Raids this week by Canada's competition watchdog suggest a major new line of inquiry into hardball pricing tactics in the grocery business. The latest focus of regulators is the bread aisle.
The Competition Bureau is not saying much publicly about the raids, other than it has "reasonable grounds" to believe individuals and companies are engaging in anti-competitive conduct. Court filings show the criminal probe deals with activities dating back to 2001 involving the country's two main suppliers of packaged bread – George Weston Ltd. and Canada Bread Co. Ltd – and five major grocery retailers – Loblaw Cos., Sobeys Inc., Metro Inc., Wal-Mart Canada and Giant Tiger.
Unfortunately, there has been more smoke than fire when it comes to prosecuting bad behaviour in the grocery industry. Food manufacturers and independent retailers have griped for decades that the big Canadian chains abuse their market clout to extract deep discounts, high fees and other concessions.
In spite of years of looking, regulators have so far found little evidence of illegal conduct. The bureau has been investigating the pricing practices of Loblaw – Canada's largest grocery chain – since it took over Shoppers Drug Mart in 2014. The bread investigation goes back even further.
Competition commissioner John Pecman has expressed frustration about the slow pace of the Loblaw probe, saying last year that many suppliers aren't co-operating for fear of "retaliation" by the retailer. That has forced the bureau to seek court orders to get vendors to hand over information.
It's pretty obvious that concentration in Canada's grocery industry gives the dominant chains a lot of clout. The top five retailers – Loblaw, Empire, Metro, Wal-Mart and Costco – control more than 80 per cent of the market. Compare Canada's grocery landscape with the United States, where the top five chains control less than half the market.
Normally, the Competition Bureau doesn't worry unless one company has 35 per cent of the market. But market power is about more than market share. Loblaw also owns two of the leading grocery brands in the country – its ubiquitous private label President's Choice and No Name lines of products. Loblaw can develop, price and place its own products on store shelves in ways that undercut outside suppliers.
The bread market is a classic example of vertical market dominance. George Weston, the No. 2 bakery with 31 per cent of the packaged-bread market, also owns Loblaw.
Loblaw isn't just a vital customer for food manufacturers. It's also a rival, jealously guarding access to its shelves. The stark reality for food manufacturers is that they need Loblaw more than vice versa.
Late last year, Loblaw and the other major chains took the unusual step of unilaterally imposing price cuts on their suppliers, ostensibly to give a break to consumers. Vendors complained, however, that it was mainly about the chains seeking to boost profits in a low-inflation environment. Just last week, Loblaw alerted suppliers that it will introduce "a supply-chain handling charge" of 0.79 per cent for all centrally distributed products.
These are just some of the indignities vendors suffer in a market where survival depends on access to the leading chains.
Leverage is worth billions of dollars a year in concessions. Retailers routinely charge fees for all kinds of services and programs, beyond just the price of a product. They may have to pay just to get in the door of a big chain, and then again to get prominent shelf space. Grocery chains may also seek discounts when they buy large quantities. Vendors often gripe about various retroactive deductions from their invoices.
It's obvious the big grocery chains have tremendous market power, and they are not afraid to use it.
But is their behaviour illegal?
Given all his efforts, Mr. Pecman must be hoping he's found a little fire amid all the smoke.