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Loblaws's Paul Uys during an interview with The Globe and Mail, while he speaks about the evolution of some of the Loblaws brands, including the No Name brand, Blue Menu, and the new Fair Trade items.Peter Power/The Globe and Mail

David Soberman is a professor of marketing at the University of Toronto’s Rotman School of Management.

Canada is becoming an increasingly difficult market for any consumer goods brand that is not a leader in its category. The imminent exit of Kleenex from facial tissues in the country has been one such shocking example.

Kleenex is the brand that pioneered the category, and for many, it remains the generic name for facial tissue. But like many similar international brands, it does not have the biggest market share in this country. Whether it is Kleenex or Skippy Peanut Butter, which pulled out in 2017, what lies behind the departure of these brands from Canada that, while small compared with the United States, is still a rich country with a population of almost 40 million?

The answer: insufficient competition in the Canadian grocery sector. For commodity-like products for which the differentiation between labels is minimum, any brand that is not in first-place finds it hard to compete in the concentrated domestic market. This is especially so with the rise of private-label products from Canada’s big grocers, such as Loblaw’s President’s Choice.

When we lose a beloved product, we lose a part of ourselves. Call that what it is: grief

There are a number of commodity-like categories (especially in grocery retailing) where the differentiation between products is minimal. Examples of such categories include facial tissues, regular potato chips, canned tomatoes and cooking oil. Because of the similarity across brands in these categories, consumers are relatively insensitive to which brand they use. This increases the importance of price in the consumer’s decision criteria. Unless a company’s volumes are significant, it is challenging for a company to turn a profit.

In the case of facial tissues, Kruger, with its Scotties brand, commands a market share of about 35 per cent in Canada. Meanwhile, Kimberly Clark (Kleenex) holds less than half that, at 16 per cent. Because there are significant fixed costs associated with carrying brand (such as securing retail listings), it is significantly more difficult for a small brand in a commodity-like category to make money.

When a brand is clearly number two in a category, it is at significant disadvantage when it deals with powerful retailers. Nowhere is this truer than Canada, where the level of concentration in our supermarket sector is high. Our top three supermarket chains command 60 per cent of the market, compared with U.S. retailers in that country’s market at 37.5 per cent; our top five command 77 per cent of the market, compared with the US at 47 per cent (numbers from Statista 2021 for Canada and Axios 2023 for the U.S.). This level of market power is a now subject of significant scrutiny in Ottawa.

A large retailer cannot afford to exclude Scotties from its shelves given its strong position in terms of both consumption (it is twice as likely for people to have Scotties compared with Kleenex in their home) and visibility. Scotties receives a high level of advertising support and is also the title sponsor for the national championship of women’s curling in Canada. On the other hand, retailers are in a position to demand significant concessions from Kleenex in terms of wholesale price, as the brand’s ability to move off the shelf is half that of the market leader.

Then there is the rise of private labels in Canada. A key change in retailing over the last 30 years has been the growth of attractive quality-equivalent store brands. Traditionally, retail shelves held several national brands, many of which were advertised, and one or two generic products. As retailers merged and become larger, they aggressively launched and promoted their own brands. The original market position of store brands was as lower price/lower quality alternatives to manufacturer brands, but they are today perceived as quality equivalent.

This trend started in Canada with the President’s Choice brand created and promoted by Dave Nichol. Studies by the Private Label Manufacturers Association (PLMA) show that a majority of consumers believe that private label products are the same as manufacturers’ brands when it comes to overall quality, taste, availability, freshness, guarantee of satisfaction, clarity of labelling and the quality of packaging, among other attributes.

The logic of this strategy is clear. First, the margins for retailers are higher on private labels. Retailers shop their business to contract manufacturers that offer much lower prices than the wholesale prices offered by manufacturers such as Kimberly Clark. Second, private label brands foster “retailer loyalty.” For example, a shopper who likes President’s Choice must go to a store in the Loblaws network if they wish to buy President’s Choice.

Whether it is President’s Choice (Loblaws), Selection (Metro) or Compliments (Sobeys), there is scarcely a single household in Canada that does not have these products in their pantry. After the launch of these brands, the retailers “delist” weaker national brands (those not supported by national advertising) by, for example, highlighting the price difference between the two.

This creates a difficult environment for the brand that is not the biggest national brand. When pressured by higher costs and inflation, consumers tend to switch to private labels. This is especially the case in commodity-like categories where consumers perceive the differences in products to be small. Private labels are underdeveloped in North America compared to Europe, but they have grown substantially in the last 10 years. In 2014, the estimated share of private label in Canada was at 18 per cent, but this was for all products. The share was certainly higher for grocery products.

In addition, a 2021 Nielsen report indicated that the growth rate of private labels in Canada was significantly higher than the growth rate for national brands. Recently, the volume share of private labels in a select group of categories was close to a third of the market: frozen foods, 32 per cent; baked desserts/breakfast, 32 per cent; processed meat, 32 per cent; dessert, 28 per cent; and condiments and sauces, 27 per cent.

So is the departure of a smaller national brand such as Kleenex from the Canadian market good for this country or its consumers? On the one hand, the gap left by the departure or demise of small national brands has largely been filled by a rich set of private labels, many of which are Canadian favourites. On the other hand, less choice and less competition for consumers is never a positive. This is difficult for Canadians who, as we have seen over the past year, have experienced one of the highest levels of global food inflation.

While there isn’t a simple solution to this problem, there are several things that government can do to improve the situation for Canadian consumers.

First, we need to strengthen our competition law and give the Competition Bureau the teeth needed to investigate and prosecute collusive behaviour (both explicit and tacit) on the part of retailers. It was satisfying for us to see the courts punish our retailers for bread price fixing in recent months.

Second, significant thought should be given to forcing some of our large supermarket chains to divest some of their divisions. For example, Loblaws includes banners such as Loblaws, No Frills and Fortinos. It is unclear that having many outlets, which appear to compete with each other, belonging to the same owner, is in the public interest.

Finally, serious consideration should be given to increasing the duty-free limits on the dollar value that shoppers who cross the border to shop state-side can bring back to Canada. If we cannot increase competition within the country, this is a simple way to import it. Ninety per cent of our population lives within 160 kilometres of the U.S. border, and while this measure will not help everyone, every little bit of increased competition makes a difference.

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