© Reuters. FILE PHOTO: The price of apples at the Northmart grocery store in Iqaluit, Nunavut, Canada July 28, 2022. REUTERS/Carlos Osorio/File Photo
By Divya Rajagopal
TORONTO (Reuters) – Canada’s plan to bring down food prices by tightening regulation could backfire and fail, raising the cost of doing business in the country without providing relief to consumers, lawyers and economists said.
Canada’s weak competition law has been long blamed for allowing a few players to dominate industries ranging from banks to telecoms and groceries. Last week, Prime Minister Justin Trudeau promised to amend the Competition Act to help bring down prices, including removing a clause that allows companies to pursue and defend mergers as long as they produce efficiencies or savings, even if they hurt competition in the sector.
The proposed amendment will drop the so-called efficiencies defense provision, giving Canada’s antitrust regulator – the Competition Bureau – the power to block deals it deems as increasing market concentration, irrespective of any cost efficiencies.
Trudeau’s move comes as many Canadians reel under an affordability crisis with food prices jumping 25% since the start of the COVID-19 pandemic in 2020. At the same time, the central bank’s efforts to bring down inflation by raising interest rates to a 22-year-high have pushed up mortgage costs for homeowners and made buying a home unaffordable for others.
The double whammy has hit the Liberal Party’s popularity, helping opposition Conservative leader Pierre Poilievre – who has blamed hot inflation on record spending by Trudeau’s government to support the economy during the pandemic – surge ahead in opinion polls.
While amending the Competition Act answers a longstanding request from the antitrust regulator to bring Canadian laws in line with other developed nations, it is unlikely to cool food inflation as it only stands to prevent future deals among grocers, and does nothing to change the status quo of a few players dominating the sector.
Omar Wakil, a partner at law firm Torys LLP who specializes in competition law, said the proposed amendments will increase the cost of doing business in Canada and provide no benefit to consumers.
For example, one proposal includes allowing the regulator to conduct market studies on anti-competitive practices.
“What is clear is that the cost of market studies will be borne by businesses that will have to pass them onto consumers,” Wakil said. “And those costs could be significant.”
CONCENTRATED MARKET
Canada’s top five grocers – which include Loblaw Co, Empire Co-owned Sobeys and Metro Inc, control about 80% of the market. The top three generated C$100 billion ($74 billion) in sales in 2022, and earned a total of C$3.6 billion in profit, a 50% jump since 2019.
But the large grocery chains have pushed back against accusations of price gouging and blamed higher prices on vendors passing on input costs to the grocers. On Monday, the government said the heads of five major grocery chains had agreed to support the government in its efforts to stabilise prices.
Economists also say that while food inflation in Canada has been running above the headline consumer price inflation number, the country – like most others – is simply suffering from higher prices globally driven by disruptions largely caused by the pandemic and Russia’s invasion of Ukraine.
Food inflation stood at around 35% in Germany and the United Kingdom – well above the 25% level of food inflation in Canada since the start of the pandemic, Scotiabank research showed.
“Our government is taking short-term and long-term measures, including a strong stance against future consolidation in the sector, to improve competition and stabilize food prices,” said a spokesperson for the industry minister under which Competition Bureau falls.
Derek Holt, vice president of capital markets economics at Scotiabank, wrote in a report that Canada may have politically tilted the field against merger proposals and that the government’s proposals could lead to unintended consequences like higher regulatory costs and taxes that deter foreign expansion into Canada and discourage investment.
“As flawed as the efficiencies defense may be according to some, what replaces it may be a completely politicized process run according to the whims of Cabinet,” he wrote.
Antitrust lawyers also point out that the efficiencies defense clause has been rarely used in recent M&A battles and almost never in the consumer-facing retail business.
Even the most bitterly contested takeover in Canada’s history – Rogers (NYSE:) Communications Inc’s bid for Shaw Communications (NYSE:), which eventually was approved by the government in March – did not invoke that clause.
($1=1.3523 Canadian dollars)
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