Competition is Important but Size Isn't Always Bad

Mike von Massow - originally published in the Globe and Mail

https://www.theglobeandmail.com/business/commentary/article-why-big-is-sometimes-better-canadas-concentrated-grocery-sector-has/

Now an unstable Parliament has resumed sitting, there will undoubtedly be renewed attention on Canada’s grocers and their role (if any) in fueling food price inflation. We’ve heard politicians talking about concentration and corporate greed. The Liberals have talked about attracting foreign grocers to increase competition. The NDP has proposed putting caps on food prices. The recently introduced Grocery Code of Conduct has been touted as a panacea for curtailing grocer power but is unlikely to have a significant downward affect on price and may even be inflationary. Competition is important but size isn't always bad.

What is lost in all this discussion is that the size of the grocery companies may even help keep prices lower. Grocery companies do more than set up stores. They have extensive distribution systems that facilitate getting products from farms and processors to stores. These large and integrated distribution systems reduce the cost of getting products on store shelves. Companies can leverage large volumes to reduce acquisition costs. Companies can also use volume to justify buying directly from large volume producers. Companies like Loblaws buy produce directly from farmers and distributors in California and other producing states rather than through distributors in Canada. Removing the middleman reduces the landed costs of these products delivered to the store. Of course, the grocers can either keep those savings or pass them along to consumers. The truth is that there is likely a little bit of both.

On the other hand, smaller grocers will tend to buy from local distributors including places such as the Ontario Food Terminal. These provide an excellent source of product but add a link and cost to the supply chain. If prices of some items were capped as the NDP has proposed, smaller grocers would bear a heavier burden than larger ones, which would make them even more uncompetitive. The suggested policy may actually increase concentration without lowering prices

There are also logistics advantages to the larger distribution systems. Larger volumes to larger stores mean lower shipping costs. Large distribution centers can aggregate products from multiple suppliers for shipment on a single truck with fewer stops. This distribution advantage matters. When Empire Co. (the parent company of Sobeys) bought Ontario regional grocers Farm Boy and Longo’s, they explicitly talked about helping those companies become more profitable through distribution. The two brands continue to operate as before and have not been absorbed into the Sobeys brand or closed for less competition. But Empire Co. also benefits by increasing volume and purchasing power, while Farm Boy and Longo’s benefit by being able to lower the cost of stocking shelves. This is why federal Industry Minister François-Philippe Champagne’s quest to bring in a foreign grocer may be hamstrung. A foreign company would need to establish relationships with suppliers and to reach a critical mass of distribution efficiencies – which is not a given. Some have pointed to Walmart as an example of a foreign competitor succeeding in Canada. But Walmart had advantages others will not with existing stores and distribution in Canada and well-established relationships with North American suppliers - Walmart owns a larger share of the US grocery market than Loblaws owns in Canada.

The Canadian grocery market is quite concentrated. And the major players leverage their market power. The Grocery Code of Conduct, which seeks to regulate relationships between grocers and suppliers, is a direct response to grocers’ market power. But I would argue that these players compete fiercely for our consumer dollars. The Bank of Canada has said that many factors contribute to grocery prices and that the grocers did not contribute substantially to food price inflation.

And which factors did contribute substantially to food inflation? Things like the war in Ukraine, climate change and extreme weather, the cost of energy, labour, transportation and exchange rates. There has been little discussion of the many reasons food prices have gone up. There has been almost no study assessing the contribution of various factors, including grocers, in contributing to food price inflation.

There are real reasons to believe that size lowers costs and moderates price increases. Any government intervention should be based on an objective foundation of facts, or individual initiatives could be counterproductive and raise prices. Good policy requires good insight. We have not yet seen good insight underpinning any of these policy proposals and we need to be careful to stay away from soundbites and simple answers or we could do more harm than good.

Keywords: food, prices, food prices, grocery, grocers, economies of scale, supply chain

Recommended citation format: von Massow, M. "Competition is Important but Size Isn't Always Bad". Food Focus Guelph (136), Department of Food, Agricultural and Resource Economics, University of Guelph, Sept 30, 2024.