The Dec. 19 admission by Loblaw that it had participated in a 14-year scheme to increase prices on packaged bread is a “historical day” that will one day be used as a case study, says one of Canada’s leading food experts.
“You have the No. 1 food retailer in the country involved in a price-fixing scheme with Weston Ltd,” says Dr. Sylvain Charlebois, professor of food distribution and policy at Dalhousie University in Halifax. “It’s a vertically integrated enterprise influencing market conditions affecting $140 million worth of food.
“It’s about bread today, but this is likely going to be about the entire food offering that we have access to as Canadians.”
Charlebois said the scandal has eclipsed the Amazon/Whole Foods deal as the most significant story of the year in the grocery business. “I just thought that companies in the food industry wouldn’t be breaking the law,” he says. “I think that’s a reasonable thing to expect.”
He likened it to a price-fixing scheme undertaken by several of the country’s major chocolate manufacturers several years ago. That resulted in a $4-million fine for Hershey Canada after it pleaded guilty to its role in what the Competition Bureau described as a “price-fixing cartel,” although he said that it is dwarfed by the bread price-fixing scheme.
The eighth annual Canada’s Food Price Report—a joint report from Dalhousie and the University of Guelph—said grocers have traditionally treated grocery staples such as bread, dairy and eggs as loss leaders, putting downward pressure on prices as a whole.
Charlebois says it’s not unreasonable to think the Competition Bureau could uncover similar schemes in other food segments. “I don’t think it ends here,” he says. “I think the Competition Bureau will start looking at other products, and the industry will co-operate."
Loblaw issued a press release on Dec. 19 admitting its role in an industry-wide price-fixing arrangement involving “certain packaged bread products” that lasted from late 2001 to March 2015. The company said it would work to ensure “it never happens again.”
Since 2015, Loblaw and George Weston have provided information to the Competition Bureau under the organization’s “immunity and leniency program.”
Gary Sands, senior vice-president of public policy and advocacy for the Canadian Federation of Independent Grocers (CFIG) in Toronto, says the organization is disappointed in the Competition Bureau, saying the leniency provided to Loblaw and George Weston sends a “troubling signal” to the industry.
“Quite frankly, we think it undermines the credibility of the Bureau.”
Loblaw said it had taken several steps of action upon discovering the “anti-competitive behaviour” in March 2015, including reporting it to the Competition Bureau and initiating a “thorough investigation” to get to the bottom of what happened.
The company also said Weston Bakeries and Loblaw employees responsible for their role in the price-fixing arrangement were no longer with the company, and that the companies had “significantly enhanced” their compliance programs with “industry-leading” measures that go beyond the Competition Bureau’s requirements.
Loblaw also announced it would issue a $25 gift card to eligible customers registered at LoblawCard.ca in January that could be used to purchase items at its stores across the country.
The latter step has particularly irked groups like CFIG, which accused the company of turning the scandal into a marketing opportunity. “That is not going over well with our members,” says Sands. “That’s not what we think is an appropriate remedy to this kind of behaviour. Marketing should not be the appropriate response to anti-competitive behaviour.”
He said that CFIG has been calling for a code of conduct in response to continued industry consolidation, which he says has “caused distortion in market prices” and is impacting the entire food chain.
“When we hurt the chain we, ultimately, are hurting ourselves and the customer, because you are hurting competition. That is not good for anybody.”
The Loblaw press release described the matter as an “industry-wide” price-fixing arrangement, noting that class action lawsuits have commenced against the companies and “a number of major grocery retailers and another bread wholesaler” on the basis of searches initiated by the Competition Bureau.
Neil Kudrinko, owner and operator of independent grocery store Kudrinko’s in Westport, Ont. says it’s still too soon to determine what the impact could be on the major grocery chains and independents. “I’m still surveying what’s going on through the media and have not received any information yet,” he says. “If I get a big fat cheque, I’ll let you know.”
In a research note to clients, Peter Sklar, equity research analyst at BMO Capital Markets, said Loblaw's disclosure of the duration of the arrangement and the decision to issue $25 gift cards were negative elements, but they were offset by its voluntary disclosure of the price-fixing scheme to the Competition Bureau.
He added that while Loblaw confirmed a class action lawsuit related to the matter, it will likely take several years to proceed.
“Overall, while the headline is negative and the duration of the price-fixing was lengthy, we note that Loblaw will not face criminal charges or fines, and we believe this is likely only a small negative for the stock,” he wrote.