Canada has one of the most concentrated food systems in the industrialized world. Typically, when corporate concentration surpasses levels that generate "efficient" business activities, processes and products, then negative social and economic effects are produced. Beyond that level of concentration, firms are able to extract excessive profits and / or control entry into marketplaces, to the detriment of other firms. High levels of concentration also typically penalize suppliers, who receive lower prices for their goods relative to what they would receive in a more competitive environment. Consumers also pay more because sellers can charge higher prices for their goods in the absence of a base of competing sellers. The difficulty for economists is determining at what level of concentration the shift from efficiency to market power occurs. Several different measures have been devised, the most commonly used being the concentration ratio, which is somewhat simpler to measure than many others. It describes the percentage of market share controlled by a specified number of firms. Typically a ratio of 40%, 4 firms controlling at least 40% of a market, is considered concentrated (CR4=40).
Unfortunately, most segments of Canadian food supply chains exceed 40%. Some examples from different parts of food supply chains follow.
The input sector comprises chemical manufacturers, energy companies, equipment firms, builders and providers of feed, livestock and seeds. Some of these sub-sectors are highly concentrated, particularly urea (nitrogen) fertilizer (CR4 of 94%) , fuel (73%) (marketsharematrix.org, 2010) and seeds. Three transnational companies - Monsanto, Dupont, and Syngenta - control about 53% of global seed sales (including Canadian sales) (ETC Group, 2015). Since then, Monsanto has been purchased by Bayer in a move that consolidates control over seeds and pesticidies. Input prices have been increasing at higher rates than crop prices (NFU, 2005), with fuel and fertilizer experiencing the largest shifts. All this suggests that farmers are paying more for many inputs than they would with higher levels of competition.
Since the 1990s, the number of food processors has fallen dramatically, but the average shipments per processor have increased over that time (AAFC, 2015), indicating significant scale increases. Most of the significant food processing sectors exceed the CR4 40 ratio, including dairy, grain and oilseed milling, sugar and confectionary, meat and fruit and vegetable processing (AAFC, 2010).
The situation in red meat is somewhat indicative of the sector trends. Periods of restructuring in the 1980s, the result of beef consumption decline and US competition, contributed to the current environment, one dominated by a small number of firms and plants. “Maple Leaf Foods is still the leading hog processor in Manitoba. Olymel (controlled by La Coop Fédérée) has become Québec and Alberta’s leading pork processor with nine pork and hog processing plants in Québec, one in Red Deer, Alberta, and one in Cornwall, Ontario. Beef processing is dominated by three large plants: Cargill Foods operates in High River, Alberta, and Guelph, Ontario; Lakeside Packers in Brooks, Alberta, is operated by JBS Canada, part of a Brazil-based multinational that was reputed to be the world's largest processor of fresh beef and pork in 2014. Concentration in the beef processing sector is a problem, with 2 firms controlling 80% of federally inspected capacity. Provincially regulated plants have only 5% of total slaughter capacity. The three largest broadline food distributors have 40% of sales, and the top 3 fast food chains have about 70% of fast food beef sales. With recent mergers and acquisitions, the 4 largest retailers have 80% of beef retail sales" (CAPI, 2012).
Two companies, Weston Bakeries and Canada Bread, control nearly 80% of the bread-making market, creating a high barrier to entry for new competitors (Strauss, 2018). This situation, and the related degree of similarity in bread offerings from store to store, contributed to the bread price fixing scandal that remains under investigation by the Competition Bureau. Sobeys, Metro, Walmart Canada Corp, and Giant Tiger were all implicated in the scheme. It has been reported that the scheme raised prices of bagged bread products 15 times, an average of 10 cents a loaf each time, increasing the price of bread well over the rate of food inflation (Strauss, 2018).
The total number of food service operations has been relatively stable since the 1990s, but the sales per outlet have increased, suggesting a general increase in size (AAFC, 2015). Food service (cafeterias and restaurants) is a complex area, with many different types of operations. Eighty percent of commercial food service is comprised of restaurants and caterers, with 20% institutional cafeterias. Many of the institutional operations are run by 3 large companies: Sodexho, Aramark and Chartwells (Compass), but in some subsectors such as health care, there are many self-operations. In other words, the institution runs it's own cafeteria. This is important because these "self-ops" often have more flexibility to change what they do and how they do it.
Although independent restaurants comprise 60% of the total number of restaurants, they account for only 35% of total sales. The chains have less flexibility compared to the independents, but if a chain gets behind a shift in practices and instructs all its outlets to follow suit, adoption of a new approach can be significant. As an example, many restaurant chains have recently announced that they'll be purchasing more product from suppliers following improved animal welfare practices.
In 2009, AAFC (2009) estimated that the 4 largest food retailers (then Loblaw, Metro, Empire [Sobey's] and Safeway) held about 72% of national market share (a high degree of concentration). Since then, the mix of firms has shifted. Sobey's bought the Canadian stores of Safeway from its US parent company and Loblaw purchased Shopper's Drug Mart so it could move more food through their pharmacies and use Shopper's pharmacy supply chains to supply their food store pharmacies. Similarly, Metro has purchased Jean Coutu pharmacies. In 2016, the top three food retailers in Canada (Loblaw, Empire and Metro) had a combined sale total of $83.8 billion, in 3,190 stores. Since 1990, the number of stores has declined an average of 871 per year, but total sales have increased an average of 3.1% annually (AAFC, 2017).
Costco and Walmart have also expanded their offerings and are now the 4th and 5th largest retailers in Canada respectively, even though sales are substantially lower than the big 2 (29% Loblaw, 22% Sobeys). The CR4 ration is still around 72% of the food retail market (Arnason, 2017). Only in Quebec do the independents still hold significant market share, with about 60% (AAFC, 2015).
Many recent mergers and acquisitions in the retail sector have been reviewed by the Competition Bureau, with the deals approved pending the sale of a limited number of stores in specific markets where concentration was deemed to be excessive without these selloffs.
Recent Competition Bureau investigations of Loblaw, the market leader, include accusations of anti-competitive behaviour and abuse of dominance contained in nine policies Loblaw imposed on suppliers. Loblaw frequently requested compensation when:
- “another retailer's price for one of the supplier's products was lower than or equivalent to Loblaw's price;
- it determined that another retailer's wholesale cost for a product was lower than its wholesale cost;
- it was not offered a product or format that was offered to another retailer; or
- its margin or profitability on one or more of a supplier's products fell below a specified threshold” (Competition Bureau, 2017).
The Bureau ultimately terminated its investigation in 2017, after some of these policies were withdrawn by Loblaw in 2016, presumably in response to the inquiry. The Bureau also could not find conclusive evidence of anti-competitive behaviour, which speaks in part to the challenges of making such cases, given the limitations of the Competition Act.
Loblaw admitted guilt to price fixing in bread over 14 years, and implicated other retailers and bread manufacturer Canada Bread. Weston Bakeries (part of the network of companies that includes Loblaw) and Canada Bread control 80% of the break market in Canada, which facilitated their ability to raise prices (Strauss, 2018). This investigation continues with Loblaw providing evidence to the Bureau in exchange for relief from criminal charges.