Study to investigate whether lack of competition is partly to blame

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Canada’s federal competition watchdog launched a probe of the grocery business amid rising public concerns that the country’s three supermarket giants took advantage of runaway food inflation to pad their profits.

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The Competition Bureau said Oct. 24 that it wants to know “why prices are so high right now,” and whether a lack of competition in the sector is making the problem worse. “More competition means lower prices,” the bureau said. “Grocery prices are increasing quickly, so we are going to study how governments can take action to improve competition in the sector.”

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In Canada, roughly 80 per cent of grocery sales are controlled by five retail chains — Loblaw Companies Ltd., Sobeys’ parent Empire Co. Ltd., Quebec grocery giant Metro Inc., Walmart Inc. and Costco Wholesale Corp., according to a 2021 government study. And, as inflation surged to its fastest rate in 41 years, some industry veterans suggested that the lack of competition means grocers aren’t under enough pressure to lower prices.

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“They do not have the DNA to take a lower margin. It’s just not what they do,” Gillian Kerr, a marketing executive who has held positions at each of the big three Canadian chains — Loblaw, Empire and Metro — said in an interview this summer. “Until it’s a competitive issue, nobody is going to do a damn thing.”

The Competition Bureau acknowledged that food inflation is partly driven by a range of geopolitical factors outside the domestic industry’s control, including Russia’s invasion of Ukraine, which spurred food security concerns and drove up grain and fuel prices on world markets because both countries are big exporters of commodities.

Until it’s a competitive issue, nobody is going to do a damn thing

Gillian Kerr, marketing executive

But the bureau will look at whether more domestic competition could have worked as a counterbalance to those forces. “Some people say it is because inflation has made it more expensive for grocers to buy the products that they sell,” the regulator said. “Others say that grocers are charging higher prices because they do not face enough competition. We want to better understand these issues.”

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The bureau’s decision to take a hard look at the industry will exacerbate external pressure on the big grocers, who already were dealing with a protracted public relations crisis. Since the early days of the pandemic, the industry has careened from the hero pay cancellations in June 2020, to a cross-governmental investigation into suggestions that grocers were bullying suppliers, to a parliamentary inquiry, announced this month, of whether corporate greed contributed to food inflation.

Last week, Loblaw’s attempt to turn public sentiment back on its side with a three-month “price freeze” on its No Name brand was widely dismissed as a PR stunt. Sources in food manufacturing said the price freeze was little more than a dressed-up version of a routine cost blackout practiced by grocers across the industry at this time of year for operational purposes.

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A Loblaws grocery store in Ottawa.
A Loblaws grocery store in Ottawa. Photo by Chris Wattier/Reuters files

The Competition Bureau stressed that its “market study” of the grocery sector isn’t a law enforcement investigation and it won’t be looking at “any specific allegations of wrongdoing,” according to its market study notice. “However, if we do find evidence during this study that someone may be doing something against the law, then we will investigate and take appropriate action,” the bureau said.

(The bureau also confirmed in an email that it still is investigating the bread price-fixing scandal, five years after Loblaw publicly admitted its part in an alleged, 14-year scheme between retailers and commercial bakeries to control the price of bread. “There is no conclusion of wrongdoing at this time, and no charges have been laid,” spokesperson Julie Baribeau said.)

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Some economists and accounting experts have called for an in-depth study to determine, once and for all, whether the grocers took advantage of inflation. But that doesn’t appear to be part of the current scope of the bureau’s new study. And even if it were, the bureau doesn’t have the power to compel companies to release the sort of data it would need to answer those questions.

This summer, Steven Salterio, a Queen’s University accounting and auditing expert who has studied the grocery sector, looked at five years’ worth of public financial data released by Loblaw, Empire and Metro. He found all three had improved their gross and operating margins in the past year compared with their five-year averages. Loblaw had the largest improvement, increasing its gross margin — the company’s profit after subtracting the cost of goods — to 31.8 per cent in the last year, compared with a five-year average of 30.5 per cent.

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The grocers say there are legitimate reasons for the margin growth, including added efficiencies and a resurgence in sales in the pharmacy and beauty aisles. Loblaw, for example, said it was benefiting from the fact that shoppers started buying higher-margin cosmetics again when pandemic restrictions on social gatherings started to subside.

The Retail Council of Canada (RCC), a lobby group that includes the grocers, welcomed the bureau’s attention. “When it’s a complex issue, sometimes the narratives — regardless of whether they’re factual or not — just are repeated and repeated,” RCC chief executive Diane Brisebois said. “There’s a lot of information that’s floating around that’s not factual.”

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The federal watchdog doesn’t have the power to compel parties to hand over information during its market studies, unlike other antitrust regulators around the world, according to Jennifer Quaid, a professor specializing in competition law at the University of Ottawa.

“Your market study’s only as good as your information,” she said. “Market studies have traditionally been limited, because of the quality of the information.”

The head of the bureau, Matthew Boswell, has been publicly pushing to fix that. In a speech to the Canadian Bar Association last week, Boswell said the current rules end up limiting “the extent of evidence-based advice that the bureau can provide to policymakers.”

The bureau made a similar point in Monday’s announcement. “This will be a tough study for us to do. It’s a complex industry,” it said. “For market studies like this, we do not have the ability to force grocery retailers to give us documents and data that they use to make pricing decisions. Instead, we have to rely on information that is publicly available or provided voluntarily.”

The study is scheduled to run until June 2023.

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