More competition can help keep ‘grocery prices in check,’ report argues

Governments must act to bring more grocers into the Canadian market, argues a new Competition Bureau report examining concentration in the sector.

The investigation, which arose in response to surging inflation at the grocery store last fall, ties higher prices to a lack of competition in the Canadian grocery industry. But it stops short of alleging any wrongdoing or profiteering from grocers amid high price pressures.

Most Canadians buy food in stores owned by a handful of grocery giants, with Canada’s three largest grocers — Loblaws, Sobeys and Metro — collectively reporting more than $100 billion in sales and $3.6 billion in profits last year, the study found.

The Competition Bureau’s investigation sought to find out to what extent high levels of concentration in Canada’s grocery industry was contributing to soaring levels of food inflation — a trend that continues to cause pain on Canadian household budgets.

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The latest annual inflation reading from Statistics Canada Tuesday showed that while overall inflation had cooled to 3.4 per cent in May, grocery prices remain elevated at 9.0 per cent last month.

“Canada needs solutions to help bring grocery prices in check,” the Competition Bureau study said. “More competition is a key part of the answer.”

While some critics have accused Canada’s grocers of profiteering off of higher food prices during the current inflationary period, a lack of detailed disclosures about how much of the grocery giants’ profits are derived from food compared to pharmacy and cosmetic sales, for example, has made analysis difficult in the past.

The Competition Bureau report offered new insights into grocers’ food margins, showing “modest yet meaningful” growth since 2017.

The average one to two percentage points added to grocers’ margins works out to an extra $1-2 per $100 spent by Canadians at the grocery store, according to the report.

The agency noted that the growth trend in grocers’ food margins had been underway since before the pandemic and the latest bout of high inflation, which many economists have tied to supply chain disruptions and severe weather impacts.

The grocery sector is typically a low-margin industry, the Bureau noted, which gives even small increases in a company’s food margins an outsized impact on overall profits.

A highly competitive grocery industry would not see margins rise easily, the report argues, as stores would find incentives to trim their margins to compete with other grocers.

“Additional grocery competition would help cap grocery price inflation,” the report read.

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Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University, which contributed to the Competition Bureau report, says the study states the “obvious” when it comes to Canada’s concentrated grocery sector.

“We need more competition,” he tells Global News.

Canadian grocers’ profit margins are typically double those of their U.S. counterparts, according to Charlebois, suggesting that big players in Canada’s grocery sector face less pressure than those south of the border.

“Grocers are in a cozy environment in Canada,” he says.

While the Competition Bureau based its analysis on willing disclosures from grocers themselves, the agency did not provide those breakdowns in its report, citing confidentiality requirements.

It also noted that grocers’ levels of cooperation with the probe “varied significantly, and was not fulsome.”

The Competition Bureau cannot compel corporations to provide financial data under current legislation — a power the agency said in the report it would like to see added in revisions to the Competition Act.

Global News reached out to Loblaw, Metro and Empire for comment on the report. Loblaw and Metro responded but deferred questions to the Retail Council of Canada.

The non-profit association, which represents retailers including Canadian grocers, said in a statement Tuesday that with the Bureau’s report finding profit margins growing at a “modest” clip, the “greedflation smear is officially dead.”

A similar report looking into the causes of food inflation from the House of Commons’ agriculture committee released earlier this month proposed implementing a windfall tax on corporate profits if the Competition Bureau’s probe found evidence that grocers were profiteering amid higher inflation.

While the Bureau’s report shows profit margins on food were indeed rising over the past five years, it does not lay any charges of wrongdoing or collusion at the feet of Canada’s biggest grocers.

Asked about whether the proposed windfall tax could help level the playing field in the grocery sector, senior officials at the Competition Bureau told reporters on Tuesday that taxation issues “fall outside (its) mandate.”

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Retail Council of Canada spokesperson Michelle Wasylyshen said in the statement that established grocers in Canada have never been inhospitable to external competitors.

She pointed to the report’s painting of Canada’s grocery industry as difficult for foreign players to break into as proof that prices are already competitive across the sector.

“The conclusion that we draw from the report is something of a paradox: more competition could result in lower prices, but foreign grocers aren’t raising their hands to enter our market because Canadian grocers already compete fiercely on price,” said Wasylyshen.

Michael von Massow, food economics professor at the University of Guelph, agrees that the Competition Bureau report fails to find any “wrongdoing” on the part of grocers.

He tells Global News that the Bureau had its work cut out for itself with a short timeframe to conduct the probe and a set of grocers who seemed unwilling to play ball.

The independent consumer watchdog recommends all levels of government encourage the entry of new homegrown grocers into the market and seek ways to lure international brands to the country.

The report also includes recommendations to standardize packaging units and to limit property controls used to prevent new grocers from opening up shop.

But von Massow says the recommendations made in the report are largely done so “in principle” — that more competition will be good for prices as a rule of thumb rather than a specific solution to a problem.

Some of these recommendations could backfire, von Massow argues, if followed blindly.

While he agrees that Canada’s grocery giants do have a degree of pricing power, they also have buying power with the scale of their distribution networks. Expanding the number of smaller players in the industry could bake higher prices into the market, he argues, if their supply chains aren’t as efficient.

“If we break them up or we bring new competitors in to split the market a bit more, we may actually put more cost into the system,” von Massow says. And that could actually be somewhat inflationary.”

Von Massow says he’d also like to see more study done on the prospect of bringing in more international retailers before governments start rolling out subsidies, for example, to see if such a move would actually directly improve prices for consumers.

Foreign players might not see the high overhead costs needed to set up shop in the market as worth the risk, but he notes incentivizing them to come here might not be worth Canada’s dime, either.

“If competitors are telling us they don’t want to come in, perhaps it means we have an already relatively competitive marketplace.”

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The Bureau said it also needs to approach its work in the grocery industry with “heightened vigilance and scrutiny” to ensure Canadians benefit from greater choice and more affordable groceries.

“We need to thoroughly and quickly investigate allegations of wrongdoing, and we need the power to act when issues arise,” the study said.

The watchdog committed to taking steps to better promote competition in the Canadian grocery industry, including providing a pro-competitive perspective to support the implementation of Canada’s grocery code of conduct.

It also committed to revisiting the findings of its study in three years to assess the progress on recommendations it has made to government.

— with files from Global News’s Anne Gaviola and The Canadian Press