Canada: As Canadian consumers increasingly express dissatisfaction with major grocers, the country’s competition watchdog has shifted its focus to restrictive clauses in retail leases that it contends hinder competition in the grocery sector.
Limiting the use of these clauses could pave the way for more independent grocers and smaller chains to compete with larger players, offering consumers greater choice and potentially lower prices, experts suggest.
“It would promote more competition in the marketplace,” said Peter Chapman, founder of consulting firm SKUFood and former executive at Loblaw Cos. Ltd.
Over the past three years, grocery prices have surged by over 20 percent, prompting political pressure on grocery executives to take action. The federal industry minister has expressed efforts to attract foreign grocers in hopes of enhancing competition.
Meanwhile, the Competition Bureau is scrutinizing the use of property controls in the grocery industry.
According to the bureau, property controls, which are clauses embedded in commercial leases imposing restrictions on neighboring tenants and their activities, can impede both smaller domestic companies and foreign entrants.
These clauses might restrict the types of stores allowed to open in a mall or limit the businesses permitted to occupy a vacated space. They could also constrain nearby stores from selling certain products.
However, experts argue that curtailing this practice would primarily boost domestic competition rather than facilitate the entry of foreign grocers into Canada.
“It’s not necessarily going to attract a major international competitor,” said Michael von Massow, a food economy professor at the University of Guelph.
In May, the Competition Bureau initiated investigations into the parent companies of grocery chains Loblaws and Sobeys over their use of property controls.
“According to market participants, property controls are widespread in the retail grocery sector, impacting where and how businesses can compete in the retail sale of food products,” the commissioner stated in court documents.
Large retailers, due to their ability to attract foot traffic to malls and plazas, wield negotiating power with landlords to secure restrictive clauses, explains Chapman.
“If the grocer’s parent company has ownership in the landlord, it’s much more likely that the retailer will get property controls in the agreement,” he added.
In May, the Competition Commissioner sought records related to real estate holdings, lease agreements, and customer data from Empire Cos. Ltd. and George Weston Ltd.
These companies’ real estate investment trusts (REITs), which include their own grocery banners as major tenants, have a broad geographic reach, resulting in property controls that extend beyond individual malls or plazas, von Massow noted.
Over time, as companies like Giant Tiger and Dollarama have ventured into food sales, these clauses have become more specific, von Massow observed.
“If consumers have access to several stores selling food within close proximity to each other, they are more likely to go to multiple stores in one trip, cherry-picking deals,” said von Massow.
Empire, the owner of Sobeys, argued in a separate court application that the bureau’s investigation appears to lack independence amid political pressure and criticism over grocers’ prices.
Though restricting the use of property controls could foster competition, Chapman believes these clauses are not among the top barriers for potential foreign entrants like those courted by federal Industry Minister François-Philippe Champagne.
Chapman contends that challenges such as establishing a distribution network and developing an economic model compatible with Canada’s regulatory environment pose greater obstacles for expanding companies.
If a foreign grocer opts to enter Canada, it’s more likely to construct its own locations or collaborate with an investor rather than attempt to enter areas already occupied by anchor tenants, von Massow added.
Nonetheless, limiting property controls will benefit independent stores and smaller chains like Dollarama and Giant Tiger, the experts assert.
“If those stores are able to open more locations, consumers will benefit from more choice,” said von Massow.
With consumers able to shop at multiple stores in one trip and search for deals, this could also bolster local price competition on certain items, he added.
“If the use of property controls is restricted, it won’t necessarily attract a Lidl or an Aldi, but it will make it easier for a dollar store to enter and offer a choice for people who are willing to shop around,” von Massow concluded.
