Federal Court Orders Grocers to Cooperate with Competition Probe

The Competition Bureau of Canada has taken a decisive step in its investigation into the country's highly concentrated grocery market, securing a Federal Court order that compels two of Canada's largest players, Loblaw Companies Limited and Sobeys Inc., to turn over documents. The order, granted on May 24, 2024, is aimed at advancing the Bureau's probe into the use of so-called "property controls" or restrictive covenants in commercial real estate leases.

This legal maneuver follows the Bureau's concerns that these clauses are being used to stifle competition. Property controls are terms embedded in lease agreements that restrict landlords from renting out space to other potential tenants, specifically other grocery stores, within the same shopping plaza or development. The Bureau suspects these long-standing practices create significant barriers to entry for new and independent grocers, thereby limiting consumer choice and potentially keeping food prices artificially high.

The investigation stems from findings published in the Bureau's June 2023 retail grocery market study. That report identified a lack of competition as a key factor behind Canada's soaring food costs and highlighted restrictive real estate clauses as a major impediment. According to the Bureau, such controls can lock up prime retail locations for decades, making it nearly impossible for competitors to establish a foothold in many Canadian communities.

Escalation of the Investigation

The move to seek a court order indicates that the grocery giants may not have been fully compliant with the Bureau's voluntary requests for information. Under the Competition Act, the Commissioner of Competition has the authority to seek such orders to compel the production of records and written information when it is deemed necessary for an investigation. This formal legal step underscores the seriousness of the inquiry and the Bureau's determination to uncover the full extent and impact of these property controls.

Matthew Boswell, the Commissioner of Competition, stated that the Bureau is committed to ensuring a competitive marketplace for Canadian consumers. "We are using all the tools at our disposal to get the facts and conduct a thorough investigation," he noted in a public statement. The recent court orders obtained by the Competition Bureau are a critical tool in this effort, providing the legal backing needed to access internal corporate documents, communications, and data related to real estate strategies.

The investigation is not limited to Loblaw and Sobeys. While they are the subjects of the current court order, the Bureau's broader market study examined the practices of all major players. The focus on these two reflects their significant market share and extensive real estate portfolios across the country.

The Impact of Property Controls

Critics of the grocery industry argue that restrictive covenants are a deliberate strategy to maintain market dominance. By preventing other supermarkets, discount grocers, or specialty food retailers from opening in convenient locations, the established players can protect their market share and face less pressure to lower prices or improve service. This can be particularly detrimental in smaller towns or underserved urban neighborhoods where retail space is limited.

For example, a restrictive clause could prevent a new discount grocer from opening in a plaza anchored by a Loblaws or Sobeys banner store, even if a suitable retail space becomes vacant. This forces consumers to travel farther or continue shopping at the incumbent store, regardless of price or selection. The Competition Bureau's ongoing probe into grocery giants aims to determine if these practices have a substantial negative effect on competition, which would be a violation of the Competition Act.

The grocery companies have historically defended these clauses as standard and necessary business practices for protecting their investment in a given location. They argue that such terms are common across the retail sector and are needed to ensure a stable and predictable business environment. However, with food inflation remaining a persistent concern for Canadians, these long-standing practices are now under intense public and regulatory scrutiny.

What Lies Ahead

With the court order in place, Loblaw and Sobeys are legally obligated to provide the requested information to the Competition Bureau. The Bureau will analyze these records to determine whether the use of property controls has prevented, lessened, or is likely to lessen competition substantially. If the Bureau finds sufficient evidence of anti-competitive behaviour, it could take further legal action, such as applying to the Competition Tribunal to have the restrictive clauses struck down.

The outcome of this investigation could have profound implications for the Canadian grocery landscape. A ruling against the use of these property controls could open the door for increased competition from international chains like Aldi or Lidl, as well as from smaller independent and ethnic grocers who have been shut out of key markets. For Canadian consumers, this could eventually translate into more choice, innovation, and, most importantly, more competitive pricing.

The federal government has also signaled its support for measures to increase competition in the sector. This investigation aligns with broader political efforts to address the affordability crisis and hold large corporations accountable. The grocery industry remains firmly in the spotlight, and the results of the Competition Bureau's deep dive into its real estate practices will be closely watched by consumers, competitors, and policymakers alike.