Federal Court Backs Competition Bureau in Grocery Sector Probe

Canada's Competition Bureau has secured a significant legal victory in its ongoing investigation into the competitive practices of the country's largest grocery retailers. The Federal Court of Canada has issued an order compelling Loblaw Companies Limited, Metro Inc., and Empire Company Limited, the parent company of Sobeys, to turn over crucial documents related to their use of so-called "property controls." This development marks a critical juncture in a probe that could reshape the landscape of Canadian grocery retail.

The investigation, which was formally launched in early 2024, centers on the use of restrictive covenants and exclusivity clauses in real estate and lease agreements. These legal tools can be used by incumbent companies to control the use of a property even after it has been sold or a lease has expired. In practice, a dominant grocer could sell a former store location with a clause in the deed that prohibits another grocery store from operating on that site for a specified period, often for many years. Similarly, a grocery chain acting as an anchor tenant in a shopping plaza could have a clause in its lease that prevents the landlord from renting any other space in the plaza to a competing food retailer.

The Heart of the Investigation: Stifling Competition

The Competition Bureau alleges that these property controls may be used to create and maintain local monopolies, making it difficult for new entrants, particularly independent and discount grocers, to find suitable retail locations. By limiting the number of competitors in a given area, these practices could be contributing to Canada's persistently high food prices and reducing consumer choice. The Bureau's concern is that such behaviour constitutes an anti-competitive practice under the Competition Act.

The move to seek a court order came after the Bureau stated that the grocery giants had failed to provide sufficient information voluntarily. The court's decision validates the Bureau's authority to demand internal records, including strategic documents, real estate policies, and communications related to the implementation of these property controls. This forced disclosure is expected to provide investigators with a clearer picture of the intent and effect of these long-standing industry practices.

This specific action is part of a much wider effort to scrutinize the grocery sector. Over the past two years, the Competition Bureau has intensified its probe into the industry amid public outcry over food inflation. The grocery giants have faced questioning from parliamentary committees and have been the subject of extensive media coverage regarding their profits and pricing strategies. The current investigation into property controls is a more structural approach, targeting the underlying mechanics of the market rather than specific pricing decisions.

Industry Response and Market Context

The grocery companies have consistently maintained that property controls are a standard and legal practice in the commercial real estate industry, not unique to the grocery sector. They argue that such clauses are necessary to protect their significant capital investments in stores and distribution networks. In statements, representatives for the companies have indicated their cooperation with the Bureau's investigation while defending their business practices as lawful and commonplace.

However, the context of Canada's highly concentrated grocery market adds weight to the Bureau's concerns. A small number of companies, led by Loblaw, Sobeys, and Metro, control a vast majority of the market share. Critics argue that this concentration gives them immense power to dictate terms, not only to suppliers but also over the physical retail landscape. The Bureau's action of securing a court order to compel the production of documents signals a more aggressive regulatory stance aimed at challenging this market structure.

Potential Outcomes and Future Implications

With the court order in place, the Competition Bureau will now analyze the trove of documents from the three grocery chains. If the evidence suggests that property controls are indeed being used to substantially prevent or lessen competition, the Bureau has several avenues it can pursue. It could seek a consent agreement with the companies to voluntarily cease the practice. Alternatively, it could bring an application before the Competition Tribunal to obtain an order to stop the conduct and potentially impose other remedies.

A successful challenge could have profound implications for Canadian consumers and the retail sector. It could open up prime real estate locations that were previously locked up, paving the way for greater competition from independent grocers, discount chains like Giant Tiger, and international players looking to expand their footprint in Canada. This, in turn, could lead to more innovation, greater consumer choice, and downward pressure on food prices. The outcome of this investigation will be a key indicator of the federal government's ability and willingness to tackle the structural issues underpinning Canada's affordability crisis.