Why restrictive lease clauses could be hampering grocery competition in Canada

As Canadian consumers have increasingly soured on the major grocers, the country’s competition watchdog has turned its sights on restrictive clauses in retail leases that it says are hampering 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 potentially even lower prices, experts say.

“It would promote some more competition in the marketplace,” said Peter Chapman, founder of consulting firm SKUFood and a former Loblaw Cos. Ltd. executive.

Grocery prices have increased by more than 20 per cent over three years, and the resulting political pressure has seen MPs order grocery executives to take action. The federal industry minister has said he’s courting foreign grocers in the hope that a new entrant would boost competition.

Meanwhile, the Competition Bureau is looking into the use of property controls in the grocery industry.

The bureau says property controls, which are terms baked into commercial leases that put restrictions on other nearby tenants and their activities, can be barriers to both smaller domestic companies and foreign entrants.

These clauses could limit the kinds of stores that can open in a mall, or limit the kind of store that can take over a vacated location. They might also limit other nearby stores from selling certain products.

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But experts say limits on this practice would do more to boost domestic competition than it would to pave the way for a foreign grocer to enter Canada.

“It’s not going to necessarily bring a big international competitor in,” said Michael von Massow, a food economy professor at the University of Guelph.

In May, the Competition Bureau launched investigations into the parent companies of grocery chains Loblaws and Sobeys over the 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 said in court documents.

Since large retailers draw traffic to malls and plazas, they have power in their negotiations with landlords to ask for restrictive clauses, said Chapman.

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

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 applied in the Federal Court to order Empire Cos. Ltd. and George Weston Ltd. to hand over records about real estate holdings, lease agreements, customer data and more.

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The court documents describe Empire’s and George Weston’s holdings in real estate investment trusts, or REITs, which count the companies’ own grocery banners as major tenants.

The REITs have a wide reach geographically, and so property controls often extend past one mall or one plaza, said von Massow.

Over time, these clauses are becoming more specific as companies like Giant Tiger and Dollarama have expanded into food, said von Massow.

“We’re seeing the introduction of new restrictions, because the nature of the competition has changed,” he said.

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. By restricting which other stores can be near a large grocer, or what nearby stores can sell, the grocers are trying to be a one-stop shop for consumers instead, he said.

Sobeys owner Empire said in a separate court application that the bureau’s investigation gives the Competition Commissioner “the appearance of a lack of independence” amid political pressure and criticism over grocers’ prices, and called the inquiry “unlawful.” The Competition Bureau has confirmed that it has filed a motion to strike Empire’s application for judicial review.

Loblaw previously said it’s co-operating with the review, but noted that restrictive covenants are common in many industries including retail.

“They help support property development investments, encouraging opening of new stores and capital risk-taking,” said spokeswoman Catherine Thomas in a statement last week.

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Though limiting the use of property controls could promote competition, Chapman said he doesn’t think restrictive clauses are one of the top barriers for potential foreign entrants like the ones being courted by federal Industry Minister François-Philippe Champagne.

Chapman said the challenges of setting up a distribution network, and of building an economic model that works within Canada’s regulatory environment, would pose much bigger obstacles for companies looking to expand.

If a foreign grocer decides to enter Canada, they’re more likely to build their own locations or partner with an investor, rather than try and enter shopping areas already occupied by an anchor tenant, added von Massow.

But the experts said limiting property controls will help independent stores and smaller chains like Dollarama and Giant Tiger.

If those stores are able to open more locations, consumers will benefit from more choice, said von Massow.

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

If the use of property controls is restricted, “it won’t necessarily bring a Lidl or an Aldi in, but it will make it easier for a dollar store to go in and provide a choice for people who are willing to shop around,” said von Massow.

— With files from Darryl Greer in Vancouver