Chasing the ‘Aldi effect’: Why it’s hard for discount grocers to break into Canada

Click to play video: 'New national study recommends more competition at the grocery store'
New national study recommends more competition at the grocery store
WATCH: A new study by the Competition Bureau says more competition is needed to bring down grocery prices. – Jun 27, 2023

A push to bring more competition into the Canadian grocery sector in the form of discount European brands such as Aldi and Lidl would face steep obstacles in Canada’s fragmented marketplace, experts say.

The Competition Bureau’s probe into concentration among Canada’s grocers released Tuesday highlighted the role international competitors could play in lowering prices as food inflation continues to cause pain at the grocery store.

The report argued that introducing international grocers such as Aldi and Lidl would push the dominant incumbents — namely Loblaw, Metro and Empire — to lower prices to compete with the discount brands popular in Europe and some parts of the United States.

The Bureau drew on a 2008 report that showed the so-called “Aldi effect” drove down grocery prices in Australia when the retailer entered the country, and even used Canada’s experience with Walmart as an example to show how a new player can disrupt the status quo.

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A Reuters report from 2008 shows a move from Walmart to cut prices on food staples by as much as 35 per cent put pressure on competitors to do the same; a 2015 Bank of Canada study showed that the company’s innovative cost structures were driving down prices elsewhere in the sector.

Click to play video: 'Reaction to Competition Bureau study into Canada’s grocery sector'
Reaction to Competition Bureau study into Canada’s grocery sector

“There is such a thing as the Walmart effect,” says Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University.

“When a new store opens, prices tend to drop — including food prices. That’s why I think everyone wants the ‘Aldi effect’ to come into the market to see this new wave of deflation with food prices.”

Of all the recommendations made in the Competition Bureau’s report, it said attracting international grocers “may be the best option” to boost consumer choice and improve prices for Canadians.

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Bringing in new players easier said than done

If the likes of Aldi and Lidl could shake up Canada’s grocery sector and compete aggressively with established players, the obvious question is: Why haven’t they?

The Competition Bureau’s analysis included interviews with international grocers to get their take on challenges entering the Canadian market.

Some of the barriers are physical: Canada’s expansive geography and low population density make it hard to set up operations efficiently, the report noted.

But beyond that, the Bureau found that the country’s existing grocery giants are “daunting competitors” to outsiders. Without naming names, the report said that one international grocer said it believed it could compete on price with the incumbents, while another said the task would be “difficult.”

The report hinted that in the Competition Bureau’s conversations with international grocers, some players said they were studying or had studied the prospect of expanding into Canada, but none had formally announced plans to do so.

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Global News reached out to Aldi and Lidl for comment on Wednesday but did not hear back.

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Canadian laws and tastes come with a number of standards that can be difficult for new entrants to get up to speed on. Labels on packaging need to be bilingual, for instance, and the Competition Bureau report notes that catering to multicultural Canadian consumers would mean carrying a wider array of ethnic products than they might otherwise sell in their home markets.

Charlebois says that interprovincial trade barriers and other government red tape can be a significant headache for international players. Launching as a truly national brand is difficult because, from province to province, there are different labour laws and regulations to consider, he says.

“All these little rules cost more money,” Charlebois says.

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He argues that established companies have already baked the costs of operating in Canada into their business models — the country’s carbon pricing regime, for one — but the country’s unique federalism system requires a complex strategy for a new player to find success.

The Competition Bureau report highlights Target’s failed entry into the market, whereby it bought up Zellers outlets in a major push only to pull out mere months later, as a possible warning sign to international players thinking of a similar move.

Charlebois says Target is not the only casualty of an inhospitable retail landscape in Canada.

“Target really miserably failed in 2014-15 just because they underestimated the complexities of the Canadian market,” he says. “We lost Lowes, Sears. We just lost Nordstrom. So if you want a national player, it is extremely difficult.”

When Walmart entered the Canadian market in 1994, it did so via the acquisition of Woolco. It started with a relatively small footprint and built up its brand over time to adapt to the Canadian market, Charlebois says.

While that slow-and-steady strategy might’ve worked decades ago, he expects dipping an international brand dipping its toe into a market like Toronto or Vancouver would not work as well today. Fresh competitors have to go “fast” in the food sector these days, or the existing “regime” would mobilize to limit their business prospects.

