Competition Bureau Deepens Probe into Grocers' Use of Property Controls

Amid ongoing public and political pressure over the high cost of food, Canada's Competition Bureau has intensified its investigation into the country's largest grocery chains, focusing on long-standing real estate practices that could be stifling competition. The Bureau is examining the use of so-called "property controls" or "restrictive covenants" by major players like Loblaw Companies Limited, Sobeys' parent company Empire Company Limited, and Metro Inc., to determine if these tactics are unlawfully preventing smaller and independent grocers from entering or expanding in the market.

The core of the investigation centres on clauses embedded in lease agreements and property deeds. These controls can dictate how real estate is used, often explicitly prohibiting a landlord from renting space in the same shopping centre to another supermarket. In some cases, these restrictions can even apply to land after it has been sold by a grocery giant. The effect, critics argue, is the creation of 'food deserts' where one company dominates, leaving consumers with fewer choices, less convenience, and potentially higher prices. The Bureau is concerned that such practices, when used systematically by dominant firms, can significantly lessen or prevent competition, which is prohibited under the Competition Act.

This inquiry is not new, but it has entered a more forceful phase. The move to seek judicial enforcement marks a significant step, as the Competition Bureau secures court orders to compel the production of records and information from the grocery giants. This action represents an escalation of its probe into the grocery giants, signaling the regulator's determination to uncover the full extent and impact of these property controls across the country.

A Highly Concentrated Market

The Canadian grocery sector is one of the most concentrated in the developed world. Loblaw, Sobeys, and Metro collectively control over 60% of the market. This dominance has long been a subject of concern, as it gives these companies immense power over suppliers, pricing, and consumer choice. When a market has so few major players, the potential for coordinated behaviour or practices that individually reduce competition becomes a significant regulatory concern.

The Bureau's 2023 retail grocery market study highlighted several issues hindering competition in Canada, with restrictive property covenants being a key barrier to entry for new and independent players. The study recommended that governments at all levels take action to limit their use. The current investigation is the enforcement follow-up to that recommendation, moving from study to a formal legal inquiry.

Industry Response and Broader Context

The grocery giants and industry associations like the Retail Council of Canada have defended the use of property controls as a standard and necessary business practice in commercial real estate. They argue that these clauses are essential for protecting their significant investment in a new store location, ensuring a stable business environment, and are not intended to be anti-competitive. They further contend that the primary drivers of food inflation are complex global factors, including supply chain disruptions, climate events, and geopolitical conflicts, rather than a lack of domestic competition.

However, the federal government has shown limited patience with these arguments. The investigation aligns with a broader push by Ottawa to strengthen the Competition Act and increase competition across key sectors of the economy, from telecommunications to banking. Recent amendments to the Act have given the Bureau more power to conduct investigations and challenge anti-competitive conduct. The government's focus on affordability has placed the grocery industry squarely in the political spotlight, with CEOs being called before parliamentary committees to justify their profits amid rising food costs for Canadians.

Potential Outcomes and What Lies Ahead

The Competition Bureau's investigation is still in the evidence-gathering stage, and no conclusions of wrongdoing have been made. If the Bureau does find sufficient evidence that the use of property controls has substantially prevented or lessened competition, it could take several actions. It could seek a consent agreement with the companies, in which they would agree to cease using such restrictive clauses without admitting liability. Alternatively, the Bureau could bring an application before the Competition Tribunal to seek an order to stop the practice and potentially impose a significant Administrative Monetary Penalty (AMP).

The outcome of this probe could have profound implications for the landscape of Canadian retail. A successful challenge to property controls could open the door for more independent grocers and international chains to establish themselves in Canadian communities, fostering greater competition and potentially leading to lower prices and more innovation. For now, consumers, competitors, and the companies themselves will be watching closely as the Bureau sifts through the newly compelled evidence, a process that will determine the future of how and where Canadians buy their groceries.