactive pricing strategy and a long-term marketing plan

Optimizing and preserving capital


Historically, ANBL’s marketing plan has been reactive and short-term (nine months to one year) focused and has not been fully tied to the strategic plan of ANBL. As a result there is little effort outside the marketing group to assist in achieving the goals set out in the plan.

ANBL is under increased pressure to implement a new pricing strategy because of declining volumes and the need to be more flexible in the market. See Appendix C and D.


This marketing plan should be expanded to incorporate customer research, forecasting, the NB economic outlook, comprehensive pricing strategy, and be aligned with the strategic plan of ANBL to ensure that other departments assist in achieving the established goals.

This comprehensive pricing strategy should address a number of pricing related issues currently faced by ANBL, including:

• The movement of NB citizens outside ANBL’s market to purchase beverage alcohol.

• A detailed review of the protocol for beer pricing.

• Possible discounts for volume purchases.


The objective of a proactive, long-term marketing plan is to align the various groups/departments within ANBL to work towards a common goal (increased revenue and net income), and yet be reactive to market changes.

An additional objective of the marketing plan is to generate additional revenue by retaining/attracting customers into ANBL’s stores.

The objective of the pricing strategy is to optimize ANBL revenues while offering customers quality products at competitive prices and keeping with ANBL’s mission to operate as a leading retailer.


• A cohesive long-term, proactive marketing plan would require the assistance of outside consultants.

• There is a risk that significant effort and resources will be invested into the marketing plan without the appropriate support from other areas of the business.

• Inability to monitor impact of the plan and measure progress against market strategies and objectives.






Prioritization rating High


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Opportunity #2—Expand and restructure the retail network

New Brunswick has the following distribution channels for the legal sale of beverage alcohol in the province:

Off-site consumption

1. Corporate stores, operated by ANBL (owned or leased), are located in larger centres in the province.

2. Agency stores, owned and operated privately, are located in smaller and more remote communities whose sales volume cannot sustain a corporate store.

3. Manufacturer’s agency stores and Cottage manufacturer’s agency stores are private sector outlets who sell products manufactured on site. The distinction between the two types is made primarily based on the size of the production facility.

On-site consumption

4. Licensees, licensed by the Department of Public Safety under the Liquor Control Act, operate a variety of establishments such as restaurants, bars, legions, and nightclubs.

5. Brew pubs are establishments that produce beer and sell it for consumption on-site.

As of April 1, 2011, this network consisted of 48 corporate stores, 73 agency stores, 2 manufacturer’s agency stores, 12 cottage manufacturer’s agency stores, approximately 1,700 licensees, and 2 brew pubs.

Since the present retail model was established in 1992, market conditions have evolved; there have been changes in consumer demographics, population distribution, and traffic patterns. The mix of corporate and agency stores has evolved along with the changing market conditions; however, there are further opportunities to expand the network. As noted previously, recent studies show that NB is less saturated than other provinces (number of stores/population base) and the store base could be increased significantly before reaching average Canadian saturation.


Opportunity 2.1 Expand and restructure the retail network Investing and optimizing capital


There is heightened pressure on ANBL to increase revenue and profitability. One way to achieve this objective is to increase volumes sold by increasing the number of access points in the market and ensuring the optimal mix of corporate and agency stores across the market.

The current liquidation store model (introduced in 2009) is similar to other corporate stores. However, liquidation stores also contain a permanent liquidation centre where discounted and clear-out products are displayed.


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Liquidation model

Fine tune the liquidation model (based on lessons learned with the initial location in Salisbury) and expand the number of liquidation stores with a focus on border crossing points and gateways.

Niche/specialty stores

Allow for niche/specialty operations, for example private wine stores and beer stores that service a single product category.


Liquidation model

Benefits to fine tuning and expanding the liquidation model including the following:

• Increased opportunities to target competitors, including Quebec/U.S. cross border shopping.

• Lower construction costs.

• More flexibility for customers, including volume discounting, unique pack sizes and access to liquidation stock.


Allowing for stores that serve a single category creates a new access point targeted at a previously untapped niche segment of the market (specialty wine and beer).


Liquidation model

• Objections from neighbouring provinces due to the increased competition.

• Potential revenue cannibalization from other neighbouring agency and corporate stores.


• The current agency programme does not allow agents to sell single product category.

• There may not be adequate population density to support niche specialty stores. (Further market research should be conducted to validate the existence of a viable market).

• Given the nature of specialty and niche stores, inventory is expensive and difficult to obtain in small quantities.

• Potential for issues related to social responsibility.





Promoting the economic development of the province X



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Opportunity 2.2 Refine and enhance the agency network Investing and optimizing capital


• The Agency store programme is designed to provide improved services in remote communities that cannot support a traditional ANBL corporate retail outlet.

• Agency selection is based on best business case and is shielded from the political process.

• As of the end of fiscal year 2010-2011, agency store sales amounted to $76 million, or 18.4% of total sales.

• The agency programme is set up for stores with sales volumes of between $300,000 and $2,600,000, based on the internal retail review performed in 2007 by ANBL.

• To date, the criteria for establishing an agency store are as follows:

• Must be at least 15 kilometres from the nearest alcohol beverage service point.

• Can only be established in a community without an existing retail beverage alcohol service outlet.

• Will not be located in NB cities.

See Appendix F for additional criteria related to the business case for an agency store.


• Refining the agency model:

• Reducing the size of the exclusion zone from 15 km to a smaller distance such as 5 km or 10 km.

• Allowing multiple agency store appointments if total sales in a community exceed a predetermined amount, or increase the upper limit for agency stores.

• Enforcing greater operational control for ANBL within agency store operations with respect to product lists and merchandising. This is important as this segment represents 18.4% of sales and agency operators cannot dedicate the time or resources to optimize merchandising strategy.

• Expanding the selection of wines offered by agents in order to attain per capita wine sales consistent with corporate stores (beer and spirits are consistent).

• Increasing agency participation in marketing promotions by increasing the financial reward to agents from promotional programmes.

• Increasing use of technology – ANBL should expand functionality of the web channel to service the administration and information needs of the agencies.

• Ensuring agents comply with current ANBL IT requirements.

• Broadening the agency network to include express stores within grocery stores in urban areas only (pilot projects in Moncton, Fredericton, Saint John, Sussex, and Miramichi). This option will require clear and precise guidelines. A two-


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phased approach would start off with wine (utilizing top sellers from ANBL’s existing portfolio) and then expand to beer and spirits through a second phase.

• Reviewing market saturation in NB to determine if there are areas with inadequate coverage (parameters for “adequate saturation” would need to be defined).

• Reviewing the corporate model and determining if there are corporate stores that should be turned into agency stores based on current sales volumes.


• Increasing revenues generated from the agency portfolio.

• Increasing customer exposure to ANBL products.

• Increasing agency store contribution margin through efficient operations/back office structure (price verification, ordering/invoicing).

• Continuing to monitor the required commercial standards related to agency stores (described above).

• Using a web channel for administration and information exchange has the potential to resolve existing communications, ordering/invoicing, price verification, and product labelling issues.

• Reviewing the corporate model to optimize store operational profitability.


• Extent to which the corporation is able to influence participation in the use of corporate recommended tools and technology not provided currently.

• Increasing the number of agency stores may cannibalize sales from corporate stores. This highlights the importance of market analysis to determine optimal saturation.

• May receive backlash from other agency stores if sales are reduced.

• Could impact the financial viability of other agency stores.








