Agriculture Committee on April 23rd, 2009

[The Chair, Conservative, Larry Miller]

Your time has expired. I was just letting you finish on that point.

Mr. Scott, Mr. Sands, I have a question before we move on.

We had a gentleman here yesterday who we ran into by accident. He was a senator from Australia who's chair of the agriculture committee there. The reason he contacted me was that he had heard we were in a study to deal with competition and that the grocery industry was part of it. It's ironic that they're doing the same thing there. Obviously, the problem we have isn't unique to Canada.

Just for the benefit of Alex and anybody else who wasn't available at the time because it was short notice, we had him come for a few minutes to our subcommittee last night to talk about this. It was interesting.

You talked earlier about the fact—and I was aware of it before—that Coca-Cola or Pepsi or any of these companies, if they want to put their product on a shelf in a Sobeys or whatever, have to pay money. This is escalating, and it seems to me something needs to be done. That's legalized extortion, in my view.

I'd like to know whether there are any countries around the world that you're aware of that have some kind of legislation in place that eliminates this. Are you aware of any? You said that we were second to Germany.

[John Scott]

In terms of trade spend. That's because of the concentration of power in the hands of just a few. The tighter and more concentrated it is.... It's a dichotomy, Mr. Chair, because on the one hand the major distributors keep asking for more, and on the other hand the manufacturers often pay more after.... I know it's more difficult to extract the dollars now, but there are all kinds of arrangements in which it's exclusivity, or exclusivity in this category, and that kind of thing. Virtually everything you see in a store, right down to the bags that are used, is under some type of arrangement, to that degree. The bigger you are, the more you can extract.

What some of the major companies have done to avoid that pressure, both in Germany and to some degree in Canada, is say “You might represent half of my business in Canada, but you're only four percent of my business in North America; I'm reporting on a North American basis, and I can afford to say enough is enough.”

That's what happened in Germany with a couple of major companies, and there was a bit of a backup. A couple of companies are trying this here in Canada, but it's a very difficult issue, and we are aware that the manufacturers have taken this issue to the bureau at the present time. I don't know what the status of it is.

Is it illegal? I don't know. You'll have to determine whether it's anti-competitive. It certainly changes the ability of others to compete in the landscape. I don't know of any country, outside of those that have dictatorial regimes, that has outlawed it.

[The Chair, Conservative, Larry Miller]

I'm not a lawyer, but I think it probably isn't illegal. It sure as heck is unethical. I think it's going to lead to further problems.

Mr. Easter, you'll have five minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

Welcome, gentlemen.

A number of members of this committee weren't here the last time you folks were here. Just for their benefit, I think it should be noted how serious the issue for the independents is.

The last time we had a hearing, we had a number of the independent operators with them. We had to hold the meeting in camera, because those independent operators were fearful that should it be found out that they were appearing before this committee, they might be out of business. That's how serious it is.

[The Chair, Conservative, Larry Miller]

Just on that, we contacted a couple—I did personally. It was the same thing. They couldn't come for that reason.

[Wayne Easter, Liberal, Malpeque, PE]

Yes, so that's how serious this is.

The other point I might mention is that one of the things about parliamentary committees is if the information these folks write is going to get into the report, it has to be on the record. To show how ridiculous this system is--Mark's not here--in Cape Breton, vegetable growers who used to supply the independents in Cape Breton with fruit and vegetables no longer do. Instead, they have to supply the central depot, which is in Debert. So instead of going six miles to the local store, your strawberries, cabbage, lettuce, etc., now go on a truck, they're trucked a little over 400 kilometres, they're taken off a truck, they're put in a warehouse, run around a warehouse, loaded back on the truck, and taken back to where they came from, only six miles' difference. Does that make sense?

In terms of that example, if you could give me your view on that, is this not all about control and power by the sector that now controls three sectors: corporate retail, franchise stores, and wholesale?

[John Scott]

It is. I think the companies would respond that it's about efficiency. I know it doesn't sound efficient, but I think they will respond that it's efficient, running everything through a central distribution system. If your product is here and there, they have to get it to this store from this farm or whatever. If you get the farmer to take it all to the central point, then you cross-stock it out of the warehouse into these different locations. I think that's the rationale, sir.

[Wayne Easter, Liberal, Malpeque, PE]

That's what they would say, and the railways out west are saying the same thing, that they now have a more efficient system because you haul your grain from a central terminal, but they don't mention the fact that a poor farmer has to truck that an additional 200 miles to get it there.

How are we going to get to a place where we look at the whole system? Somebody is paying the bill. The primary producers who come before this committee are in exactly the same position that you are in as independent stores, in that on the fertilizer end three major companies control it, they lay off people even while they're making money because they're not making enough. On the chemical side it's the same thing. How do we get to a system where we look at the whole picture from field to plate, an efficiency of the system as a whole rather than the efficiency of a corporate giant in terms of their making money for their shareholders and driving rural Canada bankrupt?

