Our industry continues to be in the news with the Competition Bureau releasing a Retail Grocery Market Study. We decided it would be good to explore what the Competition Bureau is and what they have to say about our industry.
Here is a definition directly from their website to explain their mandate:
The Competition Bureau is an independent law enforcement agency that protects and promotes competition for the benefit of Canadian consumers and businesses. Competition drives lower prices and innovation while fueling economic growth.
The words law enforcement agency and their upfront placement were interesting to me. I never really considered them to be on an equal footing with other law enforcement agencies. My perception would have been more ‘watchdog’ or ‘oversight’. Their mandate is to enforce the law, so they are constrained if the law is outdated or does not have the necessary provisions for them to act. More on that later.
Competition Bureau Retail Grocery Market Study Report
The headline is….
Canada needs more grocery competition
Our response is….
Everyone who works in this industry, except perhaps the leaders of the major retailers, think we need more competition. The balance of power is in the hands of the five major retailers that control over 85% of the market, through their corporate and franchised stores.
Once we got past the immediate response to the headline, we read the rest of the report. They have divided the content into the following segments:
1. Grocery competition in Canada
2. Domestic grocer margins
3. Property controls
4. Online grocery
5. Bringing international players to Canada
6. How other countries have increased competition
7. Informing consumers
8. Canadian’s ideas for increasing competition
There is one major flaw in the report which we will share in a few paragraphs. It is disappointing to see this lack of understanding and questions the knowledge of the authors.
Many of our subscribers like to jump right to the action so we will start with the recommendations. There is a lot more detail, but some people want to skip the rationale and look for the direction they are suggesting.
1. Canada needs a Grocery Innovation Strategy aimed at supporting the emergence of new types of grocery businesses and expanding consumer choice.
2. Federal, provincial, and territorial support for the Canadian grocery industry should encourage the growth of independent grocers and the entry of international grocers.
3. Provincial and territorial governments should consider introducing accessible and harmonized unit pricing requirements.
4. Provincial and territorial governments should take measures to limit property controls in the grocery industry, which could include banning their use.
SKUFood thoughts on these recommendations
#1-Not sure what this will be? Perhaps focus for online sellers of food that are not tied to major retailers?
#2-We agree with as it pertains to independents but not international retailers. Yes, international retailers have expertise and infrastructure, but the profits will go elsewhere and we will just make it more difficult for suppliers.
#3-Nice to have but we do not see it changes the retail landscape or will make much of a change for consumers from store to store.
#4-Agree this should be change going forward. Not sure how you can go back in time but as developments are built this needs to be part of the landscape going forward to make it easier for independents and specialty stores.
Others from SKUFood
#1- Put resources/investments into distribution. It is a major cost of food in this country, and we have to believe more than other places. Our relatively low population and geography do make it a challenge but there must be a better solution than what we do today.
#2- Explore Canadian content rules within categories to force these large retailers to carry products produced here. This reduces their leverage and ability to just bring something cheaper from somewhere else.
#3 Revisit safe food for Canadians Act to provide more realistic market sizes for producers and processors. Provincial markets are fine in the 3 largest provinces. Manitoba, Saskatchewan and Alberta should be a market as should be Atlantic Canada. We believe the reason is risk so why not make it fair? Ever tried to build a food business limited to Prince Edward Island? This would give processors a better chance at success and more leverage with retailers.
A summary of the report:
Grocery competition in Canada
They explore the history of consolidation, which is interesting, but it does not help change the situation going forward. One interesting note is they address the obvious question of, ‘you say you are concerned about consolidation, why did you approve the Sobeys acquisition of Longo’s and FarmBoy?’ The current law requires the competition bureau to prove in court that an acquisition like these would reduce choice for consumers to a level that would have a negative impact on competitive prices. These are our words, not the actual law. So, in their defense in the markets where Longo’s and FarmBoy operate there is more choice than anywhere in Canada. True there are two fewer competitors but still more than anywhere else. They do include they are lobbying to have the laws changed. The impact on suppliers is probably much more significant than consumers in these examples.
