The Competition Bureau's big snoop

The competition czar came to meet our independent grocers Monday, and one question seemed on everyone's mind: "Um...so what happened to your big investigation of Loblaw?"

You'll recall three years ago the Competition Bureau was a little taken aback by some pricing practices at the house of Weston. Those practices came to light during the bureau's vetting of Loblaw's takeover of Shoppers Drug Mart.

The Competition Bureau OK'd the deal, but then also launched an investigation into how Canada’s largest grocer deals with its suppliers. The question it sought to answer: do Loblaw’s pricing strategies and supplier arrangements go against competition rules?

Not much has been heard about the Competition Bureau's snooping since then. So on Monday, when its commissioner, John Pecman, spoke at the Grocery Innovations Canada conference and show in Toronto, more than a few wanted to know about the investigation's status. That, and what the heck is the Competition Bureau doing about consolidation in food retailing since the big Loblaw-Shoppers and Sobeys-Safeway mergers?

First, the investigation of Loblaw is ongoing. But, as Pecman told me after he left the stage, it's been slow and, at the moment, there’s no smoking gun (or lack of one) to neatly wrap the whole thing up, one way or the other.

One problem for investigators is that suppliers aren’t keen to rat Loblaw out. Some fear that by volunteering information they will suffer “retaliation” from Loblaw, Pecman told the Globe and Mail.

As with any witness uninterested in co-operating with authorities, the Competition Bureau has played bad cop, issuing subpoenas to more than a dozen Loblaw suppliers. Loblaw was also sent a subpoena to release documents, Pecman said.

That suppliers aren’t volunteering information should come as no surprise. Executives may gripe privately about the heavy handed tactics of the big grocery chains like Loblaw and Sobeys (and they do grip, trust me), but turning state’s evidence against a customer who represents a sizable part of any supplier’s balance sheet, is quite another. That’s just bad business.

Also, it's worth pointing out that Loblaw may not be doing anything wrong. Suppliers might not be happy with how they're treated, but that doesn't mean that treatment is necessarily against the law.

Still, the real question about this investigation is, how will it end?

Should the Competition Bureau find no wrongdoing on Loblaw’s part, there will still be a structural problem in the grocery industry. That is, a few big retailers have too much control over suppliers.

Compounding the problem is that, unlike most other countries, Canada’s biggest grocery chains don’t just supply their own stores; they supply a large network of franchisees, affiliated grocers and even independent competitors. The sway that Loblaw and Sobeys in particular have over the supply side of the industry is much greater than the market share they enjoy through their own stores.

And what happens if the Competition Bureau does find wrongdoing on Loblaw’s part? Will the bureau quietly tell Loblaw to play nice, or will it take the retailer to task publicly and demand changes to Loblaw practices? And will the Competition Bureau have any teeth to force changes in how Loblaw, or any other big grocery retailer, manhandles its suppliers?

The answer to that last one is probably not. The Competition Bureau’s ability to get tough is questionable. Besides, it tends to concern itself mostly with competition at the consumer level. Will a merger raise prices? If the answer is no, then the deal for the most part gets the OK. Geez, even sometimes when it does raise prices, the merger gets approved.

Supply chain competition does not seem to get the Competition Bureau's attention, though it should.When Canada's food makers only have a handful of big customers that they can sell to, competition and its traveling companion, innovation, get stifled.

So what’s the long-term solution to make a consolidated grocery sector competitive on the supply chain side? Create a grocery code of conduct that spells out the do’s and don’ts of supplier-retailer relationships. In other words, which demands by retailers are reasonable and which are not.

Other countries have a code of conduct, notably the U.K., where a few big chains dominate the market (though not as much as here). To oversee the code, the British government even appointed a Groceries Code Adjudicator, who essentially acts a supermarket ombudsman. The Canadian Federation of Independent Grocers has come out in favour of a creating such as code.

Is the British code perfect? Heck no. Like Pecman in Canada, the British code adjudicator, Christine Tacon, has found suppliers reluctant to snitch on Tesco and other big grocery customers. And some retailers have violated the code with little punishment other than a public shaming from Tacon.

But with a code, at least there are written-down, public ground rules of what demands retailers can make of suppliers. When they ask for more, it’s clear to all parties involved that the code is being violated.

In other words, a code of conduct makes clear the rules of the game, what’s fair and what’s not. And isn’t that good for competition?