Property controls causing a problem for grocery competition: analysts

As Canadian consumers have increasingly soured on the major grocers, the country’s competition watchdog has turned its sights on restrictive clauses in retail leases that it says are hampering competition in the grocery sector.

Limiting the use of these clauses could open the door for more independent grocers and smaller chains to compete with the big players, giving consumers more choice and potentially even lower prices, experts say.

“It would promote some more competition in the marketplace,” said Peter Chapman, founder of consulting firm SKUFood and a former Loblaw Cos. Ltd. executive.

Grocery prices have increased by more than 20 per cent over three years, and the resulting political pressure has seen MPs order grocery executives to take action. The federal industry minister has said he’s courting foreign grocers in the hope that a new entrant would boost competition.

Meanwhile, the Competition Bureau is looking into the use of property controls in the grocery industry.

The bureau says property controls, which are terms baked into commercial leases that put restrictions on other nearby tenants and their activities, can be barriers to both smaller domestic companies and foreign entrants.

These clauses could limit the kinds of stores that can open in a mall, or limit the kind of store that can take over a vacated location. They might also limit other nearby stores from selling certain products.

But experts say limits on this practice would do more to boost domestic competition than it would to pave the way for a foreign grocer to enter Canada.

“It’s not going to necessarily bring a big international competitor in,” said Michael von Massow, a food economy professor at the University of Guelph.

In May, the Competition Bureau launched investigations into the parent companies of grocery chains Loblaws and Sobeys over the use of property controls.

“According to market participants, property controls are widespread in the retail grocery sector, impacting where and how businesses can compete in the retail sale of food products,” the commissioner said in court documents.

Since large retailers draw traffic to malls and plazas, they have power in their negotiations with landlords to ask for restrictive clauses, said Chapman.

“Some landlords would say that having a large retailer as a draw is worth restricting some of the other avenues they can pursue,” he said.

If the grocer’s parent company has ownership in the landlord, it’s much more likely that the retailer will get property controls in the agreement, he added.

In May, the Competition Commissioner applied in the Federal Court to order Empire Cos. Ltd. and George Weston Ltd. to hand over records about real estate holdings, lease agreements, customer data and more.

Though limiting the use of property controls could promote competition, Chapman said he doesn’t think restrictive clauses are one of the top barriers for potential foreign entrants like the ones being courted by federal Industry Minister François-Philippe Champagne.

Chapman said the challenges of setting up a distribution network, and of building an economic model that works within Canada’s regulatory environment, would pose much bigger obstacles for companies looking to expand.

If a foreign grocer decides to enter Canada, they’re more likely to build their own locations or partner with an investor, rather than try and enter shopping areas already occupied by an anchor tenant, added von Massow.