Competition and innovation in the Canadian grocery sector: Buyer power, concentration, resale price maintenance and deceptive marketing

Remarks by John Pecman, Commissioner of Competition

Grocery Innovations Canada
National Tradeshow of the Canadian Federation of Independent Grocers

Ottawa, Ontario

October 17, 2016

(As prepared for delivery)


Introduction

Good morning, everyone.

It is impressive to take a walk around this building and see the multitude of products on display. It is clear that I am in the right place to talk about competition and innovation.

This is a time of rapid change in many Canadian industries, driven by new technologies, innovative new business models, and changing consumer attitudes. And the grocery sector is no exception.

Grocers are facing strong consumer demand for new products and services. People are thinking hard about what they choose to eat. They are demanding healthier and fresher foods. Our increasingly diverse population is looking for more international foods. And there is a growing consumer interest in e‑commerce that has grocers launching online "click and collect" services.

Grocers also operate in a dynamic and growing marketplace where there is competition not only on price, but also on variety and quality of products and services, stores hours, level of convenience, customer experience, and more.

Overall grocery store sales totalled nearly 79 billion dollars last year, according to Statistics Canada. We’re seeing growth by large retailers like Loblaw, Walmart and Costco, and news reports speculating about potential entry by e‑commerce players like Amazon and discount grocers like Aldi.

All the while, independents continue to compete vigorously in the market. With about 6,900 stores across Canada, they contribute an annual 3 billion dollars to the local, regional and national economy. And according to the CFIG’s Financial Survey, independents were able to increase their same‑store sales by a healthy 4.8% in 2015. (I am an economist by training, so please forgive my fondness for numbers.)

Now, I would like to outline how the Competition Bureau’s work relates to such a vital part of the Canadian economy. Our role is fairly straightforward: to protect competition and foster innovation in the marketplace for the benefit of suppliers, retailers and consumers. I want to emphasize that what we protect is competition, and not particular competitors in the marketplace.

From the Bureau’s perspective, an innovation‑themed tradeshow is a positive sign. Businesses in competitive markets are driven to innovate. They pursue more efficient production techniques and business models. They develop better products and services to attract and retain customers. And their increased efficiency and productivity leads to strong economic growth.

Allow me to speak briefly to four main points of interest for the Bureau in this sector—buyer power, concentration, resale price maintenance, and deceptive marketing—then highlight the role that both suppliers and retailers have to play in ensuring compliance with competition law.

Buyer power

I’ll begin with buyer power. This involves a negotiating dynamic where a purchaser has the ability to bargain for lower prices from input suppliers.

Under the Competition Act, the use of buyer power can, in some cases, be considered an abuse of dominance. To make that determination, the Bureau requires evidence not only of the buyer’s power to influence price, but also of practices with an anticompetitive purpose, and evidence that those practices actually result in harm to competition.

You will likely know that we have been investigating some of Loblaw’s policies directed at suppliers and their impact on competition in the retail market. In particular, we have focused on Loblaw’s programs or agreements with its suppliers which make reference to the retail pricing of its competitors.

I know the case involves issues that are very important to you and you may have many questions. Please note that I am limited in what I can say about the ongoing investigation.

But I can say this:

The review has proven to be highly complex and both the competitive landscape and business practices have evolved throughout. Our investigative team has put a great deal of time into gathering the facts and getting a deep understanding of the issues in this industry. The team has conducted over a hundred meetings and interviews with a range of retailers and suppliers of all sizes, and has travelled across Canada to meet with a number of independent grocers, visit their stores, and hear their views.

Many of you will be aware of news reports that Loblaw announced the elimination of a number of the practices under investigation by the Bureau, effective January of this year, and adopted new approaches to dealing with its suppliers.

Nevertheless, our investigation is ongoing to ensure that we fully understand the nature and effects of these past policies as well as the announced changes, among other developments. This is an important issue for us, and we are committed to doing a thorough review and making the right decision.

Concentration

Concentration in the grocery sector is also very much on our radar. Given that the five largest players represent well over 80% of the market, we will continue to be vigilant in our review of mergers and business conduct in the industry.

In the past few years, for example, we required significant divestitures in both the Sobeys/Safeway and the Loblaw/Shoppers Drug Mart mergers to preserve competition in a number of local markets. We also reviewed the merger of Kraft and Heinz on the supplier side, and we are paying close attention to that part of the industry as well.

When we consider market concentration with respect to mergers or abuse of dominance, our guideline is that players with less than 35% market share are not likely to raise competition issues. This is a general guideline only, however, and our courts have stated that firms with market shares below 35% can have market power in some cases.

There are also many other factors, in addition to market share, that the Bureau must consider in determining whether a firm is dominant. And again, market power is just one part of the story. In all cases, we will ultimately be focused on harm to competition and whether it meets the threshold set out in our legislation.

Resale price maintenance

We are also paying attention to what we call resale price maintenance. This happens when a supplier influences the prices at which a retailer sells its products, such as setting a minimum in order to keep a product above a certain price.

This behaviour used to be a criminal offence under the Competition Act. In 2009, it became a civil provision that barred the practice only when it harmed competition. This decriminalization—and requirement that the Bureau look at the effects of the practice—reflects a recognition that resale price maintenance can have both pro‑competitive and anti‑competitive effects.

You can imagine a common pro‑competitive outcome in retail sectors where selling products requires a high level of customer service. For example, think of a store selling high‑end speakers and the value provided to customers through knowledgeable sales staff and attractive in‑store displays. Retailers who make the investment in those services risk being undercut by discounting "freeriders" who benefit from their competing retailers’ investment. In these cases, minimum pricing can be seen as a protection of that service investment against those so‑called "freeriders".

Since the 2009 amendments, we have seen a proliferation in policies imposing minimum advertised prices on products, including in the grocery sector. The use of these policies in the grocery sector is particularly notable, because some of the traditional pro‑competitive explanations for the practice—including the example I mentioned—may not always apply to grocery store products.

This is something the Bureau is paying attention to and we will take action if we find evidence of anticompetitive uses of resale price maintenance.

Advertising and consumer confidence

Finally, the Bureau is also paying attention to consumer deception through misleading advertising. It benefits all businesses when well‑informed consumers can buy with confidence. With respect to the grocery industry, the Bureau strongly endorses the Scanner Price Accuracy Code, which aims to ensure that the price on the shelf is the price consumers pay at the register. The Competition Act also contains provisions that ensure that when advertisers promote products at sale prices, consumers are not enticed by misleading references to inflated regular prices.

Grocers, like all retailers, must comply with the deceptive marketing provisions of the Competition Act, not only in their flyers, but also on their websites and in‑store displays. We will not hesitate to take action in order to promote consumer trust in the marketplace.

Shared compliance

Now I’ve spoken a lot about the Bureau’s role in protecting competition in the grocery sector, but we also view compliance as a shared responsibility. Suppliers and retailers also have a role to play.

Businesses do their part to ensure fair play in the marketplace by implementing and adhering to corporate compliance programs. A credible and effective compliance program minimizes your risk of violating the law, and protects your business, your reputation and your employees.

We do what we can to help businesses of all sizes play their part by providing guidance and tools to help you out. That includes our recently revised Corporate Compliance Programs bulletin, which is available on our website along with a number of other compliance tools for businesses large and small.

Increasing compliance with the law, in which we all play a part, strengthens competition, drives innovation, and benefits businesses, consumers and the Canadian economy.

Thank you.

Date modified: