Federal Watchdog Seeks to End Grocers' Control Over Retail Real Estate

In a significant move aimed at shaking up Canada's highly concentrated grocery sector, the Competition Bureau has filed a legal application with the Competition Tribunal to put an end to the use of so-called "restrictive covenants" by major grocery chains Loblaw Companies Limited and Sobeys Inc. The Bureau alleges that these property controls, embedded in lease agreements for decades, are anti-competitive practices that artificially limit consumer choice and contribute to soaring food prices.

The case targets a long-standing industry practice where a major grocery chain, as an anchor tenant in a shopping plaza, can insist on lease clauses that restrict the landlord from renting out space to any other potential food retailers. These controls can be remarkably broad, preventing not only other large supermarkets but also smaller specialty food stores, butcher shops, or bakeries from operating within the same complex. In some cases, these restrictions can remain in effect even after the original grocery store has vacated the premises, effectively sterilizing prime retail locations from competition for years.

A Market Under Scrutiny

This legal action did not arise in a vacuum. It is the culmination of years of mounting public frustration over food inflation and growing scrutiny of the grocery oligopoly in Canada, where a handful of companies, including Loblaw, Sobeys, and Metro, control the vast majority of the market. The Competition Bureau's own comprehensive retail grocery market study, published in June 2023, identified these property controls as a key structural barrier preventing new domestic and international players from entering and expanding in the Canadian market.

Matthew Boswell, the Commissioner of Competition, stated that the Bureau's action is essential for the health of the Canadian economy and the well-being of its citizens. "Removing these restrictive clauses is critical to creating the conditions for new grocery stores to open in Canada," he noted in a statement. "We are taking action to provide Canadians with more choice and competitive prices."

The Bureau's application to the Tribunal argues that these practices substantially lessen or prevent competition in numerous local markets across Canada. By limiting the availability of suitable real estate, Loblaw and Sobeys allegedly make it more difficult for rivals to establish a foothold, thereby protecting their market share and reducing the pressure to compete on price, quality, and innovation.

The Grocers' Defense and the Legal Path Forward

In response to the allegations, representatives for the grocery chains have argued that such clauses are standard, legitimate business practices common in many retail sectors, not just grocery. They contend that these agreements are necessary to justify the significant capital investment required to build and operate a large supermarket. Without the assurance that a direct competitor will not open next door, they argue, they would be less willing to commit to long-term leases that anchor and vitalize shopping centres.

The case will now proceed before the Competition Tribunal, a specialized quasi-judicial body that adjudicates cases brought under the Competition Act. This is a civil matter, not a criminal one. The Bureau is not seeking fines but rather an order from the Tribunal to prohibit Loblaw, Sobeys, and other grocers from enforcing existing restrictive covenants and from entering into new ones in the future. The legal process is expected to be lengthy and complex, involving extensive evidence from economists, real estate experts, and industry insiders.

Potential Impact on Consumers and the Market

Should the Competition Bureau succeed, the implications could be profound. The removal of these barriers could unlock thousands of retail locations, creating opportunities for independent grocers and potentially enticing international discount chains, such as Aldi or Lidl, to finally enter the Canadian market. Increased competition is theoretically the most effective tool for driving down prices and improving service quality. The Competition Bureau's lawsuit against major grocers is a direct attempt to dismantle what it sees as structural barriers that have insulated the incumbents from such pressures.

However, some analysts caution that while this is a positive step, it is not a silver bullet for food inflation. Global supply chain issues, climate events, and labour costs also play significant roles in food pricing. Furthermore, new entrants would still face other challenges, including navigating complex supply networks dominated by the existing players. Nonetheless, creating a more level playing field in retail real estate is seen as a fundamental prerequisite for any meaningful increase in competition. As a result, this landmark case targeting grocers' land controls is being watched closely by market analysts, consumer advocacy groups, and all levels of government as a pivotal test of Canada's ability to foster a more competitive and affordable grocery landscape for its citizens.