Competition Bureau Intensifies Probe into Grocery Giants' Use of Property Controls

Canada's competition watchdog has secured a significant legal victory in its ongoing investigation into the competitive practices of the nation's dominant grocery chains. The Federal Court has ordered Loblaw Companies Limited, Sobeys' parent company Empire Company Limited, and Metro Inc. to turn over crucial documents related to their use of so-called 'property controls' or 'restrictive covenants' in commercial real estate agreements. This development marks a major escalation in the Competition Bureau's probe into whether these clauses are being used to illegally limit competition in the grocery sector.

The investigation, which began in March 2023, focuses on contractual terms that major grocers allegedly place on their properties, both when they sell or lease them. These covenants can explicitly prohibit the land from being used by a competing supermarket or discount food retailer for an extended period. The Bureau argues that such practices create artificial barriers to entry for new and independent players, effectively locking them out of desirable retail locations. By limiting the number of competitors in a given area, these property controls can lead to reduced consumer choice, lower quality of service, and, most critically, contribute to the persistently high food prices that have squeezed Canadian households.

In its application to the Federal Court, the Bureau stated it has reason to believe that the use of these controls is widespread and has been a long-standing practice among the major players. The concern is that this strategy goes beyond legitimate business protection and constitutes an anti-competitive tactic that harms the market. The Competition Bureau secured the court order after the grocery giants allegedly failed to voluntarily provide all the information requested by investigators. The order legally compels them to produce records, communications, and strategic documents pertaining to their real estate leasing and development practices.

This probe is a key component of a wider federal effort to address concerns about concentration and lack of competition in Canada's economy, particularly in the grocery industry. The issue has gained significant political and public attention amid soaring food inflation. This investigation runs parallel to broader legislative changes, as the federal government has been pursuing a significant overhaul of the Competition Act, with specific amendments aimed at giving the Bureau more power to tackle anti-competitive behaviour. The outcome of this property controls investigation could set a precedent for how the newly empowered Bureau addresses similar issues in other sectors.

The grocery companies have maintained that such clauses are a standard and legal practice in the commercial real estate industry, used to protect their investments and brand presence in a competitive market. They argue that these controls are not the primary driver of food price inflation, pointing instead to global supply chain disruptions, increased supplier costs, and other macroeconomic factors. However, the Bureau's position is that in a highly concentrated market like Canada's—where the top three grocers control a vast majority of sales—these practices have a disproportionately negative effect on competition compared to more fragmented markets.

If the Bureau's investigation uncovers sufficient evidence of anti-competitive conduct, it could lead to several outcomes. The Bureau could seek a consent agreement with the companies to cease the use of such clauses, or it could take the matter to the Competition Tribunal to seek a prohibitive order. Financial penalties are also a possibility under the strengthened Competition Act. For consumers, a successful challenge could eventually lead to more grocery stores opening in underserved or protected areas, fostering greater competition that could, in theory, exert downward pressure on prices and increase product variety.

The investigation highlights the complex interplay between real estate law, corporate strategy, and competition policy. While property rights are fundamental, competition law seeks to ensure those rights are not used in a way that subverts the proper functioning of the market. The coming months will be critical as the grocery giants comply with the court order and the Bureau analyzes the trove of information it is set to receive. The findings will not only determine the future of this specific case but will also send a strong signal about the federal government's commitment to fostering a more competitive and affordable marketplace for all Canadians.