Canada’s Grocery business is not as competitive as it could be.
The Competition Bureau’s Market Study reveals an oligopoly, high entry barriers, and little government willingness for change.
The debate over high — and rising — food prices has been raging for months.
Ever since the pandemic slowly wound down, and life began to get back to a new normal, the one constant irritant in people’s day-to-day lives has been constant food inflation.
NDP histrionics about ‘greedflation’ aside (it was a lot of heat that drove attention to the issue, but was, in the end, a wet firecracker that was totally disproven), there are a number of stubborn reasons for why our food is more expensive now than it was:
- Climate change — whether you choose to believe it or not, the climate is changing across North America, and in other prime agricultural growing regions around the world. Dry spells that last for weeks; rain, when it comes, arrives in monsoon quantities that wash away topsoil and newly grown crops; heat domes that drive daytime temperatures to 40C and higher shrivel crops where they grow.
- Rising input costs. Farmers have to deal with rising input costs as they struggle to deal with climate change: fertilizer, pesticides, insecticides, fuel, labour — it’s all more expensive than it was which increases the price of the final product at the farm gate.
- Transportation — labour shortages and fuel costs are the twin evils of the transportation sector, and they’ve been feeling both of these for some time. It simply costs more to get goods from the farm gate to the transformers and retail outlets.
- Transformation — again, labour shortages and rising input costs. Remember those higher costs on the farm? They get passed along to food transformers who purchase the basic inputs grown on farms, and transform them into the food we buy at the retail store.
If those weren’t bad enough, we can now add to the list an underperforming grocery retail sector that has, over the past decade, further concentrated into fewer hands, leading to less overall competition in the sector. Less competition generally means less price competition.
The Bureau’s report is good primer on the retail grocery sector in Canada. It starts by revealing how Canada used to have eight independent grocery retailers in the late ‘80’s, but now has five through a series of successive grocery chain mergers. The Bureau, ironically, had to approve these mergers and, in some cases, forced the two parties to sell stores to independents to reduce the market concentration. Has this worked? Not in all cases, and even the Bureau admits that its remedies may have slowly produced the concentrated market we’re now living with.
In terms of prices, the Bureau indicates that high prices alone are not indicative a competition problem, or a market concentration problem in the sector. A retail grocer might charge higher prices to reflect the higher wholesale cost of food products in general. This is what they have maintained in multiple statements, and in testimony in front of House of Commons committees.
However, high prices coupled with increasing margins might be, and the Bureau has found that retail grocer margins have increased significantly over the past five years, indicating that these companies may be raising prices higher than they should be just to recover increased costs. And, the Bureau makes sure we don’t forget that food retail is a low margin business to begin with. If your margin increases by just 1%, that’s hugely meaningful. In the case of the five grocery retailers, that 1% increase in margin could add $1 billion to the food bills of Canadians.
What else did the Bureau find? Well, entering the market is not easy for someone new. Access to suitable real estate is highly restricted. When an existing grocery retailer sells a location, they can restrict the new owner from opening a competing business. Similarly, when a grocery retailer rents a new location in a mall, for example, they can demand the landlord restrict the entry of other competitors for a similar business. These collectively are called restrictive covenants and are a characteristic of the Canadian market.
The Bureau also found that the market has begun to shift away from traditional bricks and mortar operations, as some of the business moves online. These online options come in three flavours: a) grocery stores themselves, who move their offer online and provide a delivery services (Voila, by IGA, is a good example); b) delivery services, which partner with existing retailers and provide a full buy-and-deliver service (Instacart is the usual example cited), and; c) online grocery stores, where a customer orders what they need through an online store, and the order is fulfilled from a warehouse and delivered to the customer’s home (HelloFresh, Goodfood and Amazon are all examples of this model). While more prevalent since the pandemic, only about 30% of Canadians state that they’ve used an online option in a particular month.
What the Bureau left out are smaller, regional food growers and distributors, like Lufa Farms in Quebec, which not only produces large quantities of fresh vegetables using roof-top urban greenhouses, but also, leverages their online platform to distribute other locally produced products such as meat, baked goods, beverages and sweets.
Last, the Bureau looked an international grocery chains and their potential entry into the Canadian market. Canada already has two foreign-owned grocery retailers — Costco and Walmart. But, between the two of them, they have about 500 stores in Canada, compared to the over 3,000 locations jointly held by Loblaws, Sobey’s and Metro. Other foreign chains — such as ALDI or Lidl (quite successful in Australia and Europe, for example) — face a host of other barriers to entering the Canadian market, such as the market position of the big three chains in the Canadian market, the unique product makeup of the Canadian grocery market (higher multicultural product mix than other markets), lessons learned from the failure of Target to get to a profitable position in the Canadian market and Canada’s labelling laws.
So, where does this leave us?
Well, the Bureau’s job was to produce a report that updated the situation in the Canadian grocery market, and provided recommendations to government for action. The overview they provided is a welcome addition to the debate, as it is written in clear language that is easy to understand.
Their recommendations include the development of a grocery innovation strategy, where all 3 levels of government work together to develop regulatory and market conditions that would favour the entry of competition in the retail grocery sector — either brick and mortar stores, online stores or other business models that disrupt the current retail market.
In addition, the Bureau is suggesting that government financially support the emergence and growth of independent retailers, either directly or through incentives such as access to real estate. Also, the Bureau wants government to force the development of uniform unit pricing across the country, to reduce the bewildering format and pricing points for the same or similar products, making it easier for consumers to compare pricing from one retailer to another. Lastly, the Bureau is asking that government take action to limit the use of property controls, or covenants, that would lead to the prevention or lessening of competition in the market.
The Bureau has set out these recommendations, and further committed to work with government to help implement them, to continue to monitor the industry and support the effort underway to produce an industry Code of Conduct that will help better govern the market behaviour between the retailers and their suppliers, hopefully leading to better outcomes in terms of pricing and product availability.
Will these measures get prices down in the short term? No. Governments, if they act at all, will do so on their own schedule based on what is politically keeping voters awake at night. This issue is certainly a hot one, so they may act once the politicians get back from their respective summer breaks.
In addition, the market is taking care of that in certain food groups, as inflation gradually comes down from its highs a year ago. However, the decline is spotty and not applicable to all food types. Some food prices have gone down (tomatoes, cucumbers, strawberries) while others have increased (pork shoulder, grapes, carrots). As domestic supply floods the market in Canada, prices for vegetables and certain fruits should decrease over the summer months. But for other foods, prices will remain high, or even continue to rise, as those foods will be imported from areas where growing and/or producing is getting tougher due to climate unpredictability.
In the end, even if government acts and competition increases as other players enter the retail grocery market, it will be months, if not years, before Canadians see any benefit.
Until then, Canadians will have to continue to seek whatever bargains they can, and hope that political pressure will continue to brought to bear on the industry.