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Opportunity 2.3 Improve relationships with the licensee community Investing and optimizing capital


The Licensee community is made up of approximately 1,700 individual licensees that operate a variety of establishments including, but not limited to restaurants, nightclubs, beverage rooms, hotels, motels, dining rooms, lounges, military canteens and legions.

Volume sales to licensed establishments have declined in recent years and are virtually unchanged in terms of dollars of revenue generated. The chart below compares sales, in dollars, over the past decade for the general public, licensees, agents, and other sources.

The Licensee community represents a unique channel within the overall network. While the majority predominantly work independently from ANBL with little interaction aside from the product procurement function, they remain an important part of the overall beverage alcohol network.

Aside from product supply, ANBL has little interaction with licensees as the Department of Public Safety is responsible for the issuance of licenses and enforcement functions.

Licensees can also play a special role in the public eye as a launch pad for new brands and product trends and as a location for low cost product trials by consumers.


As previously discussed within this report, in order to ensure the continued profitability of ANBL, there is a need to increase revenues.

In order to stimulate business and help the licensee community, three other initiatives have been proposed.

1. Licensees have suggested buying some product as a group, for instance house wines, and receiving a discount if the pre-determined volumes are exceeded.

2. Payment terms or a modified form of credit card have been discussed. 3. Licensees have proposed a percentage discount off their purchases to reflect

the wholesale nature of their relationship with ANBL.

$0

$100

$200

$300

$400

$500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Mill

ions

Sales in $ by Source

Public

Licensees

Agents

Other

Total


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• Helping the licensees offset reduced tourism spending experienced in recent years and creating more financially viable businesses.

• The programme would assist in developing strong relationships between ANBL and licensees.

• Increase the profitability of the licensees.


• There is a risk that this opportunity may negatively impact ANBL’s contributions to the province.








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Opportunity 2.4 Seasonal agency stores Investing capital


Seasonal stores are designed to improve service levels and access points during peak periods and to capture an otherwise untapped market during tourism season.


Establish a seasonal agency store programme in areas within the province that may not warrant the establishment of a year-round agency operation but where ANBL may benefit from a seasonal operation. Possible locations might be in close proximity to seasonal tourist operations.


Maximizing revenue from areas of high concentration that do not warrant year-round stores.


• Identifying viable locations would require market study to determine expected volumes and potential profitability.

• Cost to set up and dismantle the store.

• Minimal availability of leased spaces for seasonal occupancy.

• Cannibalizing sales from current retail network, although this risk is low.








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Opportunity 2.5 Online Sales Investing and optimizing Capital


ANBL currently has a website which includes a product listing but no online purchasing capacity.

Other liquor boards across Canada have implemented online sales to increase revenues. For example, in Quebec SAQ.com allows customers to purchase products and gift cards from their website and to select delivery options (morning, or daytime).


• ANBL already has two specific product related websites: “Selection Wine Club” and “My World of Beer.” These sites would be modified to allow for online purchase of specialty products.

• Allowing for the purchase of gift cards/certificates from the website.

• Enforcing the right of first receipt from out-of-province producers selling and shipping products to NB customers over the internet. Developing relationships with these out-of-province suppliers such that certain allocated products are available to NB consumers on an ANBL website with a cost/revenue sharing agreement.


• NB customers will have access to previously unavailable products.

• Opening up an additional revenue stream from out-of-province suppliers while setting up a legitimate ordering process.

• Improving service to NB customers.

• Reaching customers that are not currently located near corporate and agency stores.


• Legal ramifications need to be fully investigated and addressed to ANBL’s satisfaction prior to any discussions taking place with any potential out-of-province suppliers.

• ANBL IT systems would require upgrades to handle online sales.

• Customer readiness and uptake for online sales.

• Without the appropriate safeguards in place, there is a risk of minors gaining access to alcoholic beverages.








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Opportunity #3—Invest in technology systems to improve the efficiency and security of ANBL

As part of this strategic review, ANBL engaged Barrington Consultancy Group to complete an Information Technology Gap analysis.

The IT GAP review recommended that ANBL initiate multiple projects that have been grouped as part of a broader programme called the ANBL Technology Modernization Programme. It is suggested that this multi-year endeavour broadly consider all aspects of modernizing the IT landscape, including organizational governance, strategic planning, enterprise applications and operational support.


Opportunity 3.1 Enable retail to evolve to current competitive standards Investing capital


ANBL’s current application portfolio includes a small number of functionally-specific Commercial-off-the-Shelf (COTS) solutions integrated by an internally developed enterprise system called PIPER. Functional and architectural deficiencies and limitations of PIPER are preventing the IT organization from fully meeting the needs of line-of-business users in areas such as pricing, purchasing, sales and supply chain.

ANBL has not made a significant investment in IT over the past few years and this is now limiting its ability to achieve business goals and objectives.


This strategic imperative is focused upon enabling modern retail strategies and advancing the retail capabilities of ANBL to make the corporation more effective, efficient and flexible to changing customer needs. Customer expectations have evolved significantly in the last 10 years with increasing importance being placed on the online channel and heightened in-store expectations. ANBL needs to adapt to these changes to enhance the customer experience, gain efficiencies by adopting proven retail practices and ultimately drive expanded revenue and profitability.


If implemented, this opportunity would be focused upon modernizing existing systems to better support current and future requirements that allow ANBL to be a more effective and efficient retailer, leveraging multi-channel capability for the benefit of all stakeholders through the following:

• Upgrading ANBL’s Wide Area Network (WAN) infrastructure.

• Planning, designing and implementing a modern suite of applications that better meet the business requirements. Appropriate reuse of technology already in place is a cornerstone of this initiative.

• Improving line-of-business access to data analytics, product acquisitions, sales records and business intelligence resources.

• Seeking alternative payroll and human resource scheduling solutions, for example.

• Establishing a social media strategy and roadmap.


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Also, an improved IT system would create cost-saving efficiencies throughout ANBL:

• Integration risk related to new software products.

• Extraction of data which is untimely, insufficient or unreliable, negatively impacting management's ability to make well-informed business decisions.

Unreliable data integrity related to heavy reliance on manual inputs.


There is a significant cost associated with the implementation of the aforementioned IT opportunity. However, in terms of revenue, the level of information technology spend has historically been low for an enterprise of this size. Over the years, ANBL’s operational and capital expenditures have consistently been a fraction of what is typically spent by retail enterprises in general and by peer provincial beverage alcohol retailers in Canada.








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Opportunity 3.2 Redesign IT governance and organization Preserving capital


The current information technology governance model is organized predominately to focus on infrastructure and application support rather than “project-based” work geared to evolve and grow the business. In addition, some key roles are absent from the current IT governance model (i.e. IT Director, Enterprise Architect, etc.).


These initiatives are focused on enabling the ANBL IT organization to provide a more proactive role in the broader business strategy and planning, effective operations support, as well as successful execution of projects. ANBL’s IT governance requires reorganization of current staff to address resourcing gaps, structural alignment gaps with regards to business strategy and planning, and a realignment to better ensure the successful execution of projects that advance ANBL business objectives.


Undertaking these initiatives under the control of a formally authorized and initiated programme is recommended as it will provide the governance, reporting structure, and project management rigor necessary to assure value for money.

As initiatives are delivered under the ANBL Technology Modernization Programme, ANBL will incrementally create the conditions under which the Premier’s mandated objectives can be achieved. When completed, the ANBL Technology Modernization Programme will have created a technology organization, application landscape and processes and procedures that will support and enable ANBL’s continued retail evolution into the future.


