Loblaws, Sobeys owners under investigation by Competition Bureau for alleged anticompetitive conduct

Canada’s Competition Bureau has launched investigations into the parent companies of grocery chains Loblaws and Sobeys for alleged anti-competitive conduct, court documents reveal, with Sobeys’ owner calling the inquiry unlawful.

The Federal Court documents show the commissioner of competition launched the probes on March 1, saying there’s reason to believe the firms’ use of so-called property controls limits retail grocery competition.

The commissioner claims the controls that the grocery giants have baked into lease agreements are designed to restrict other potential tenants and their activities and are hampering competition in the grocery market.

The Competition Bureau revealed its investigation into the use of property controls in the grocery sector in February.

At the time, deputy commissioner Anthony Durocher told a House of Commons committee that property controls can be a barrier both for independent grocery stores and chains looking to expand, as well as for foreign players looking to enter Canada.

That’s why in a report last June, the bureau recommended the government limit their use in the grocery sector in order to help boost competition and make it easier for new supermarkets to open.

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Property controls in contracts

Loblaw Cos. Ltd. and Sobeys parent Empire Co. Ltd. are two of the three major Canadian grocery companies and each owns a number of grocery chains across the country.

Details of the investigations are contained in a pair of court applications lodged by the commissioner on May 6.

Sobeys owner Empire has pushed back against the investigation, saying in a separate court application that the probe gave the commissioner the appearance of a lack of independence amid public criticism from federal politicians over grocery pricing and retailers’ conduct.

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Loblaws’ parent company is co-operating with the bureau’s review, said spokeswoman Catherine Thomas on behalf of George Weston Ltd.

Restrictive covenants are very common in many industries, including retail. They help support property development investments, encouraging opening of new stores and capital risk-taking, she said.

The commissioner applied in the Federal Court to order Empire and George Weston to hand over records about real estate holdings, lease agreements, customer data and other records.

In the court documents, the commissioner describes Empire and George Weston’s holdings in real estate investment trusts, or REITs. In both cases, the companies’ own grocery banners are significant tenants for the real estate companies.

Through a subsidiary, Empire holds a 41.5 per cent interest in Crombie Real Estate Investment Trust, and Empire is an anchor tenant in the majority of Crombie’s properties, the documents say, adding that Empire’s ownership interest in Crombie puts it in a position to exercise influence over the REIT.

George Weston has a controlling ownership interest of 61.7 per cent in Choice Properties Real Estate Investment Trust, and Loblaw accounted for more than half of Choice Properties’ rental revenue in 2023, the documents say — and Choice Properties and Loblaw have a strategic alliance under which the REIT has agreed to significant restrictions limiting its ability to enter into leases with supermarket tenants other than Loblaw.

The commissioner’s probe is focused on the companies’ operations in Halifax, but also more broadly across the country.

Examining restrictions and ‘exclusivity clauses’

The documents show the inquiries are zeroing in on two types of property controls in contracts and commercial leases used by the grocery retailers in many markets in Canada.

Restrictive covenants in private contracts, the commissioner says, limit or restrict how a piece of land can be used and can apply even after changing ownership.

The covenants can leave restrictions or exclusions on competitors that extend beyond ownership of the land, sometimes for decades, the applications say.

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The probes are also looking into exclusivity clauses in commercial lease agreements that limit or restrict who a landowner can lease to and which products can be sold by other parties close to another leaseholders’ business.

The property controls, the commissioner says, may give the companies the ability to exclude actual or potential competitors from selling food products within certain geographic areas or to dictate the terms upon which they carry on business.

Empire denies ‘dominant’ position

This is a novel case, said Michael Osborne, chair of the Canadian competition practice at law firm Cozen O’Connor.

Previous cases alleging abuse of dominance involved companies with significantly more market power than George Weston or Empire have individually, said Osborne.

Therefore, the bureau will have to argue the companies are jointly dominant because they’re using the same tools and together represent a large portion of the market, he said.

Sobeys parent Empire claims the commissioner was wrong to start the inquiry because it doesn’t have a dominant market position.

In a separate application in Federal Court that has yet to be decided by a judge, the company denies that property controls are anti-competitive and says they are not unique to the grocery sector, but have been widely used for decades in a range of retail and other sectors across the country.

Empire also claims the inquiry was launched for an improper purpose, claiming the grocery sector has been the subject of an inordinate amount of attention from politicians.

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Empire says the decision to launch an inquiry, amid a wave of criticism over rising grocery prices, raises at least the appearance of a lack of independence of the Commissioner.

The company’s lawyer declined to comment since the matter is still before the courts.

Darryl Greer (new window), Rosa Saba (new window) · CBC News

This article is republished from RCI.