[John Scott]

It's a very difficult situation, sir.

[Wayne Easter, Liberal, Malpeque, PE]

On the fidelity agreements, what level should it be at? It's at 5% now. What level would make it--

[John Scott]

I'm sorry, sir, I wouldn't touch a percentage at all; I would leave it at 95%. What I'd do is make exceptions and I'd say they can do, except for local produce, local this, local that. In other words, it would be exceptions in the marketplace. I'm not going to protect the corporations here, but I think it's important to note that we have among the lowest prices in the world, the most comfortable shopping environments, and that's because of a very efficient system. Again, I'm not protecting the bureau here. You don't want to discount the consumer; you just want to make sure everybody has a role to compete fairly in that system and is able to survive at the end of the day.

They need a certain volume through that warehouse to maintain the warehouse, but you can make exceptions. That's what Quebec did.

[Wayne Easter, Liberal, Malpeque, PE]

That's fine on the trade--

[The Chair, Conservative, Larry Miller]

Your time's expired, Mr. Easter.

Ms. Bonsant.

[France Bonsant, Bloc, Compton—Stanstead, QC]

Good afternoon, gentlemen.

[The Chair, Conservative, Larry Miller]

Oh, sorry, Ms. Bonsant, I went out of order here. You will be next. Mr. Hoback, then you.

[Randy Hoback, Conservative, Prince Albert, SK]

I'd like to thank you for coming out. I appreciate your taking the time out of your day.

I want to drive into a little more detail to help explain to me, and to consumers and producers, just how this system works its margins. One of the complaints I get right now, and I'll use the beef industry, for example, is the cow producers aren't making any money. We've had the packing plants here, and they say they're not making any money. Yet if you look at the price of that steak in the store, it hasn't gone down any. So how does that margin split up and how does it work its way through the system? It appears as if it doesn't. Can you give us a quick answer on that?

[John Scott]

I'd be happy to come in here and lay it all out for you. I can't do it here, but bottom line is that retail is high volume, very low margins, so our people work on a net margin of 1% to 1.5%.

When you're talking about the meat industry, gross margin in meat is anywhere from 19% to 26%, depending on the store you're in. They're buying it from the packer, and I'm not sure where the margin is at the packer, but that's how it works right now.

When we're looking at the profitability of the store, we're looking at a total mix that includes produce that might be a 30% to 33% mix; deli might be a higher mix; meat is pretty well at 21% or 22% in the grocery store. You look at the total mix to come down to that 1.5% net margin. I'm happy to peel the onion back at some point, but it's tough to do without being able to illustrate it.

[Randy Hoback, Conservative, Prince Albert, SK]

I guess it's really frustrating as a consumer when you hear the beef guys are going out of business because they can't make enough money, yet the price of steak hasn't gone down. You can take other examples. I think Wayne said the bottle of whisky is still up there even though the price of the inputs has gone down. So you've got so many examples. The price of a loaf of bread is still high, yet the price of wheat has dropped by 60%.

[John Scott]

I will caution you on that. I am an economist, and I study this stuff. I think you'll see the price of a lot of packaged goods coming down in the next little while. Don't forget, when buyers buy commodities, they're buying them six to eight months out, so there are still high input prices on those.

[Randy Hoback, Conservative, Prince Albert, SK]

I'll go back to my example, the meat industry, that shelf space for these guys to do their small abattoir. How do they get shelf space? How do they get into your scenario and get shelf space and freezer space? Do they have to buy all the time? Are there other ways of doing this?

[John Scott]

Do they have to buy? Yes, they have to buy from the central.... Again, there's huge money changing hands here. The majors will make a deal with a major meat-packing house and here's the deal. They need their whole system to support the commitment they've made. Basically, that's how it works. How does a provincially inspected abattoir get on the shelves? It's pretty tough.

That's what Gary was saying earlier. The last time we were in front of this committee, we had some meat packers with us. It would be really smart of the Government of Canada to work with the provincial governments to see if we can get some reciprocity between provincially and federally inspected meat plants. In a lot of cases, there's very little difference--a paved parking lot as opposed to a gravel parking lot.

I think we need to move there, and I think we need to get really sensible about our food supply.

[Randy Hoback, Conservative, Prince Albert, SK]

You're making a recommendation that we get rid of these provincial regulations and have more of a national regulation right across Canada?

[John Scott]

I think we need to find a way to get reciprocity, sir.

[Randy Hoback, Conservative, Prince Albert, SK]

Freer trade right across the provinces?

[John Scott]

Right. Then they can't say they only carry meat from federally inspected plants when there's really no difference. You could say they all meet the standards.