• Failure to align technology strategy and initiatives to strategic objectives.

• Inability to prioritize technology initiatives to support the Corporation’s strategic business objectives.

• Inability to effectively manage and allocate resources to technology initiatives in order to meet the Corporation’s strategic objectives.



X






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Opportunity 3.3 Protect ANBL assets Preserving capital


ANBL’s information technology assets are being managed in a server room in the Head Office which does not possess many of the safeguards present in a more sophisticated data centre (e.g. fire suppression, diesel generator/electrical backup, etc.).


Protecting ANBL’s information technology assets inherently provides protection to this vital source of provincial revenue. Initiatives related to this strategic imperative are oriented around protecting ANBL assets including infrastructure and information assets, from any loss in integrity and in the worst case scenario, mitigating disaster.


Specific initiatives to be undertaken include:

• Relocating ANBL IT assets to a high performance data centre.

• Updating the Disaster Recovery and Business Continuity Plans.

• Documenting the current Enterprise Architecture and also focusing upon the management of key master data.


• Costs.

• Inadequate level of support to implement controls to make safeguards work effectively.

• Failure to protect the Corporation’s data by securing access to IT systems and applications.

• Unauthorized parties obtaining confidential employee, customer or operations data, thereby exposing the Corporation to legal liability and damage to its public image.

• Inadequate identity and access management.

• Failure to protect the Corporation from viruses or sabotage.


Preservation of the short-term contributions to the province -




Prioritization rating Low


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Opportunity #4— Develop broad based cost reductions and internal efficiency opportunities

ANBL has operated with industry leading earnings, margins and cash flows for over a decade. As detailed elsewhere in the report, this has been achieved largely through pricing control.

Management believes that significant future price increases may erode revenues and volumes sold.

Opportunity 4.1 Develop broad based cost reductions and internal efficiency opportunities

Optimizing capital


In order to grow the contributions to the province ANBL will have to investigate cost saving measures to increase the net income, as revenue is not projected to grow significantly.

While ANBL has been a cost conscious organization throughout its history, management believes that further efficiencies do exist.


To preserve operating margins, the business must pursue a comprehensive cost/effectiveness approach.

Based on high level benchmarking there is an opportunity to reduce costs (cost of goods sold and operating costs) to industry leading standards.

If accomplished this would preserve contribution growth to the province in a “limited revenue growth” environment.

Management has commenced, and will complete, a detailed benchmarking exercise to identify cost saving opportunities in the following areas:

• Supply chain.

• Finance.

• Sales and marketing.

• Human resources.

• Information technology.

• Product acquisition costs (cost of goods sold).

Management expects to incorporate the results of this benchmarking exercise into the fiscal 2014 business plan.


Preserve the contributions to the province by reducing cost of goods sold and operating expenses of the Corporation.


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• Public perception of employee reductions.

• Union agreement.

• Severance packages.

• There is a risk of reduced service during the implementation phase.

• Supplier resistance.








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Opportunity #5—Review the governance structure of ANBL and drive transformation to a high performance culture with focus on long-term ROI

ANBL is mandated by the NBLCA to carry out the general business of manufacturing, buying, importing and selling liquor of every kind and description. The NBLCA calls for the Corporation to be administered on a commercial basis, and stipulates that all decisions and actions be based on sound business practices. The future of ANBL is highly dependent on evolving the focus to operating on a full commercial basis to achieve the revenue and profitability targets established in the mandate letter from the Premier. This requires a shift in governance practices to enable this change and fully transform the culture of ANBL to a high-performance retail organization.


Opportunity 5.1 CEO and Board appointments Preserving capital


• The government is responsible to recruit and appoint members of the Board. The Board, in turn, is responsible to appoint the CEO, subject to Lieutenant-Governor in Council approval.

• While the Board has many responsibilities, there are also circumstances the Board members should avoid, such as being over or under-involved. Generally, the Board should not:

• Concern itself with the day-to-day management of the Corporation.

• Rubber stamp decisions. While the Board should take the recommendations of the Corporation’s President and staff into consideration, the Board needs to be an independent decision-making body.

• Leading practices for the effective governance of publicly accountable entities, such as ANBL, state that a Board has direct accountability to the shareholder (government), the President has accountability solely to the Board, and the staff has accountability to the President.

• To provide knowledgeable governance and to support the CEO in the delivery of business results, it is critical Board members and the CEO be selected based on carefully considered criteria such as competencies that are needed for their roles.


• Adopting a formal and competitive recruitment programme for Board and Senior Executive appointments – this would include opportunities being made public and appointments being made based on predetermined criteria and screening processes. This process currently exists for the remainder of the Executive Team.

• Establishing an independent hiring process for CEO recruitment based on predetermined criteria approved by the Board and the Lieutenant-Governor in Council in accordance with ANBL by-laws.

• Finalize a performance management process for the CEO that drives best-


39

in-class corporate performance and achievement of business results.

• Adopting compensation and incentive programmes that will ensure the appropriate people are attracted and retained by the Corporation and are strongly linked to carefully established personal and organizational performance targets.


• That ANBL be able to attract and retain the best candidates in a highly competitive talent market.

• Driving for targeted business results.


• The ability to attract the appropriate talent with the required competencies.

• Government wage freeze impact on competitiveness, morale and pension income.

• Political influence on hiring, compensation and performance payment structures.

• Potentially creates a workplace environment which is non-conducive to efficiency and competence.

• Potential failure to create and instil a culture which is proactive and encourages the identification and pursuit of innovative ways of doing business.

• Failure to create and instil a culture which promotes people to speak up and communicate concerns and solutions to potential issues.








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Opportunity 5.2 Implementation and monitoring of governance processes adopted by ANBL

Preserving capital


The ANBL governance processes were reviewed in 2010. As a result of this review, the governance manual and related processes were updated but have not been fully implemented.

This has resulted in control being exercised and decisions being influenced from outside the established Board of Directors and Executive management structure. As a result, investments, changes and decisions are not always made to support the objectives of the organization but are made in the broader interests of government public policy.


• Operating and measuring ANBL on a full commercial basis with a focus on delivering superior business results based on sound business practice as stipulated in the NBLCA.

• Providing full autonomy to the Board to oversee the success of ANBL but maintaining accountability to the shareholder strictly through the Board.

• Limiting accountability of the CEO and Executive management directly to the Board for delivering on the strategic plan and fulfilment of ANBL’s mandate.

• Fully adopting the new governance manual and related policies that set out responsibilities among the government, Board and management.

• Developing and agreeing to a set of key organizational performance measures and targets that will clarify expected performance outcomes acceptable to all stakeholders.

• Periodically having an external independent review of the effectiveness of governance processes and appropriate board composition.


• Ability to make nimble strategic and operational decisions to take advantage of market opportunities.

• Improve the ability to optimize decisions and increase the focus on delivering business results and fulfilling ANBL’s mandate.

• Eliminate political interference in sound governance and operational decision making.


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• Requires support and buy-in from all levels including the government, the Board and management.

• Not all stakeholders accept the established channels of communication and control.

• Public misunderstanding of ANBL’s mandate and contribution creates increased pressure for government representatives to become directly involved in operational decisions.

• Culture change risk from the Board through all levels of management.

• Ability to attract and retain quality people.



