Federal Watchdog Turns Up Heat on Grocers Over Anti-Competitive Land Deals

Canada's Competition Bureau has significantly escalated its ongoing investigation into the country's highly concentrated grocery market, taking legal steps to force major supermarket chains to disclose information about their use of so-called "property controls." This move marks a critical phase in a broader market study launched in late 2022 to examine the state of competition in the grocery sector, a topic of intense public and political scrutiny amid soaring food inflation.

The Bureau announced it is seeking orders from the Federal Court of Canada to compel Loblaw Companies Limited, Sobeys' parent company Empire Company Limited, and Metro Inc. to produce records and information. The focus of this legal action is on restrictive covenants—clauses embedded in lease agreements and property deeds that can effectively block competing grocery stores from operating in specific locations, sometimes for decades. These controls can apply to other tenants within a shopping plaza or even to adjacent lands, creating what some critics call "food deserts" where one brand holds a local monopoly.

The Nature of Property Controls

Property controls, also known as restrictive covenants or exclusivity clauses, are not uncommon in commercial real estate. A large anchor tenant, like a major supermarket, will often negotiate a lease that prevents the landlord from renting space to a direct competitor within the same development. The rationale from the grocer's perspective is to protect its investment and market share. However, the Competition Bureau is concerned that the extensive and long-term use of these controls by a few dominant players may be going beyond reasonable business practice and actively stifling competition.

These restrictions can make it exceedingly difficult for independent grocers or new international chains to enter established markets. If the most viable commercial locations in a community are locked up by incumbents, potential new entrants face significant barriers, leaving consumers with fewer choices. The Bureau's study aims to determine the prevalence of these clauses and assess their true impact on grocery prices and innovation in Canada.

Escalation to the Courts

The decision to seek court orders indicates that the Bureau was not satisfied with the level of voluntary cooperation from the grocery giants. Under the Competition Act, the Commissioner of Competition has the authority to conduct market studies to examine an industry's state of competition. While the Bureau can request information from market participants, it requires a court order to compel disclosure if companies are unwilling or slow to provide the necessary data. This legal step underscores the seriousness of the inquiry and the Bureau's determination to obtain a complete picture of the industry's practices. The move is a key part of how the Competition Bureau deepens investigation into anti-competitive practices by major grocers, moving from requests to legal demands.

In its application to the court, the Bureau typically outlines the information it seeks and why it is relevant to its study. The grocery companies will have an opportunity to respond, but the Federal Court often grants such orders provided the request is relevant to a formal inquiry. The fact that the Competition Bureau secures court orders in probe of grocery giants' property controls will be a pivotal moment, granting the watchdog access to the documents needed to complete its analysis.

Industry Context and Response

This investigation is occurring against a backdrop of sustained public anger over food prices, which have risen faster than the general rate of inflation for several years. Politicians have summoned grocery CEOs to testify before parliamentary committees, demanding explanations and solutions. While the grocers have pointed to global supply chain issues, energy costs, and supplier price increases, the lack of competition in the Canadian market remains a primary concern for consumer advocates and policymakers.

The major grocery retailers have maintained that their practices are lawful and standard in the retail industry. They argue that property controls are necessary to secure the long-term leases and significant capital investments required to build and operate modern supermarkets. They may also argue that the information requested by the Bureau is commercially sensitive. However, the Bureau's mandate is to assess the overall effect of these practices on the market, regardless of whether they are considered standard practice.

Potential Outcomes and Broader Implications

The findings from this market study could have far-reaching consequences. If the Bureau concludes that property controls are significantly harming competition, it could recommend a range of remedies. These might include:

• Legislative Changes: The Bureau could recommend that federal or provincial governments pass new laws to limit or ban certain types of restrictive covenants in commercial leasing, similar to actions taken in the United States and the United Kingdom.
• Enforcement Action: While a market study itself is not an enforcement action, the information gathered could form the basis for a formal investigation into whether specific companies have engaged in anti-competitive acts under the Competition Act.
• Increased Transparency: The final report will, at a minimum, shed light on a little-understood aspect of the grocery business, potentially empowering local governments and developers to push back against restrictive clauses.

The conclusion of the Bureau's study, expected in 2024, will be eagerly awaited by consumers, independent retailers, and all levels of government. The current legal maneuvering demonstrates that the path to a potentially more competitive grocery landscape in Canada is a contentious one, with the federal watchdog now using its full legal authority to uncover the facts.