It was indeed the most surprising food story of the year.
Most Canadians were stunned and dismayed to learn that our country's number one grocer and carrier of perhaps our most-trusted brand, President's Choice, was caught up in a price-fixing scheme with bread maker Weston, owned by the same company. The scheme lasted 14 years, from 2001-15. As a result, Loblaw Cos. Ltd. fired several people involved and then turned itself into Santa Claus by giving a $25 gift certificate to millions of Canadians who may have been affected. The Competition Bureau, in return, offered not to lay criminal charges – a precious gift for a company for whom image and brand is everything.
Any supply-chain-related issue is complicated to understand. But in layman's terms, what was happening between Loblaw and Weston was inexcusable. For more than a decade, Weston's pricing scheme for its bakery products gave an unfair advantage to Loblaw, while putting other food retailers at a disadvantage. The strategy was not so much about getting more money out of consumers, at least not recently, but more about managing margins. Bread is often used as a loss leader – an item sold at a loss to increase traffic in a store. In fact, according to Statistics Canada, a standard loaf of bread is cheaper today than it was back in 2013.
But if we go back in time, bread prices have indeed fluctuated. A decade ago, the price of some bakery items doubled over just a few months. In 2007 and 2008, when commodity prices exploded as a result of the ethanol effect, the price for a bushel of wheat reached unprecedented heights. Higher input costs were used as a backdrop for the narrative, to justify enormous price hikes. But U.S. consumers also experienced a similar phenomenon, so higher bread prices at the time were not just unique to Canada. Many countries were affected.
Loblaw has done the right thing by coming forward, but several questions have cropped up as details emerged. First, the length of time: For 14 long years, two of the largest players in the business altered market conditions, just because they could. Many wonder why it took so long for the company to realize it had a problem.
In the grocery industry, a week is already an eternity, let alone 14 years. Most food businesses are literally just one recall away from closing. Quality assurance and ethics are central to most businesses, including Loblaw. Knowing this, it is challenging for Canadians to believe the company had only just become aware of the issue. The case for plausible denial at Loblaw is weak, at best.
Second, the people involved: It is likely, that over several years, more than just a few employees were a part of this. Numerous employees have come and gone, moving on to other positions, probably in the food industry. There is therefore a possibility that the culture of collusion and price-fixing may have spread beyond the company's walls and that the movement of human capital, over time, may have created an industry-wide problem. A scary thought.
When considering these factors, we can conclude that Loblaw coming out is just the beginning. The Competition Bureau is also investigating Sobeys, Metro, Wal-Mart, Giant Tiger and even bread producer Canada Bread Co. If price-fixing in bread was real, it is quite conceivable that similar schemes could exist and affect prices in other parts of the grocery store. Therefore, this matters to all Canadians.
The $25 gift card is just window dressing, embedded in some public relations framework to save face. What is at stake is consumer trust and how the industry can maintain its social licence to operate. Without this, everything becomes more challenging: expanding revenues, supporting communities, innovating, partnerships, loyalty programs – everything.
Independent grocers have the most to win out of this mess. They just cannot do what Loblaw and Weston admitted to doing for 14 years. They don't have the market power. But it is doubtful Canadians have the stamina or the discernment to punish the company by withholding their shopping dollars. Habits are hard to break, especially with food.
As surprising as the Loblaw admission may be, the market is cruelly fickle. Despite breaking the law, most will have forgotten about Loblaw's mea culpa within weeks – perhaps even days, given the time of year. These cases are inherently complicated. Case in point: Most have forgotten that Hershey admitted doing the same thing just a few years ago.
For Loblaw, this incident won't be as damaging as the Joe Fresh facility disaster in Bangladesh in 2013, which killed more than 1,000 people. Not even close. But now, Canadians have the right to doubt and second-guess anything. The fact that bread, a main food staple, was targeted by the Bureau's investigation, could give us hope for change. Everyone can understand the association of terms such as "bread" and "price-fixing," however complicated the situation may be. Most Canadians will understand that it is wrong, plain and simple. Let's hope the industry learns from this, too.
Sylvain Charlebois is professor in food distribution and policy and dean of the Faculty of Management, Dalhousie University.