Agriculture Committee on April 23rd, 2009

[The Chair, Conservative, Larry Miller]

Yes, you indicated that.

[Wayne Easter, Liberal, Malpeque, PE]

—just in case there's a problem on the record.

[The Chair, Conservative, Larry Miller]

Before we let the witnesses resume here, just so this is clear to me, is it the intention of the committee that we go ahead and discuss the report at the next meeting? Is that the direction for the full meeting?

[Brian Storseth, Conservative, Westlock—St. Paul, AB]

Quite frankly, I think it will take the full meeting; I want it to be a priority, as I had farmers come here.

[The Chair, Conservative, Larry Miller]

Rather than bring a witness here for an hour and then possibly end up eating into his time, I think it would be better just to cancel the witnesses and bring them here another day.

Is that okay with everyone?

[Some hon. members]

Agreed.

[The Chair, Conservative, Larry Miller]

Okay, that's what we're going to do then. Thank you very much.

Mr. Sands and Mr. Scott, thanks for being here today and bearing with us while we dealt with some business.

Go ahead for about ten minutes, if you could, please.

[John Scott, President, Canadian Federation of Independent Grocers]

Thank you, Mr. Chair.

I'm John Scott, and I'm president and CEO of the Canadian Federation of Independent Grocers. With me is Gary Sands, who is vice-president of public policy with CFIG.

I've been president of CFIG since 1991. I'm an economist and have studied the retail grocery industry in Canada, and I understand it very well.

You asked us to attend today. We did not make a request, but we're pleased to be here, Mr. Chair.

We'll provide a very quick recap of some of the competitive issues, which I understand you wish us to address, and then we'll open the floor to questions, because I think that's where you really want to go.

Two years ago we met in camera with the agriculture committee and talked at length about the competitive issues that are affecting two things. One was the viability of independent grocers across Canada, and the second was the viability of members of the farming community in some of the rural areas attempting to get their product into stores and what the reasons were behind why they could not do that. We talked about that at some length.

I'll give you a bit of a recap on what this industry is all about on the retail side.

This industry is controlled by five players. If I take the top two, Loblaws and Sobeys, they control 75% of the market. If I add an additional three, Metro, Safeway, and Walmart, they control 85% of the market. Canada is the only country that allows its major distributors to operate corporate retail stores, to franchise stores, and to wholesale all in the same market. This occurs regularly, so in essence in many cases the major distributors in Canada are continually in competition with themselves. We can get into how that works later on.

The independents in Canada are a very interesting group and can be separated into four distinct groups.

First of all, there are the full independents, the people who supply their own goods, buy directly from manufacturers, and sell into the marketplace. They are in various parts of the country: Longo's in Toronto; the Farm Boy group in Ottawa; Colemans in Newfoundland; the Grocery Store in Chesley, Ontario; the Overwaitea Food Group owned by Jimmy Pattison in western Canada; and the fast-growing Asian group, the T&T group that you see opening here in Ottawa—and I urge you to go and see that store, because it's going to be pretty interesting. This group exists; it's very strong and very entrepreneurial.

The second group are banner, which may appear to be franchised, but aren't franchised. These are people who group together for advertising purposes. In western Canada you'll see Super A , AG Foods; in southwestern Ontario you'll see L&M Food Markets. Quite a number of IGAs are banner, but not franchised. This is just to give you a differentiation. They group together for advertising and buying purposes.

Then there are the franchised stores. You'll be familiar with most of those. The most prolific, of course, is IGA. It's very strong, particularly in the province of Quebec. There's also Metro, which is very strong in Quebec. Of the Sobeys stores across Canada, about half of them are franchised and former IGAs. Also, there is Your Independent Grocer that you see here in Ottawa. There are quite a number of franchised banners—Foodland—across the country.

Then we have specialty stores, such as Pete's Frootique in Halifax, Pusateri's in Toronto, Sunterra Market in western Canada, and I can go on.

The independent grocers, if I include the franchised grocers, the full independents, and the specialty stores, represent about 40% of the market. Don't forget I said earlier that 85% of the market is controlled by the major players. That means the independents must buy from the major players in order to sell into their market.

Here are the issues the independents deal with. First of all, there's competition against these major players who can operate corporate stores, franchise, and wholesale in the same market.

There are issues of access to supply, access to national brands, and access to local supply because of certain fidelity agreements, particularly in franchised situations.