X






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Opportunity 5.3 Establish succession plans for critical knowledge positions Preserving Capital


• Critical knowledge positions include:

o President and CEO

o Senior Vice-President and Secretary of the Board

o Vice President, Finance & CFO

o Vice President, Supply Chain / Products & Marketing

o Vice President, Customer Service & Retail Operations

o Vice President, Human Resources

• A number of industries and organizations are about to experience a significant loss of their workforce because of retirement.

• 70% of ANBL staff in leadership roles will be eligible to retire in the next five years.

• Key operational and organizational knowledge may be lost.


• Formalizing a succession plan with identification of the skills/competencies required in key roles expected to become vacant in the next five years. Mapping required skills to current leadership skills and developing a plan to bridge the gap.

• Identifying key operational positions and developing plans to embed critical operational knowledge within the processes and systems of the Corporation.


• Reducing the impact of turnover and retirement.

• Preserving vital knowledge of the Corporation.


• Inability to invest in short-term positions to transfer knowledge.

• Taking concrete action on the potential issue may be delayed because of other urgent organizational issues.

• Failure to recruit and retain key employees with the requisite knowledge and experience required to execute ANBL’s business objectives.








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Opportunity 5.4 Strategic planning process/department integration Preserving capital


With increasing pressures on profitability, ANBL will need to extract the most out of limited investment dollars and make certain that these dollars are well aligned to quickly react to changing market conditions.

Currently, ANBL has a detailed strategic planning process in place; however there are areas that could be improved. A preferred strategic planning process is detailed below.

See Appendix G for a copy of ANBL’s 2012/2013 strategy map.


• There is an opportunity to adopt an integrated strategic planning process that aligns all organization departments. A leading practice strategic plan must be:

• Linked to market modelling, industry trends, customer expectations, internal expectations, competitive factors, and external influences.

• Aligned to corporate objectives and cascade down to foster alignment at the business planning level.

• Each department’s business plan should be driven out of the strategic plan.

• Business plan goals and performance measures and staff performance measures should be linked to goals outlined within the strategic plan.

• To be successful, ANBL needs to continually foster a culture of collaboration across internal departments (focus on the end to end process and objective, servicing the customer, rather than on distinct departmental roles).


• Business and investment decisions are made on a consistent set of criteria.

• Efficient prioritization and allocation of investment dollars.


• There is a risk that the end to end process will be rejected by the employees of ANBL, which would impact the effectiveness of the strategic planning process.

• Time to complete a thorough strategic plan.



X






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Opportunity 5.5 ANBL’s contribution to regional economic development Optimizing capital


Historically, ANBL has provided economic opportunities throughout the province through the following practices:

• Purchasing NB suppliers’ products.

• Assisting with the financial viability of businesses throughout the province through the agency and licensee programmes.

• Providing high quality jobs in the head office and corporate stores.

• Providing quality products and services to all areas of NB.

It is estimated using Statistics Canada financial models that the direct and indirect economic impact of ANBL operations is approximately $175 million in wages and salaries and approximately $329 million in GDP for the province of New Brunswick annually.

Despite economic development not being part of its mandate, ANBL is proud of the contributions it has made to the province of NB.


To have an open discussion with the government of NB about the mandate of ANBL, to determine its role in economic development throughout NB.


To be provided a clear direction from the government of NB on ANBL’s role in the economic development versus providing increased contributions to the provincial treasury.


With the increasing demand for ANBL to be profitable, management is forced to make decisions based on a business case which assigns little to no value on the economic development aspect of ANBL’s business, which is consistent with the wording in the current NBLCA.








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Opportunity #6—Pursue changes to the legislative environment and improve relationships with other government departments

There are a number of areas that could be changed within the legislative environment that, by working with other government departments, would allow ANBL and the government to improve revenue and profitability. In addition, these legislative changes would allow ANBL to continue to comply with the NBLCA and operate as a leading retailer.


Opportunity 6.1 Department of Transportation – Highway Signage Optimizing capital


Effective signage, both on and adjacent to stores, has been a challenge for ANBL and the agency store owners for years. The current Highway Signage Regulations will not allow ANBL and the agency stores to advertise on major roadways.


There is an opportunity to increase revenues by amending Highway Signage Regulations to permit signs to be erected on major roads. With ever-increasing volume challenges being faced by ANBL, it is felt that all opportunities to attract customers to the stores should be pursued, including an appropriate amendment to permit the erection of highway signs.


The objective is to attract more customers into the stores, particularly customers travelling through the province. This increased traffic in stores would lead to increased revenues, profitability, and therefore increased funds available to the province of NB.


• Currently, the Highway Signage Regulations will not allow ANBL to advertise on the major roads.

• Agents can’t advertise their “agency”.

• Public perception that liquor stores should not advertise their presence.








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Opportunity 6.2 Department of Public Safety – Changes to the Liquor Control Act

Optimizing & Preserving Capital


Several restrictions imposed by the Liquor Control Act (“LCA”) reduce the ability of ANBL to generate revenue or profit, for example:

• Currently there is no restriction on advertising beverage alcohol from another province in NB. This further promotes New Brunswick citizens crossing the border to purchase alcohol at the expense of ANBL.

• The LCA limits the quantity of product you can legally possess that was purchased out-of-province, but the limits are so small that there is no effective enforcement effort.

• The current licenses available restrict licensees from hosting certain events which negatively impacts the revenues of the licensees and ANBL.

• The LCA prohibits people from being employed at a licensee and ANBL or agent at the same time, even on a part-time basis which reduces the pool of part-time staff available for ANBL.

• The current age restrictions imposed by the LCA will not allow individuals under the age of 19 to sell or handle beverage alcohol. This restriction has a significant impact on the agency store network.

• Restrictions within the various types of licenses constrain the licensees’ ability to meet customer needs, thus impacting licensee and ANBL revenues.

• Fines prescribed by the LCA related to licensees purchasing alcohol out-of-province are ineffective (too low) which directly impacts ANBL sales.


ANBL would like to work with the Department of Public Safety to redraft sections of the LCA to help stimulate the growth of the Corporation and its partners (agency stores, licensees, etc.).


Create a more profitable environment for ANBL while maintaining the high standard of public safety for the citizens of NB.


Public scrutiny.








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Opportunity 6.3 Department of Finance - Treasury function Optimizing and investing capital


Currently ANBL does not control all aspects of its treasury function; the government of NB withdraws excess funds on a daily basis to be used in operations.

The government pays certain bank fees on behalf of ANBL in exchange for the use of the cash; however they do not cover electronic fees (debit card and credit card fees) which are currently in excess of $2.1M per annum.

The main roles of a treasury department are as follows:

• Raising equity capital and working capital; and

• Investing surplus funds.

The treasury department would be responsible for the timely availability of those funds when needed for the support of the business.


Assigning responsibility for the treasury function back to ANBL would allow ANBL’s management to better track and manage working capital, and give management the ability to invest surplus funds, which could lead to increased profitability and expense reduction.

It is recommended that the current cash withdrawal process described above be altered to a quarterly dividend process to give management more flexibility and to align ANBL with other retailers/corporations.


The objective of giving ANBL the responsibility for the treasury function is to minimize costs related to working capital and to allow ANBL to invest excess funds in order to offset the various electronic bank charges.


• There is a risk that the cost savings and investment income realized by ANBL would not offset the additional cost of debt incurred by the Department of Finance.

• Cost to implement a treasury department within ANBL, including staffing and setting up the appropriate process.








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Opportunity 6.4 Department of Public Safety—U-Vin operations Preserving capital


The government of NB recently amended the Liquor Control Act resulting in u-vin operations requiring licenses. At the time of the amendment, however, the government did not implement any additional levy or fee on these services.

