Why restrictive lease clauses could hinder competition in Canada’s grocery retail sector – National

As Canadian consumers‘ resentment of major grocery retailers grows, the country’s competition authority is turning its attention to restrictive clauses in retail leases that it says hamper competition in the grocery sector.

By restricting these clauses, more independent grocers and smaller chains could pave the way to the big players and offer consumers more choice and possibly even lower prices, experts say.

“It would create more competition in the market,” says Peter Chapman, founder of consulting firm SKUFood and a former executive at Loblaw Cos. Ltd.

Food prices have risen by more than 20 percent in the last three years. The resulting political pressure has prompted MPs to call on food managers to take action. The German industry minister has said he is courting foreign food retailers in the hope that a new market entrant would boost competition.

Meanwhile, the Competition Office is investigating the use of ownership controls in the food sector.

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The agency says property controls – clauses in commercial leases that impose restrictions on other tenants in the area and their activities – can be a barrier to both smaller local businesses and foreign market entrants.

These clauses could restrict the type of stores that can open in a mall or the type of stores that can take over a vacant location. They could also prevent other nearby stores from selling certain products.

However, experts say restricting this practice would help promote domestic competition rather than making it easier for foreign food retailers to enter the Canadian market.

“It won’t necessarily attract a major international competitor,” says Michael von Massow, professor of food economics at the University of Guelph.

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In May, the Federal Trade Commission launched an investigation into the parent companies of the grocery chains Loblaws and Sobeys for applying ownership controls.

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“According to market participants, ownership controls are widespread in the food retail sector and impact where and how businesses can compete in the food retail sector,” the commissioner said in court documents.

As large retailers draw customers to malls and plazas, they can demand non-compete agreements when negotiating with landlords, Chapman says.

“Some landlords would say it’s worth having a major retailer as an attraction by depriving them of other opportunities they can pursue,” he said.

If the grocer’s parent company owns the landlord, it is much more likely that the retailer will receive ownership rights in the agreement, he added.

In May, the Competition Commissioner applied to the Federal Court to order Empire Cos. Ltd. and George Weston Ltd. to hand over records relating to property ownership, leases, customer data and more.

The court documents describe Empire and George Weston’s holdings in real estate investment trusts (REITs), whose primary tenants include the corporations’ grocery stores.

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REITs have a large geographic reach, and so control over real estate holdings often extends to more than just a shopping center or plaza, says von Massow.

Over time, these clauses are becoming more specific as companies like Giant Tiger and Dollarama expand their operations into the food sector, says von Massow.

“We are seeing the introduction of new restrictions because the nature of competition has changed,” he said.

When consumers have access to multiple stores that sell groceries in close proximity to each other, they are more likely to visit several of them in one purchase and cherry-pick, von Massow said. By limiting what other stores can be near a major grocer or what nearby stores can sell, grocers are instead trying to be a one-stop shop for consumers, he said.

Sobeys owner Empire said in a separate court filing that the office’s investigation gave the competition commissioner “the appearance of a lack of independence” in the face of political pressure and criticism of the grocers’ prices, and called the investigation “unlawful.” The competition office has confirmed that it has filed a motion to dismiss Empire’s application for judicial review.

Loblaw had previously stated that it would cooperate with the review, but noted that non-compete agreements are common in many industries, including retail.

“They support investment in real estate development, encourage the opening of new businesses and the assumption of capital risk,” spokeswoman Catherine Thomas said in a statement last week.

While limiting ownership controls could encourage competition, Chapman does not believe that restrictions on competition such as those touted by Federal Industry Minister François-Philippe Champagne are among the biggest obstacles to potential foreign market entrants.

Chapman said the challenges of building a distribution network and developing an economic model that works within Canada’s regulatory environment would pose far greater obstacles for expanding companies.

If a foreign grocer decides to enter the Canadian market, it is more likely to build its own stores or partner with an investor rather than try to enter shopping areas already occupied by an anchor tenant, von Massow adds.

However, experts say that limiting ownership controls will help independent stores and smaller chains like Dollarama and Giant Tiger.

If these stores could open more locations, consumers would benefit from a wider selection, von Massow said.

By making it easier for consumers to shop at multiple stores and look for special offers in one purchase, it could also stimulate local price competition for some items, he added.

If the application of property controls is restricted, “it won’t necessarily bring a Lidl or Aldi into the market, but it will make it easier for a dollar store to set up shop there and offer a choice to people who are willing to shop around,” von Massow said.