We also deal with issues related to vendors. You have to understand that most of the major distributors in Canada work with manufacturers this way: they treat their shelf space as real estate, and it costs money to get the product on the shelf. The price of putting that product on the shelf, the price of the real estate, continues to escalate at a very rapid pace. In fact, as someone said to me last week, it's unrelenting, it doesn't cease, and it's worse than anybody has seen in the last 40 years. We call that the “trade spend”, and according to some estimates, Canada has the second-highest trade spend in the world, second only to Germany. So if you look at somebody, a fully independent, that is trying to buy product from the same manufacturer, it doesn't have the same weight to get the same amount of support. So they're obviously settling for less. They're buying a product at a lesser price.

Those are some of the competitive issues we deal with. The last time we were here, we talked about some of the solutions the Government of Canada could provide. One of them involved some of the amendments passed in association with the last budget, and we thank you for that. Moving predatory pricing and promotional allowances into the civil section makes all kinds of sense, as long as they're under abuse of dominant position and there's a right to administrative monetary penalties. All of that was provided, and we thank you, and we hope that this committee had something to do with that.

However, we're going to submit to you today that those amendments won't work a whole lot and won't work very well if the bureau is unwilling to enforce the preamble to the act. The purpose of the act, as stated, and as stated on their website, is that they're not only in business to protect the consumer; they also are in business to ensure that small business has an opportunity to continue to participate in the Canadian landscape. It is stated in the preamble to the act and is stated on their website. However, when you meet with the bureau, they'll tell you that they're only interested in the consumer, and they see low prices as the panacea, period. There needs to be a bit of equilibrium here. We need to see the bureau take a good hard look at situations where an independent could be put out of business for whatever behaviour and determine whether, in the long run, that is good for the consumer. So having the bureau deal with the spirit and intent of the act is very important.

The next time you look at amendments to the Competition Act, please consider this: Put the right to civil damages into the civil section, so if someone is actually convicted under abuse of dominant position, the individual can refer to the courts for civil damages. We think that's very important.

At the current time, the biggest single issue facing us and a lot of other small people is the potential change to the debit card system in Canada. You have to understand that the rules for the debit card, and the credit card to some degree, represent a little bit of a highway. It's like a public utility, if you will. It's kind of like power. You've had a defined agreement since around 1995, signed with the Competition Bureau, that sets Interac up as a non-profit organization at certain fee levels. You have to understand that independent grocers pay anywhere from three to five cents per transaction for the right to use those cards. But some of the larger retailers in Canada own their own credit cards, and they're not subject to those kinds of fees. If we move into an unregulated environment, as is being proposed by the banking system and Interac itself, you run the potential of increasing those fees and exacerbating the competitive landscape, which currently, as I said before, can be considered almost a public utility. That is very important.

I urge you to take heed of the hearings under way currently in the Senate and later in the industry committee on that issue of the debit and credit card, because it could affect the competitive landscape of this industry quite dramatically.

Mr. Chair, we know that you have a specific interest in food safety. We appreciate the work we've done with the Government of Canada over the last five years in food safety. We, together with the major distributors, developed a food safety protocol in this country, and with the assistance of the APF in the last three years, we have run training sessions across the country on a very comprehensive food safety system. We've been very pleased with the results, so pleased that last year we even translated the manual into Mandarin and ran Mandarin sessions in various markets in Canada. So we think we're doing a lot in food safety. We do not believe that food safety is a competitive issue. We believe that it's something everybody needs to be involved in. I wanted to express our appreciation to the Government of Canada for the support they've given us and independent grocers in ensuring that the food safety protocol can be implemented cost-effectively across the board by any retailer, regardless of size.

Mr. Chair, those are just some opening comments. I thank you for the right to appear. I'm not sure where you want the dialogue to move, but based on my background and that of Mr. Sands, who has been with CFIG for 13 years, we know this industry pretty well, and I think we can handle most of your questions.

Thank you.

[The Chair, Conservative, Larry Miller]

Okay. Thanks very much for being here.

You touched on a couple of issues I want to respond to later, but I'm going to turn it over to the members first.

Mr. Eyking, you have seven minutes.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chair.

I thank the guests for coming and for having patience today to sit before us.

In Europe now there's a big push to minimize the effect on the environment when you're transporting food. They call it the green footprint, and it's recognized big-time. It's pushed by governments and retailers.