The resultant price disparity between ANBL and U-Vin operations continues to pull customers away from ANBL products.


Applying a levy or fee to U-Vin products and services to ensure a competitive market between ANBL products and U-Vin products.


ANBL believes that a levy or a charge should be applied to U-Vin products to: a) establish an additional revenue source for the government of NB; and b) create a fair operating environment between the U-Vin operations and ANBL for lower priced wine products.

Management estimates that the province could receive a significant benefit via collection of the levy and/or increased sales of lower-prices wines through liquor stores and agencies.


• The current Liquor Control Act.

• Backlash from U-Vin customers and owners of these businesses.








49


Opportunity 6.5 Department of Environment – Environmental Handling Fees Optimizing capital


ANBL is named as a Distributor in the Beverage Containers Act (responsibility for which rests with the Department of Environment) and as such assumes specified obligations and liabilities.


Handling fees prescribed by the Beverage Containers Act are increased on a regular basis, creating incremental costs for ANBL, now in excess of $1 million per annum. There is an opportunity for ANBL to actively participate in an undertaking to update the Beverage Containers Act and procedures needed to ensure compliance. Potential updates would improve efficiency, and control or reduce direct costs for redemption centres and thus ANBL.


Reducing the impact of the environmental handling fee on the profitability of ANBL.


Without the appropriate changes to the Beverage Containers Act, ANBL will continue to pay increasing environmental handling fees.



X






50


Opportunity 6.6 Outlays and expenditures approval thresholds Preserving capital


Currently the New Brunswick Liquor Corporation Act states:

All outlays and expenditures of a capital nature in excess of $100,000 must be approved in advance by Board of Management (section 16 (4)).


This section (16(4)) of the Act should be increased to $400,000 to allow ANBL to operate as a high performing retailer without unnecessary involvement by the Board of Management.

Currently, government is involved in the approval of individual capital projects, this practice should be discontinued.


• Allowing ANBL to perform more as a retailer as opposed to a department of government.

• Board of Management approval of the capital budget on an annual basis and not on a project-by-project basis.

Constraints New Brunswick Liquor Corporation Act.

Risks There may be a perceived risk that management would not have the appropriate level of oversight from the Board of Management.



X




Prioritization rating Low


51

Opportunity #7—Explore strategic alliances (regional cooperation) with other liquor boards

On May 16th, 2011, the Council of Atlantic Premiers met in Sussex, NB and agreed to strengthen collaboration between their provinces with new actions to improve the efficiency and cost-effectiveness of government services. The Premiers noted the ongoing efforts of the region’s liquor corporations to reduce costs through collaborative actions. Atlantic liquor corporations provide joint tendering of international freight from consolidation to delivery, and collaborate on product acquisition, marketing and promotion of the responsible use of alcohol. The Premiers encouraged further dialogue among the liquor corporations to continue to enhance regional co-operation.

This regional collaboration could take a number of different forms; the opportunities related to strategic alliances with other liquors boards are discussed in greater detail below.


Opportunity 7.1 Explore the creation of a regional organization similar to Atlantic Lottery or Atlantic Central (Atlantic Credit Unions)

Raising and optimizing capital


Regional cooperation within the Maritimes and the Atlantic provinces leads to the creation of regional organizations in several industries, including the Atlantic Lottery Corporation and the Atlantic Central (Atlantic Credit Unions Central).

• Atlantic Lottery Corporation was formed by the governments of NFLD, NS, PEI and NB on September 3, 1976.

• Atlantic Central was formed when the individual credit union centrals of PEI, NB and NS joined together in a business combination to form Atlantic Central.

• Building and sustaining service excellence both internally and externally and rationalizing operational costs will be critical to the success of ANBL and the other maritime liquor boards in the future.


Creating a provincially-owned corporation responsible for the purchase, importation, distribution, and retail activity for all beverage alcohol in Atlantic Canada or the Maritimes. The province of NB would be a shareholder of this corporation and receive a return on their investment.


The objective of a provincially-owned amalgamated liquor corporation would be to maximize the return available to the shareholders (provincial governments) by exercising the significant synergies available, including:

• Reducing overhead costs by combining the head offices of the various liquor boards.

• Combining the purchasing, distribution, pricing, and warehousing of products.

• Combining the marketing and branding of a common brand name and corporate image.

• Strengthening the competitiveness of the regional liquor boards.

• Improving quality of services offered to consumers.

• Improving cost effectiveness of delivery to consumers.


52

• Solving the staffing issues looming for ANBL with 70% of the leadership incumbents eligible for retirement in five years.

Risks and constraints • Difficulty of getting the various liquor boards to cooperate and satisfy individual objectives.

• Costs of implementation.

• Regional thinking of citizens.

• Political resistance to amalgamation.

• Differences in the liquor acts within the various provinces.

• Difficulty in negotiating details of the amalgamation (head offices, staff, and ownership % by province, etc.).

• Given the unique nature of the NB marketplace, there is a risk that NB customers would not get the same quality service they have become accustomed to.

• Reduced reliability of product availability.

• Variety of collective agreements in the locations involved.

• Risk of regional pricing being implemented.

• New Brunswick is the only officially bilingual province in the region.

• Reduced flexibility in decision making.

• Tax leakage to other provinces.

• Salary leakage to employees outside of NB.



X






53


Opportunity 7.2 Create a harmonizing series of programs and policies. Optimizing capital


Although there has been a history of regional cooperation among the Maritime liquor boards, there are a number of other programmes and policies that could be harmonized to improve the efficiency of ANBL operations and to maximize profitability.


Currently, ANBL works with Nova Scotia Liquor Corporation and the Prince Edward Island Liquor Control Commission to consolidate freight on products from overseas. However, this cooperation could be expanded to include the following:

• Regional warehousing on imported product lines.

• Mark-ups and pricing on products.

• Common selection panel regarding product acquisition.

• Consumer marketing.

• Shared services models for back office functions


Using regional cooperation to create economies of scale that do not currently exist within each of the Atlantic liquor boards individually.

The ultimate goal is to increase the profitability of each of the liquor boards involved through regional cooperation by taking advantage of improved economies of scale.

Risks and constraints • Getting the various liquor boards to agree to a mutually beneficial programme.

• Given the unique nature of the NB marketplace, there is a risk that NB customers would not get the same level of attention as they do under the current model.

• Salary leakage to employees outside of NB.

• If implemented:

o Public perception of employee reductions.

o Union and management contracts.

o Supplier contracts.








54

Opportunity #8—Explore monetization of a portion or all of the government of NB’s ownership of ANBL

In recent years, provincial governments across Canada have found ways to raise capital by monetizing all or a portion of non-core assets without losing related revenue. The government of NB currently has an opportunity to raise capital by selling a portion or all of its ownership in ANBL, or certain ANBL services (retail network).

Opportunity #8—Explore the monetization of a portion or all of the government of NB’s ownership of ANBL

Opportunity 8.1 Explore monetization of a portion of ANBL Raising capital


Monetization refers to exchanging securities for currency, or selling a possession. It should be noted that monetization may refer to a portion of the ownership, and is not necessarily the sale of 100% ownership.


There are several opportunities available to monetize the government of NB’s ownership of ANBL. The advantages and disadvantages of each monetization opportunity are detailed below:

Initial Public Offering (“IPO”) – the first sale of stock by a formerly private company. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises.

