On June 27, 2023, the Competition Bureau (the “Bureau”) released its “Retail Grocery Market Study Report” (the “Report”). The Report is the result of the October 24, 2022 announcement by the Bureau that it would conduct a study of grocery store competition in Canada.
The Report observes that grocery prices have been rising and suggests this is in part because Canada’s grocery industry is concentrated and has high entry barriers. The Report concludes that increased competition in the industry is part of the solution. The balance of the Report is devoted to explaining the basis for the Report’s conclusions and exploring and recommending steps for achieving increased competition.
The Report’s Recommendations:
The Report provides four recommendations of actions that federal, provincial, and territorial governments can take to help improve competition in the sector. They are:
- Implementing a Grocery Innovation Strategy that would support the emergence of new types of grocery businesses and expand consumer choice.
- Encouraging and supporting the growth of independent grocers and the entry of international grocers into the Canadian market.
- Introducing accessible and harmonized unit pricing requirements that would enable shoppers to conveniently compare prices of similar items at different retailers on a per-unit basis. While unit pricing is already implemented in some grocery stores, it is only required by law in Quebec, creating a lack of standardized practices across the country.
- Limiting property controls in the grocery industry, which could include banning their use. Property controls, also known as restrictive covenants, restrict the types of stores that can operate in certain locations, and could prevent new owners from using a location for a competing grocery store.
The Report also notes that the Bureau “needs to approach its work in the grocery industry with heightened vigilance and scrutiny to ensure that Canadians benefit from greater choice and more affordable groceries.” In this regard, among other things, the Bureau commits to support the implementation of a grocery code of conduct (to govern the relationship of grocers and their suppliers).
Consumer Behaviour and Grocery Industry Competition:
The Report drew five conclusions from its market study of consumer behavior in the grocery industry. Firstly, proximity to home plays a significant role in grocery shopping decisions, with consumers generally preferring local options due to the added time, effort, and expense of traveling farther for potential savings. Furthermore, the degree of grocery industry competition differs between urban and rural communities, with smaller towns and rural areas having fewer options and higher prices.
The Report also found that supermarkets remain the primary choice for consumers, indicating their value in terms of pricing and product range. Online grocery options are also gaining importance, with about a third of Canadians having used online platforms to purchase groceries. This trend is expected to continue growing in the future. Finally, loyalty programs significantly influence consumer decisions, as they provide incentives such as points, rewards, and special offers. These programs can drive competition among grocery stores and are particularly popular with women and immigrants, although lower-income Canadians are less likely to have loyalty or points cards.
Current State of Grocery Industry Competition:
The Report notes that the Canadian grocery industry is dominated by five major players, Loblaws, Sobeys, Metro, Costco, and Walmart. While independent grocers exist, the Report argues their growth and ability to compete are hindered by various barriers. Many independents must purchase groceries from the major players as they cannot support their own warehouses or purchase directly from suppliers. Also, while some communities have access to competitive independent stores, expanding nationally or opening new grocery stores across Canada requires significant investments. Large grocers also own discount stores, limiting competition from standalone discount grocery chains. Further, independent grocers, although playing an important role in communities, often have limited space and variety compared to larger grocers.
Despite the success of companies like Costco and Walmart in providing more options, the Report notes that they are not available in every community. Public surveys conducted for the study showed that the concentration of market power among the major chains is a concern for many Canadians who feel limited in their choices and believe they are paying higher prices for groceries.
Grocer Margins Increased by a Modest yet Meaningful Amount:
Certain grocers were reluctant to share key information for the Bureau’s Report, such as financial data that removed non-food products sales. This limited the details of the study and the Report’s ability to answer key questions. Nonetheless, it found that Canadian grocers’ food gross margins have generally increased over the last five years by a “modest yet meaningful amount”. It also found that this was a longer-term trend which began before the supply chain disruptions faced during the pandemic and the current inflationary environment.
The Report found that grocer gross margins generally increased by one or two percentage points since 2017. This roughly correlates to $1-2 on each $100 that Canadians spend on groceries. As grocery prices have increased, so have grocers’ profits. The profits of Canada’s three largest grocers rose from $2.4 billion in 2019 to $3.6 billion in 2022.
The Report argues that the fact that Canada’s largest grocers have generally been able to modestly increase their profit margins over the last five years is an indication that there is space for more competition in Canada’s grocery industry.
Attracting International Grocery Players to Canada:
The Bureau consulted various international grocers to understand their perspectives on entering Canada and what factors might attract or deter them. The Report found that Canada’s geography and low population density pose challenges for new entrants; and international grocers acknowledged the tough competition they would face from established Canadian grocers.
They also recognized that the popularity of Canada’s private label grocery products and its unique multicultural grocery experience offers a potential opportunity. They emphasized the need for a concerted effort, including establishing distribution networks, relationships with Canadian suppliers, and brand recognition, to enter and succeed in the Canadian market. Despite some concerns, international grocers expressed interest in Canada but have not publicly announced immediate plans for entry.
Adequacy of Canada’s Merger Laws:
The Report acknowledged criticism that the Bureau’s focus on local grocery competition has allowed for a gradual reduction in the number of grocers as the industry has consolidated. It specifically mentions the acquisitions of Safeway, A&P, IGA, Provigo and Steinberg’s as examples.
The Report points to the inadequacy of current competition law to address this issue. It argues that while the Bureau can raise concerns when larger companies acquire smaller competitors, current competition laws generally do not allow intervention unless there is strong evidence of significant harm to competition by the removal of one grocery store option. This can be difficult to establish in areas where there are multiple stores nearby.
The Report argues that the Bureau’s recent recommendations on changes to competition policy would provide it with an enhanced enforcement and monitoring toolkit that would enable it to better protect consumers and promote competition in the industry.
In not so subtle terms, the Report reinforces the Bureau’s recommendation for legislative changes to give it formal market study powers, including the power to compel the production of information and documents. Throughout the Report, the Bureau highlights its limitations due to less than full cooperation from certain industry participants and the Bureau’s inability to compel information. To the extent that the Bureau is given formal market study powers in the next round of amendments, we can expect more comprehensive market studies in the future, compelling significant information and documentary production from numerous market participants and third parties.
The Report also suffers from methodological shortcomings that raises concerns with the inferences to be drawn. It identifies large grocers’ increasing gross margins as an indication that there is room for more competition. While profitability can be indicative of market power, it is unclear why the Bureau focuses on gross margins, as opposed to net margins, which would be a more accurate measure of profits. Gross margins do not take into account costs such as utilities, rent, wages or other overhead costs. To the extent that these costs were subject to inflationary or other market pressures, true profits (i.e., net margins) would have been impacted. It is unclear whether grocers’ net profits increased over the time frame examined by the Bureau.
In sum, while the Report raises a red flag concerning concentration in the Canadian grocery sector today, it also points out that potential new entry from large international grocers and the emergence of online business models could substantially increase grocery competition in the future.