Fresh Takes

Supermarket-supplier relationship does not need government intervention

Supermarkets are pretty miraculous when you think about it. They provide us with access to vast quantities and varieties of food products on demand and at any time of year—the occasional panic-induced toilet paper shortage notwithstanding. And this “miracle” is all the more impressive given that it is the result of spontaneous and voluntary collaboration between millions of people, most of whom will never meet.

But a group of associations representing farmers, food processors, and independent retailers wants the federal government to introduce a government-enforced grocery code of conduct. Such a code would include rules regarding fees charged to get products on grocery store shelves and fines for late product delivery. In a letter to three federal ministers on Wednesday, eight major industry associations complained about consolidation in the grocery store sector having “distorted fair market practices,” implying that the now more dominant players can throw their weight around and dictate the terms of deals with suppliers.

While it’s true there has been some consolidation, the top three players(1) still only account for 63.4% of the supermarket industry in Canada. And with other big players like Walmart and Costco nipping at their heels, the industry seems plenty competitive. According to the Retail Council of Canada (RCC), the industry association representing Canada’s biggest grocers, supermarkets’ profit margins are paper thin (just 1.6% in 2018, compared to 4.4% for wholesale food sellers), which also implies that competition is alive and well in this sector.

In any case, worrying about consolidation and so-called market dominance is indicative of a flawed, “static” vision of competition which, although it continues to influence decision makers and the general public, has fallen out of favour in the field of economics. A more realistic, “dynamic” vision of competition takes into account the rapid evolution of markets open to innovation, and emphasizes the fact that competition must be seen as a process rather than a fixed situation. It gives less importance to the distribution of market share and the number of competitors in the market, and more to potential competition. Remember that Walmart, for instance, was mostly just a low-cost department store not so very long ago.

As an RCC spokesperson commented, “It’s not surprising that the food processors would like higher profits.” After all, everyone wants to make more money, all else being equal. But in the interaction between suppliers and retailers, it’s the competitive marketplace, not government intervention, that should determine who gets how much.

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1. The three leading food retailers in Canada are Loblaw, Sobeys, and Metro.

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