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A spokesperson for the Retail Council of Canada, which represents the country’s major grocers in the industry, said in response to the Competition Bureau report on Tuesday that the grocery market has “always welcomed competition.”

Click to play video: 'Canada’s grocery giants not cooperative with pricing investigation'
Canada’s grocery giants not cooperative with pricing investigation

Spokesperson Michelle Wasylyshen said in a statement that Canada’s grocers do not impose barriers on new entrants and instead said their absence was a sign that existing discount grocers are “well-established” in the market.

Michael von Massow, food economist with the University of Guelph, says that if international grocers don’t want to enter the Canadian marketplace, perhaps it’s a sign that Canada wouldn’t benefit from having them.

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

The Bureau noted as well in its report that Aldi and Lidl operate as the primary discount retailers in markets where they challenge large brands — in Canada; however, many discount options such as Food Basics and No Frills are also owned by the existing giants.

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How can Canada attract outside players?

While the Competition Bureau report recommended governments “take steps” to encourage global players to enter the Canadian grocery sector, it was light on suggestions for what exactly that would look like.

Von Massow says he’d like to see a more direct study of the impact new grocers coming to Canada would have before governments go out of their way to attract international players with subsidies, as it has done recently to lure auto giants such as Volkswagen and Stellantis.

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Help with some of the high overhead costs that come with expanding into Canada could lower the barrier to entry, but he says it’s worth being sure consumers will feel the benefit on their grocery bills at the end of the day.

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“Should the government be saying, ‘Well, we’ll grease the wheels like we have for electric battery plants and that sort of thing?’ Government could do that, but I wouldn’t do it unless I had some real assurances that it would actually lower prices,” von Massow says.

Global News asked Industry Minister Francois Philippe-Champagne whether the government would take a similar tact to attract international grocers to Canada, or what other actions it would take in response to the Competition Bureau’s report.

A spokesperson for the minister did not say whether subsidies of any kind were on the table or if Ottawa would attempt to lure more international grocers to the market. The statement called the Competition Bureau analysis a “good first step,” adding the government will now review the recommendations to see “how we can continue to make life more affordable for Canadians.”

Charlebois says there are arguments for using government subsidies to lure manufacturers, as Kraft-Heinz received for a plant in Quebec, but not for bringing in retailers.

Rather, he’d like to see governments at all levels focus on improving market conditions for prospective entrants.

Even at the city council level, Charlebois says, there are zoning restrictions and conditions granted to grocers that will limit property uses in an area to box out competition. The Competition Bureau also flagged such property controls as a barrier to competition in the market.

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But Charlebois also points the finger at the Competition Bureau, arguing its policing of the industry “devalues” Canada’s reputation as a good place to do business.

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Parliamentary Committee finds grocers not entirely to blame for high food prices

Executives at international grocers are reading headlines in Canada too, he says, and can see the relatively muted fallout from the Bureau’s investigation of the bread price-fixing scandal. Canada Bread was fined $50 million last week for its role in fixing prices, a penalty that came more than a decade after the initial incidents.

Weston Foods and Loblaw Cos. Ltd., both subsidiaries of George Weston Ltd. at the time, had previously admitted their participation in an “industry-wide price-fixing arrangement” involving the coordination of retail and wholesale bread prices. The investigation continues into other players in the industry.

Charlebois argues that if Canada is not seen to be taking collusion seriously — granting Loblaw immunity for its cooperation rather than prosecution, for example — why would an outsider try to break into the market when it knows it’s not part of the existing “regime”?

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“Why would you go into a market where there are suspicions of collusion when you are not part of the family?” he asks. “It probably is getting some Aldis and Lidls to think twice about the Canadian market.”

Global News reached out to the Competition Bureau to ask whether it felt its response to the price-fixing scandal has affected Canada’s reputation.

Noting that the $50-million fine against Canada Bread was the largest price-fixing fine ever issued by Canadian courts, a spokesperson for the Bureau said that its investigations into the grocery industry have been “rigorous.”

Spokesperson John Power added that “price-fixing conspiracies are difficult to uncover” and can take longer to build the case so it can be proven in court.

Power said the grocery industry is becoming “more consolidated over time” and said Canadian laws “need to be modernized” so the Bureau can protect and promote competition.

“The Bureau continues to do everything in its power to pursue those who conspire to increase the cost of living for Canadians by fixing prices,” the statement read.

In the report, 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.

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— with files from The Canadian Press

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