Federal Watchdog Targets Property Clauses in Grocery Sector Probe

Canada's Competition Bureau has intensified its examination of the nation's highly concentrated grocery market, launching a formal investigation into the use of so-called 'property controls' by major supermarket chains. The probe targets industry giants, including Loblaw Companies Limited, Sobeys' parent company Empire Company Limited, and Metro Inc., focusing on restrictive covenants embedded in their commercial lease agreements that the Bureau suspects may be anti-competitive.

At the heart of the investigation are clauses that landlords and property developers are often required to accept, which can effectively block other potential grocery tenants from opening stores within the same shopping centre or development. These controls can take various forms, from outright bans on rival supermarkets to granting the incumbent grocer the right to approve or veto any new food retail tenants. The Bureau's concern is that such practices create artificial barriers to entry for new competitors, including independent grocers, discount chains, and specialty food stores, ultimately limiting consumer choice and insulating the dominant players from competitive pressure that could drive down prices.

The Mechanics of Market Control

For decades, the use of restrictive covenants has been a common, if controversial, tool in commercial real estate across North America. The major grocers argue that these clauses are a standard and necessary business practice used to protect their substantial capital investments. When a supermarket anchors a new development, it invests millions in store construction, equipment, and long-term leasing commitments. The companies contend that property controls ensure the viability of that investment by preventing a direct competitor from immediately setting up next door and diluting their customer base. They frame it as a legitimate strategy to secure a return on investment in a low-margin industry.

However, competition watchdogs in Canada and abroad are increasingly viewing these practices through a different lens. From a regulatory perspective, the systematic use of such clauses by a few dominant firms can lead to a calcified market structure. In many Canadian communities, both urban and rural, the available and suitable commercial real estate is limited. If the best locations are locked up by incumbents through these exclusive agreements, it becomes exceedingly difficult for new players to enter the market. This can result in fewer shopping options, less innovation, and persistently high prices for consumers already grappling with significant food inflation.

Escalating the Investigation

The Bureau's move from a market study into a formal investigation signals a more aggressive enforcement posture. To advance its probe, the Bureau has secured court orders from the Federal Court. These orders compel the grocery giants to produce a wide range of internal records and communications. Investigators are seeking documents related to real estate strategy, lease negotiations, internal analyses of competitors, and any communications discussing the intent or effect of these property controls. This legal step is crucial, as it allows the Bureau to look behind the companies' public statements and understand the strategic motivations for using these clauses.

This legal action is a key part of how the Competition Bureau intensifies scrutiny of Canadian grocery giants, reflecting broader political and public pressure to address affordability. The investigation runs parallel to ongoing efforts by the federal government to stabilize food prices and hold grocery executives accountable for their pricing strategies. While the property controls issue is distinct from direct price-setting, it is fundamentally linked to the market dynamics that enable high prices to persist.

Potential Outcomes and Broader Implications

If the Competition Bureau concludes that the use of property controls substantially prevents or lessens competition, it can bring an application before the Competition Tribunal. The Tribunal has the authority to issue orders to remedy the situation, which could include prohibiting the companies from enforcing existing restrictive covenants or entering into new ones. It could also impose significant financial penalties.

A successful challenge could have transformative effects on the Canadian grocery landscape. Removing these barriers could open the door for new and diverse competitors. International discount chains that have so far been hesitant to enter the Canadian market due to real estate challenges might see a new opportunity. Similarly, independent and ethnic grocery stores could find it easier to secure locations in prime retail hubs, offering more choice and catering to specific community needs.

The grocery companies are publicly stating their cooperation with the Bureau's investigation while defending their business practices. The Retail Council of Canada has noted that such clauses are not unique to the grocery sector. The outcome of this investigation will be watched closely, not only by consumers but also by the commercial real estate industry, which has long operated with these clauses as a standard feature of lease agreements. The Bureau's challenge could set a major precedent for how competition law is applied to real estate practices in Canada, potentially impacting other retail sectors beyond food.