Ownership controls a major barrier to competition in Canada’s grocery industry: experts

As Canadian consumers grow increasingly negative about the big grocers, the country’s competition watchdog has turned its sights on restrictive clauses in store leases that it says are hindering competition in the grocery sector.

Limiting the use of these clauses could open the door for more independent grocers and smaller chains to compete with the big players, giving consumers more choice and possibly even lower prices, experts say.

“It would encourage a little more competition in the market,” said Peter Chapman, founder of consulting firm SKUFood and former director of Loblaw Cos. Ltd.

Food prices have risen by more than 20 percent in three years, and the resulting political pressure has led to MPs ordering supermarket managers to take action. The federal industry minister has said he is courting foreign grocers in the hope that a newcomer would boost competition.

Meanwhile, the Competition Bureau is investigating the use of ownership controls in the food industry.

The agency says ownership controls, terms baked into commercial leases that impose restrictions on other nearby tenants and their operations, could be a barrier to both smaller domestic companies and foreign entrants.

These clauses may limit the types of stores that can be opened in a shopping center, or limit the types of stores that can take over a vacant location. They can also restrict other stores in the area from selling certain products.

But experts say limiting the practice would do more to boost domestic competition than clear the way for a foreign grocer to enter Canada.

“It won’t necessarily bring a major international competitor,” said Michael von Massow, a professor of food economics at the University of Guelph.

In May, the Competition Bureau launched an investigation into the parent companies of supermarket chains Loblaws and Sobeys over their use of ownership controls.

“According to market participants, ownership controls are widespread in the grocery industry, impacting where and how companies can compete in food retailing,” the commissioner said in court documents.

Because big retailers drive traffic to malls and plazas, they have the power to ask for restrictive clauses in their negotiations with landlords, Chapman said.

“Some landlords would say that having a major retailer as a draw is worth limiting some of the other avenues they can take,” he said.

If the grocer’s parent company owns the landlord, the retailer is much more likely to gain ownership control in the agreement, he added.

In May, the Competition Commissioner filed an application in the Federal Court to order Empire Cos. Ltd. and George Weston Ltd. to hand over data on real estate ownership, rental agreements, customer data and more.

The court documents detail Empire and George Weston’s interests in real estate investment trusts (REITs), which list the companies’ own supermarket banners as major tenants.

The REITs have a wide reach geographically, so control over properties often extends beyond one shopping center or one plaza, Von Massow said.

Over time, these clauses will become more specific as companies like Giant Tiger and Dollarama expand into food, Von Massow said.

“We are seeing the introduction of new restrictions as the nature of competition has changed,” he said.

When consumers have access to several stores that sell food near each other, they are more likely to visit multiple stores in one trip, which Von Massow says is icing on the cake. By limiting what other stores can be near a major grocer, or what nearby stores can sell, the grocers are instead trying to be a one-stop shop for consumers, he said.

Sobeys owner Empire said in a separate court filing that the agency’s investigation gives the competition commissioner “the appearance of a lack of independence” amid political pressure and criticism of grocery prices, calling the investigation “unlawful.” The Competition Bureau has confirmed that it has filed a motion to withdraw Empire’s application for judicial review.

Loblaw previously said it was cooperating with the review, but noted that restrictive covenants are common in many industries, including retail.

“They help support investment in real estate development, encourage new store openings and capital risk-taking,” spokeswoman Catherine Thomas said in a statement last week.

While limiting the use of ownership controls could boost competition, Chapman doesn’t think restrictive clauses are one of the biggest obstacles to potential foreign entrants like those being courted by federal Industry Minister François-Philippe Champagne.

Chapman said the challenges of establishing a distribution network and building an economic model that works within Canadian regulations would pose much greater obstacles for companies looking to expand.

If a foreign grocer decides to enter Canada, it is more likely to build its own locations or partner with an investor than to try to enter retail areas already occupied by an anchor tenant, Von Massow said.

But experts say limiting ownership controls will help independent stores and smaller chains like Dollarama and Giant Tiger.

If those stores can open more locations, consumers will benefit from more choice, Von Massow said.

With consumers better able to shop and search for deals at multiple stores in one trip, this could also boost local price competition for some items, he added.

Limiting the use of property checks “will not necessarily bring a Lidl or an Aldi, but it will make it easier for a dollar store to get in and offer a choice to people who are willing to shop around.” said Von Massow.

— With files from Darryl Greer in Vancouver

This report by The Canadian Press was first published May 29, 2024.

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Rosa Saba, The Canadian Press