• Advantages of an IPO:

o Potential to achieve highest value.

o Permanent access to equity capital for growth.

o Ability to retain some ownership level (future upside/dividends).

o Risk is transferred to new shareholders.

• Disadvantages of an IPO:

o Public disclosure of information.

o Accountability and duties to public shareholders.

o Vulnerability of share price to market conditions.

o Commitment of resources (time and money).

o Likely requirements for minimum level of retained interest.

Sale to a strategic or financial buyer – identifying buyers with a strategic purpose for acquiring the operations of ANBL.

• Advantages of a sale to a strategic or financial buyer:

o Negotiable forms of consideration.

o Potential to participate in value.

o Ability to monetize entire ownership, if desired.

o Can price the transaction off the current projections.

o Risk is transferred to new shareholders.

• Disadvantages of a sale to a strategic or financial buyer:

o Minimal strategic buyers may exist.


55

o Buyers' ability to pay may be limited.

o May result in permanent discontinuance of cash flows to the province.

o Less flexibility regarding partial sale or two-stage monetization.

o Potential loss of operating control


The monetization option assumes that the government of NB would sell off a portion, or all, of its ownership of ANBL through an IPO or private sale to a strategic buyer. Management has performed a high level valuation of ANBL, using valuation multiples of Canadian public traded retailers and the 2011 financial results. This high-level valuation analysis has indicated a value range of $1.2 to $1.9 billion. See Appendix H for additional detail.

By monetizing a partial stake or complete ownership in ANBL, the following results would be achieved:

Description Monetizing a partial stake

of ANBL

Monetizing 100% of ANBL

Province could retain majority control at 51% ownership level

X

Regulatory regime does not change or have any adverse impact from this monetization

X

Government continues to be the sole retailer in the province

X

Priority offering for residents of NB X X

Exclusive marketing period for residents X X

Provides access to capital in advance of the other liquor boards

X X

Ongoing meaningful cash remittances to the province

X

Payment of a significant amount of existing Provincial debt from proceeds of partial monetization

X X

Results in millions of dollars in annual savings to the province in reduced interest costs

X X

Potential of improving permanent debt position of the province which leads to future interest savings

X X


There is a significant risk associated with the timing of monetizing the government of NB’s ownership in ANBL. This report has identified a number of opportunities related to improving the retail strategy, increasing revenues and profitability, and improving


56

the culture and governance of ANBL. By implementing these opportunities, ANBL would achieve a higher value in a monetization transaction. If the monetizing transaction were undertaken after the opportunities were implemented, a significant increase in value would be realized.

• Public perception of increased access to alcohol, drinking and driving, etc.

• Risk that the government of NB may miss out on the increased value from the implementation of value enhancing opportunities.

• Tax leakage to other governments. • Loss of future ANBL growth.

The extent and viability of this opportunity requires detailed independent assessment. At this stage, management has not engaged in an independent exploration of this opportunity to validate the complete implications.








57

Opportunity #8— Explore monetization of a portion or all of the government of NB’s ownership of ANBL

Opportunity 8.2 Explore the privatization of the retail distribution portion of ANBL

Raising capital


Within Canada, other provincial governments have reduced their involvement in roles that do not relate to social programs and essential services. One notable example is the province of Alberta’s privatization of the retail operations of liquor distribution in their province.

In 1993, Alberta privatized liquor retail and sold its government owned liquor stores to private enterprises. Subsequent to privatization, the following items were noted:

• All Alberta Liquor Control Board (“ALCB”) liquor stores were sold or closed.

• The properties were sold for estimated proceeds of $50 million.

• It was estimated that at least twice as many jobs were created under the privatized model; however, the pay rates were decreased.

• An excess of 1,000 new products were made available to customers in the province; however the selection varied significantly by store.

• Price discounts, sales, and other competitive business practices reduced some product prices to below ALCB prices.

• No material reduction in revenue was experienced by the government of Alberta.

Other examples of retail privatization, or partial privatization, include British Columbia and Quebec where beer and wine are sold in private outlets. Numerous other distribution privatizations have occurred in North America and Europe.

Management believes there is interest from leading retailers to explore the possibility of partnership.


Retail privatization proposes that all aspects of the retail liquor operations be privatized. The privatized retail outlets are not required to be standalone operations and may be operated within grocery stores, convenience stores or other retail outlets. This opportunity would allow ANBL to retain its role as sole wholesaler and importer of beverage alcohol in NB. The procurement, consolidation, shipment and ownership of all inventories would be the responsibility of the suppliers and/or agents representing the suppliers. ANBL could contract out the management and operation of the warehouse.

The opportunity to privatize the retail network within the province of NB demonstrates an additional opportunity for the government of NB to maximize the capital available.


Under the privatization scenario, ANBL could sell its retail operations (49 corporate-owned stores) and continue to provide wholesale services to these stores as well as the agency and licensee network. The province of NB would continue to receive the revenue of wholesale services and the sales taxes on the products sold by private retailers.


• There is potential that privatization may lead to a diminished level of service (customer service, product selection, store appearance, etc.), as ANBL would


58

lose control of these items.

• Public objection to a significant change in the structure of a Crown corporation.

• Difficult transition and implementation.

• Potential for social concerns related to health issues, drinking and driving, crime, and mental health.

• Privatization in Alberta resulted in an increase in jobs but also in a significant decrease in the wages paid to employees.

• Tax leakage to other governments.

It should be noted that the privatization of the retail network in Alberta worked given the economic environment, unemployment rates, demographics, pay rates, etc. within the province at the time. This success may not be transferred to the NB marketplace and given the differences stated above; there is a risk that NB would not see the same benefits as Alberta.

The extent and viability of this opportunity requires detailed independent assessment. At this stage management has not engaged in an independent exploration of this opportunity to validate the complete implications.








59

4. Summary of opportunities

As previously discussed within this report, ANBL is facing increasing pressure to continue to provide significant financial contributions to the province. The distribution of the opportunities listed below, primarily within preserving and optimizing capital, displays the need for ANBL to focus on these two areas before investigating the others (investing and raising capital).

Investing Capital2.1 Expand and restructure the retail network 2.2 Refine and enhance the agency network 2.3 Improve relationships with the licensee community2.4 Seasonal agency stores2.5 Online sales3.1 Enable retail to evolve to current competitive standards6.3 Department of Finance - Treasury function

Optimizing Capital1.1 Conduct customer research to better understand market trends and

growth opportunities1.2 Create a marketing brand strategy1.3 Initiate proactive pricing strategy and a long-term marketing plan2.1 Expand and restructure the retail network2.2 Refine and enhance the agency network2.3 Improve relationships with the licensee community 2.5 Online sales4.1 Develop broad based cost reductions and internal efficiency

opportunities5.5 ANBL’s contribution to regional economic development6.1 Department of Transportation – Highway Signage 6.2 Department of Public Safety – Changes to the Liquor Control Act

6.3 Department of Finance - Treasury function6.5 Department of Environment – Environmental Handling Fees

7.1 Explore the creation of a regional organization7.2 Create a harmonizing series of programs and policies

Raising Capital7.1 Explore the creation of a regional organization similar to

Atlantic Lottery or Atlantic Central (Atlantic Credit Unions)

8.1 Explore monetization of a portion of ANBL8.2 Explore the privatization of the retail distribution portion

of ANBL

Preserving Capital1.1 Conduct customer research to better understand market

trends and growth opportunities1.3 Initiate proactive pricing strategy and a long-term marketing

plan3.2 Redesign IT governance and organization3.3 Protect ANBL assets5.1 CEO and Board appointments5.2 Implementation and monitoring of governance processes

adopted by ANBL5.3 Establish succession plans for critical knowledge positions5.4 Strategic planning process/department integration6.2 Department of Public Safety – Changes to the Liquor

Control Act 6.4 Department of Public Safety—U-Vin operations6.5 Outlays and expenditures approval thresholds

The Capital Agenda


60

5. Conclusion

ANBL submits this strategic review to fulfill the mandate given by the Premier in late 2010 which focused on the following:


The strategic review identified a significant number of opportunities to address these key areas.

