Largest grocers making more on food sales: competition watchdog

Plus, four recommendations from the report.
6/27/2023

Canada's grocery sector needs more competition to help keep food prices down and encourage new entrants, the country's competition watchdog has found.

In a highly anticipated study released Tuesday, the Competition Bureau said concentration in the grocery industry has increased in recent years and the largest grocers have grown the amount they make on food sales.

Most Canadians buy groceries in stores owned by a handful of grocery giants, with Canada's three largest grocers - Loblaws, Sobeys, and Metro - collectively reporting more than $100 billion in sales and $3.6 billion in profits last year, the study found.

"We saw Canada's largest grocers' food gross margins generally increase by a modest yet meaningful amount over the last five years,'' it said. "This longer-term trend pre-dates the supply chain disruptions faced during the pandemic and the current inflationary period.''

The Competition Bureau said this signals the need for more competition in Canada's grocery industry.

"Canada needs solutions to help bring grocery prices in check,'' the study said. "More competition is a key part of the answer.''

The competition watchdog proposed four recommendations to improve competition and lower prices, including an innovation strategy to support new grocery businesses and expand consumer choice.

It also recommends governments encourage the growth of independent grocers and the entry of international grocers into the Canadian market, standardize unit pricing to help Canadians easily compare grocery prices, and curb real estate practices in the industry that limit competition, such as putting covenants on sold land that prevents any new grocer from operating there.

Meanwhile, the Bureau said it also needs to approach its work in the grocery industry with "heightened vigilance and scrutiny'' to ensure Canadians benefit from greater choice and more affordable groceries.

"We need to thoroughly and quickly investigate allegations of wrongdoing, and we need the power to act when issues arise,'' the study said.

In a survey of consumer attitudes and opinions about the grocery sector, some Canadians said the country's laws don't go far enough to stop deals that are bad for competition, while others felt the Competition Bureau has just not done a good enough job enforcing those laws, the study said.

When the Competition Act was introduced in 1986, there were at least eight large grocery chains across Canada, the study said. Each was owned by a different company.

Today there are five large chains that operate in Canada: Loblaw, Sobeys, Metro, Costco and Walmart.

The competition watchdog committed to taking steps to better promote competition in the Canadian grocery industry, including providing a pro-competitive perspective to support the implementation of Canada's grocery code of conduct.

It also committed to revisiting the findings of its study in three years to assess the progress on recommendations it has made to government.

The highly concentrated nature of Canada's grocery's sector has come under intense scrutiny in recent years.

The big three grocery chains have been embroiled in an alleged bread price-fixing scheme, which observers say has triggered distrust of the grocery industry.

The large grocers have also been accused of wage fixing after simultaneously scraping pandemic bonuses for front-line workers.

It's behaviour the House of Commons industry committee likened to "cartel-like practices'' in a June 2021 report.

Yet Canada's grocers have argued that consolidation increases efficiencies and provides consumers with more value.

Grocery executives have vehemently denied accusations of price gouging and so-called greedflation, saying their margins on food have remained modest - despite soaring profits.

Yet the House of Commons agriculture committee has floated the idea of a windfall tax on those profits.

In a report on grocery affordability tabled earlier this month, it said if the Competition Bureau finds evidence that large grocery chains are generating excess profits on food items, the government should consider a windfall profits tax to "disincentivize excess hikes in their profit margins for these items.''

Meanwhile, a grocery industry committee is continuing to hammer out a new code of conduct that would help level the playing field between large grocers, independents and suppliers.

Food prices have recorded a massive spike in Canada since November 2021 - the last month for which grocery inflation was under 5%.

Since then, grocery prices have consistently risen by close to double digits, peaking at an 11.4% year-over-year price hike last September and again in November before easing somewhat in recent months.

Statistics Canada said Tuesday grocery prices rose 9% year over year in May.


Four recommendations to improve competition

Canada's competition watchdog released its much awaited study into the country's retail grocery market on Tuesday.

Here are the Competition Bureau's recommendations for the sector, in its own words:

Recommendation one

Canada needs a Grocery Innovation Strategy aimed at supporting the emergence of new types of grocery businesses and expanding consumer choice.

There are new businesses that want to disrupt how the industry works, including by selling groceries to Canadians online.

Governments at all levels should work together to encourage the emergence of new types of grocery businesses that are willing to take risks to shake things up.

Recommendation two

Federal, provincial and territorial support for the Canadian grocery industry should encourage the growth of independent grocers and the entry of international grocers into the Canadian market.

There are a number of important independent grocers across Canada who already compete against Canada's grocery giants. However, given their relative scale, they face real challenges growing into national competitors.

To encourage more competition in the industry, governments should implement policies that support the growth of independents, as well as the entry of international and discount grocers.

The entry of new competitors and growth of existing independents would increase competition, empower consumers and drive businesses to lower prices, improve product quality and innovate.

Recommendation three

Provincial and territorial governments should consider introducing accessible and harmonized unit pricing requirements. It is difficult to compare prices on even a few items between different grocery stores.

Canadians need tools to help them compare grocery prices and empower them to make informed purchasing decisions. This information is key to shop better and shop smarter, and to encourage more competition in the industry.

To achieve these goals, provincial and territorial governments should consider working together to develop and implement accessible and harmonized unit pricing requirements.

Recommendation four

Provincial and territorial governments should take measures to limit property controls in the grocery industry, which could include banning their use.

Property controls limit how real estate can be used by competing grocers. They make it difficult, or even impossible, for new grocery stores to open, which reduces competition in communities.

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