Since 1986 we have experienced the major retailers reduced from 8 to 5. In 1986 we had:
Perhaps some of those acquisitions and mergers should have been questioned more. The dominance now is really a challenge for the entire value chain, including consumers.
Domestic grocer margins
They state they had requested detail from retailers but not all complied. If they are law enforcement, then we need to make some changes to ensure they can get the information they require. There is a good comparison of food inflation vs. all price inflation. We see food price inflation growing at a similar rate to all prices then in the summer of 2022 a gap begins to appear. Inflation is declining in all prices, however food hovers close to 10%, whereas all prices drops to 5%. If food is truly unique and global factors are impacting prices, we should see this in other countries to prove our Canadian retailers are telling the truth. It would have been beneficial to see more comparisons to other countries with the following food inflation chart.
The report explores retailer margins. Just hours after it was released, I got a text from Al Archibald (Archibald Analytics), wild about the calculations they had included in the report. One of the things we try hard with at SKUFood is to help people understand the terms in our industry and how to calculate gross margin. Gross margin is retail – cost / retail. Check out the chart they include:
They are incorrect to say the grocer’s margin is 20%. The retailer’s margin is 16.7% in the lower cost example ($1.20-$1.00)/($1.20) and 16.7% ($1.32-$1.10)/($1.32) in the higher cost example.
Their argument is correct retailers make more cents per unit profit when inflation occurs in pricing, but their example uses mark up, not gross margin. Disappointing to see that lack of understanding.
My first job at Loblaw was in real estate. I learned very quickly control over real estate was a huge part of the strategy for any retailer, regardless of the sector. If you have the best location and can prevent competitors, even small specialty stores, you will do the business. This is true even if you do not operate great stores or have the sharpest prices.
We do need to explore the influence these large retailers have over locations and the impact on the rest of the value chain.
It is true this could be an opportunity for some disruption, but we probably missed the window to really change consumer behaviour. In fairness society was dealing with pandemic and just trying to figure out how to get food produced and to consumers. If we had really provided some incentives to innovative people, we could have brought competitors to the market and consumers would have changed some habits.
The large retailers have responded and although more food is being bought online most of it goes through the same 5 companies. It will take a lot more work now to change the habits.
Bringing international players to Canada
It is interesting to see our own bureaucracy recommending introducing foreign competitors into the market. I am sure this will get some comments in a few retailer’s boardrooms. The report references Aldi in other countries having an impact on pricing. One important piece that is lost in that argument is how the existing retailers responded. Our understanding is a huge amount of pressure on suppliers to deliver lower costs to compete with a discounter. Might not be the solution we need in Canada.
How other countries have increased competition
This section referenced the code of conduct which we do believe will happen here soon. Unfortunately, it is needed and should alleviate some of the issues in the value chain. It does not change we have only 5 retailers to work with and if two of them want to list a cheaper item from another country, you have lost access to a huge proportion of the market.
They also list property controls, buying groups, unit pricing and foreign competitors which are repeated in other sections.
We agree unit pricing informs consumers, but it does not really help make the choice from store to store. It does help within the category, at the shelf. There are so many prices to remember and they do change. Many retailers do this now because they want you to buy their private label. We do not see this will change the overall situation much.
Canadian’s ideas for increasing competition
The report does include 10 ideas that were generated from ideas they received. It appears many are designed to preclude questions from being asked as the commentary does explain why or why not it might be feasible. We do have an issue in this country in sectors like food retail, telecommunications and air travel where choice is limited and consumers are paying too much.
If you have any comments you can always send me an email email@example.com or call me at (902) 489-2900.
Focus on commodity prices
As input costs continue to fluctuate all producers and processors need to watch the changes. Keep your customers, the retailer informed. If cocoa is an ingredient in your product, we would recommend you share articles like this. You might not need a price increase right now, but it looks like you will in the future. The more you can educate your customers the better it is. You want them to be thinking an increase will be coming and expect it as opposed to be surprised by it.
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