ANBL recommends pursuing opportunities 1 through 6 in the short to medium term as displayed below. Concurrently, further research and investigation should be performed regarding opportunities related to third parties.

Management has concluded that the implementation of these opportunities will allow ANBL to continue to provide meaningful financial contributions to the province while sustaining a high level of customer and employee satisfaction, and improved service across the province. Although these opportunities will support the predictability of cash flows it should be noted that the forecasted growth rate will be somewhat less than past experience given the challenging economic and demographic reality.

An action plan to address the medium and high priority opportunities identified as part of this strategic review is included below, including an estimate of the commencement date for each.

Management has analyzed opportunities 1 through 6 from two key perspectives (inherent contribution to net income and perceived impact on customer service) and quantified the potential costs/benefits where applicable. See Appendix I for the prioritized opportunities quadrant that resulted from that analysis.


61

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

# Opportunity1.1 Conduct cus tomer resea rch to better understand market trends a nd growth opportunities1.2 Create a marketing brand s trategy

1.3 Ini tia te proactive pricing s trategy and a long-term marketing plan2.1 Expand and res tructure the reta i l network 2.2 Refine and enhance the agency network 2.3 Improve relations hips with the l i cens ee community2.4 Seas ona l agency s tores2.5 Onl ine Sales3.1 Enabl e reta i l to evolve to current competi tive s tandards3.2 Redes ign IT governa nce a nd orga nization3.3 Protect ANBL as s ets4.1 Devel op broad ba sed cos t reductions and internal efficiency opportunities5.1 CEO a nd Boa rd a ppointments5.2 Implementation and monitoring of governance process es adopted by ANBL5.3 Establ i sh s uccess ion pla ns for cri tica l knowledge pos i tions5.4 Strategic pla nning proces s/department integra tion5.5 ANBL’s contribution to regional economic development6.1 Department of Transportation – Highway Signage 6.2 Department of Publ ic Sa fety – Changes to the Li quor Control Act 6.3 Department of Fina nce -Trea sury function6.4 Department of Publ ic Sa fety—U-Vin operations6.5 Department of Environment – Environmental Ha ndl i ng Fees6.6 Outla ys a nd expenditures approval thres holds7.1 Explore the creation of a regional orga nization s imi lar to Atla ntic Lottery or Atlantic Centra l (Atlantic Credit Unions )7.2 Create a harmonizing s eries of progra ms a nd pol icies .8.1 Explore monetization of a portion of ANBL8.2 Explore the privatization of the reta i l dis tribution portion of ANBL

ANBL Action Plan 2012-2013 2013-2014 2014-20152011-2012


62

Appendices


63

Appendix A – Ernst & Young’s Involvement

The following excerpt from the Ernst & Young response to ANBL’s request for proposal outlines their role in assisting management with the creation of this report.

Overview of our methodology

Your mandate is to identify ways to:

► Strengthen retail strategies► Increase revenues► Determine ways to change the culture and governance of ANBL

Some early areas of focus you considered to achieve this mandate were as follows:

► Retail network optimization strategies► Identification and prioritization of cash flow and profitability

enhancement opportunities► Monetization / privatization opportunity assessment► Regional and private partnership opportunities identification

Key recommendations were developed along with their implementation considerations. Our methodology section is a simple 3-step approach that will assist you in assessing and developing these recommendations to refine them further.

Ernst & Young strongly believes in the value of a collaborative approach throughout the engagement. The project will begin with an initiation phase that collaboratively revalidates the project goals and approach and completes detailed planning. The initiation and planning meeting will be held with our EY integrated team and ANBL team members to discuss and confirm the components of the project plan.

Our methodology includes a number of planning and delivery tools allowing us to perform efficient assessments for our clients and deliver a high quality product that adds value to the organization. These tools include process assessment and analysis modelling and engagement planning tools.

Project updates are built into each work-step and serve as a regular check point between EY and ANBL. Communication and validation of the completed work as well as the overall direction of the project are normally included in these discussions.

14

Project Initiation and Planning

Analysis of current state

Recommendations and reporting

Step 1 Step 2 Step 3

► Define and confirm project deliverables, requirement and objectives with ANBL.

► Develop detailed execution plan.

► Assemble background information and supporting material provided by ANBL.

► Review relevant background information, including financial and operational results, reports/studies.

► Review existing advice to Minister and other relevant analysis documentation.

► Conduct an assessment of management's analysis of the opportunities and assist with developing further opportunity definition and recommendations.

► Co-development of final draft document.

► Assist and support management with final preparation and delivery of the document.

Regular communication with stakeholders


64

Our proposed fees

17

We are committed to providing fair and transparent value to you through our services at a fee that is competitive in the market place. Moreover, we are providing all of our resources at significantly discounted rates. Mutual satisfaction regarding fees is an important aspect of any long term business relationship.

Our estimate is based on the information provided to us in the Request for Proposal. The work will be charged on a time and material basis up to a maximum of $100,000. It is also assumed that our team will have unconditional access to required information and resources necessary to perform the assessment.

Our fee and scope assumptions:

► Out-of-pocket expenses for items such as travel, meals, accommodation and other matters specifically related to your engagement will be invoiced, subject to pre-approval of individual out-of-pocket costs over $1,000.

► The fee is exclusive of HST.

► Information requested from key stakeholders and management will be made available in a timely manner so as not to negatively impact the project’s critical path.

► Scope will be defined and agreed to upon commencement of the project. Any deviations from the approved scope will be analyzed against the four constraints (time, budget, scope and quality) and any required adjustments to timing or deliverables will be approved by the Client Steering Committee.

► Ernst & Young may recommend adjustments to the deliverable to meet the project timeline.


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Appendix B – Historical net income since incorporation

-5%

0%

5%

10%

15%

20%

25%

30%

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Historical net income and % change

Net Income

% Change


66

Appendix C – Canadian retail prices for one dozen bottles of beer

$15.00

$16.00

$17.00

$18.00

$19.00

$20.00

$21.00

$22.00

$23.00

$24.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011*

Pric

e pe

r D

ozen

$

Years

ANBL

NSLC

PEI

NLC

Quebec

LCBO

MLCC

SLGA

BCLDB


67

Appendix D – ANBL Beer Volumes (in litres) vs. Beer Revenue ($)

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

55,000,000

60,000,000

$70,000,000

$90,000,000

$110,000,000

$130,000,000

$150,000,000

$170,000,000

$190,000,000

$210,000,000

$230,000,000

$250,000,00019

81

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

ANBL Beer Volumes (litres) vs. Beer Revenue ($)

Revenue $

Volume in Litres

Trend lines


68

Appendix E – Research Conducted

The following documents were reviewed as part of the strategic review.

ANBL Documents Date of the Document

Financial Institution Discussion Materials 2011 Retailer Consultations 2011 Brewery Consultations 2011 Grocery Chain Consultations 2011 Winery Commercial Opportunities 2011 Brewery Thoughts on Future Structure 2011 Warehousing Discussion Materials 2011 Brewery Discussion Materials 2011 Retailing Partnership Opportunities 2011 Key Stakeholder/Supplier Consultations 2011 Major Brewery Summit Meeting 2011 Representative New Brunswick Licensee Consultations 2011 ANBL - Annual Report 2011 2011 ANBL Departmental Input—9 Departments 2011 ANBL - Governance Manual 2011 ANBL - Identifying partnership opportunities to drive incremental earnings 2011 ANBL - Grocery store presentation 2011 ANBL - On-line market survey 2011 ANBL - IT Gap Analysis 2011 ANBL - Balanced Scorecard 2011 ANBL - Employees by category and age range 2011 ANBL - Factors affecting ANBL 2011 ANBL - Five year net income comparison to budget 2011 ANBL - Net income since incorporation 2011 ANBL - Senior Management listing 2011

ANBL - SOMIA 2011-2012 2011 ANBL - SOMIA 2012-2013 2011 ANBL - Strategy Map 11-12 2011 ANBL - Strategy Map 12-13 2011 A Proud History of Progress 2010 Financial Institution Discussion Materials 2010 ANBL - Commercial Opportunities NB Liquor Board 2010 ANBL - ALDP Overview 2010 ANBL - Retail Review Report 2007 New Brunswick Liquor Corporation Act 2002 ANBL Interoffice memo-Regional Warehousing Proposal 1992 Executive Council Office Memo 1991


69

Other Documents Date of the Document

Liquor Board-Annual General Meeting 2011 2011 Liquor Board-Annual Information Form 2010 2010 Liquor Board-Focusing on our Strengths 2010 2010 NABCA-The Control System Pamphlets 2010 LCBO Annual Financial Plan 2009 An Integrated Approach 2007 LCBO Strategies 2006 Liquor Control Board Final Review 2006 CAMH-Position Paper-Retail Alcohol Monopolies and Regulation 2004 The Alberta Liquor Retailing Industry Ten Years After Privatization 2003 The Privatization of Liquor Retailing in Alberta 2003 Privatization of BC's Retail Liquor Store System 2003 Liquor Board-Celebrating 10 years of Privatization 2003 The Privatization of Liquor Retailing in Alberta(Correspondence) 2003 Alternative Services Delivery for Provincial Governments 1996 University of Toronto-The Privatization of Liquor Retailing in Alberta 1996 A New Era in Liquor-The Alberta Experience 1994 Atlantic Liquor Boards Regional Warehousing Program 1992 Report on proposal for Atlantic Liquor Boards 1992 NSLC Meeting Minutes 1992 1992 CMP-Press Release-Integration 1991 An economic alliance of a Maritime government 1991 Brights Liquor Store classification 1991 NBLC-Alliance Maritimes Together We Stand 1991 NBLC-Maritime Economic Integration 1991 Liquor Control Commission-Memorandum 1991 CMP Meeting Minutes 1990

The following members of Management contributed to the identification of opportunities:

• Rick Smith (Senior Vice-President and Secretary of the Board)

• Chris Evans (Vice-President & CFO)

• Brad Cameron (Vice-President Customer Service & Retail Operations)

• Michael O’Brien (Vice-President Supply Chain, Products and Marketing)

• Nora Lacey (Marketing Manager)

• Gary von Richter (Customer Service Manager)


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Appendix F– Agency Store Program

ANBL’s retail model launched in 1992, is a mix of the public and private sectors. Beverage alcohol is retailed through two channels:

1. Corporate stores, owned and operated by ANBL, are found in larger centres in the province. 2. Agency stores, owned and operated by private sector operators, are found in more remote and

smaller communities. A retail review was conducted in 2007 whose outcome was to provide recommendations that would refine the retail model establishing an ideal mix of corporate stores and agency stores. Based on the analysis conducted:

• Agencies provide a higher net income percentage for their sales volumes, compared to ANBL corporate stores. In fiscal 2007, agency net income percentage is 41% while the average corporate store’s net income percentage is 38.6% ranging from a high of 41.2% to a low of 31.1%.

• Generally there is a direct relationship between sales volume and store profitability; annual corporate store sales below $2.3million (2006-2007) result in lower returns.

General recommendations resulting from the retail review Revise guidelines for agency versus corporate stores as follows:

• $2.4 million minimum sales (excluding agency) guideline to operate a corporate store. • $2.6 million maximum net sales guideline for an agency, above which a corporate store may be

more appropriate for ANBL. • $300,000 minimum net sales guideline for an agency, below which the sales volume may render

the agency not viable.

In order to keep the above guidelines current and relevant for store reviews until the next comprehensive retail review, the guidelines should be adjusted by the corporation’s total budgeted revenue percentage increase on an annual basis.


71

Appendix G – Strategy Map


72

Appendix H – High-level illustration of value for ANBL

For the purposes of this strategic review, management has prepared the following illustration of value range for ANBL.

Please note this is a high-level illustration performed by management and is not a comprehensive calculation of the fair market value of the Company. Significant additional analysis would be required to determine the fair market value of the Company and no decisions should be made based on this illustration.

TickerShare price as of

Nov 18/11Market

CapitalizationTotal Enterprise

Value ("TEV")

Last Twelve Month EBITDA ($

millions) TEV/EBITDALoblaw Companies Limited TSX:L 36.78 10,362.80 15,232.80 2,026$ 7.52XShoppers Drug Mart Corp. TSX:SC 41.88 9,015.10 10,124.90 1,214$ 8.34XMetro Inc. TSX:MRU.A 50.56 5,119.30 5,898.40 751$ 7.85XCanadian Tire Corp. Ltd. TSX:CTC.A 61.52 5,051.40 8,460.20 936$ 9.04XEmpire Co. Ltd. TSX:EMP.A 60.25 4,039.90 4,596.40 844$ 5.45XThe Jean Coutu Group (PJC) Inc. TSX:PJC.A 12.78 2,824.00 3,020.70 284$ 10.62XDollarama Inc. TSX:DOL 37.66 2,775.80 3,022.30 258$ 11.73XNorth West Company Inc. TSX:NWC 18.9 914.30 1,067.20 126$ 8.49XLiquor Stores NA Ltd TSX:LIQ 15.02 340.10 480.50 46$ 10.40X

720$ 9.25X46$ 7.52X

2,026$ 11.73X

ANBL - Illustration of value using the market valuation approach

Min Average Max1,216$ 1,496$ 1,896$

Value indicators ($ millions)

Company Name

AverageMinMax

The conclusion of this high level illustration is consistent with information that has been received from various capital market groups.

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Appendix I –ANBL opportunities quadrant (prioritized measures and targets)

1.1 Market reseach

1.2 Brand strategy

1.3 Pricing / marketing strategy

2.1 Restructure retail network

2.2 Enhance agency network

2.3 Licensee relationship

2.4 Seasonal agency stores

2.5 Online sales

3.1 Retail IT

3.2 IT governance

3.3 Protectassets

4.1 Efficiencies

5.1 Board/CEO appointments

5.2 Governance processes

5.3 Succession

5.4 Strategic planning

5.5 Economic development

6.1 Highway signage

6.2 Liquor Control Act

6.3 Treasury

6.4 U-vins

6.5 DoE fees

6.6 Authorizations

Strengthen new retail strategies Increase revenue & profits Determine ways to change culture & governance

CUSTOMER SATISFACTION

NET

INCO

ME

+

+

_

_