As a previous vegetable grower, my biggest disappointment is seeing Canada going in the opposite direction. I see it coming from the retailers with their distribution systems whereby they've started pushing farmers to ship to some big distribution system away from their local markets. It seems we're going in the opposite direction.

How can we have reasonably cheap food for consumers but somehow encourage local farm produce in the retail stores? Right now there is a push for farm markets, but at the end of the day, 80% of the food is going through retail organizations. How can we, as a government, encourage that change and maybe follow a little bit what Europe is doing?

[John Scott]

First, the trend toward ”buy local”, the carbon footprint, is prevalent in Canada. One of the most interesting things is that despite what's come as a result of the recession, the consumer is still looking at local product as a good product. We have very savvy consumers in Canada, and they are looking at health and wellness. And an interesting corollary to that is that consumers are buying less of a product but ensuring it's a healthy product. So it's an interesting change from previous recessions.

The distribution systems for the major distributors are very well defined and they do move through central warehouse systems. Having said that, there are several things you can do. First, in Toronto we have something called the terminal. Product comes into the terminal--and you may be familiar with that, sir, I'm not sure where you're from--from all over the world, but it comes in particularly from Ontario. Every day everybody, including the major corporate chains, goes down there and buys that product. That fresh product is in their stores later on that day.

We only have one terminal in Canada, Mr. Chair. It wouldn't be a bad thing to look at whether we need a terminal in Montreal and a similar terminal in Vancouver. We could easily do that kind of thing, and that does two things. It helps the farmer and it also helps the independent grocer and the food service group differentiate themselves from all others. It's very important, and I'd consider that.

I'd like to come back to something we talked about the last time we were here. It was a different committee composition then, and for some of you, your eyes will glaze over when I talk about this.

The franchise agreements that the major players have in place have a fidelity clause in them that ensures the majority of product must be bought through wholesale. That's why, when the local farmer comes to the store with his corn, the store says it can't buy it because he's going to have to go to its franchise or sell it through that company. If he's only allowed to buy 5% outside the fidelity agreement, it's not very much, because you get shorted over the winter and you have to buy milk here or whatever and it goes away very quickly.

Last year, when the mania for “buy local” became very hot, you saw even the major players in Canada say they were into “buy local” now. That was pretty interesting. You saw them back off on those fidelity agreements. You need to make sure that back-off is permanent. They've done that in the province of Quebec. It is very strong on buying local, but that's something we need to encourage right across the country, because it's very healthy and it's good for the local farmer and it's good for the local independent. It is. That's what I would do.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

You're right. A lot of times the retailers will put on a show that they're buying local for the summer, but at the end of the day, if somebody has a nice crop of strawberries or things like that, they can't go into the store. So I like the idea of the terminals and the Quebec model.

The other thing is the Wal-Mart factor. In certain areas of Canada they're coming in strong. And I'm not trying to beat up on Wal-Mart. They supply a lot of things we need. But how is that going to change how retail business is done in this country? How will it change for the local farmer? What do you see out there?

[John Scott]

Okay, so here's what's happening with Wal-Mart....

I'm sorry, Gary.

[Gary Sands, Vice-President, Government and Industry Relations, Canadian Federation of Independent Grocers]

I just wanted to reiterate what Mr. Scott was saying. I just want to stress that part of the message we're trying to deliver here is that for the independents to continue to survive--and this is important for the whole chain--it's critical that they buy locally. They have to differentiate their offering to the consumer. We can't compete with the Wal-Marts on the price issue because of what Mr. Scott's outlined in terms of how the system works.

What you're saying resonates with our members all too well. I just wanted to emphasize that point about where we're trying to be, as well.

[John Scott]

Wal-Mart is another major player that's come into the market. CIBC World Markets reported on this earlier this year. It isn't necessarily the independent that gets hurt by Wal-Mart coming into the market. Of course, anybody that comes in and sells food.... I mean, we've even been going to Canadian Tire and buying Kraft Dinner every once in a while these days. It's a little silly right now. When there's a major competitor coming into the market, you need to be efficient against them. There isn't any independent that's in business because they're afraid of that competition. We have some very smart entrepreneurial independents in the market right now.

CIBC World Markets were able to prove that the more inefficient store goes out of the market. In fact, in all cases across the country, there is no record of an independent going out of business because of Wal-Mart opening, but there is evidence of major distributors closing stores.

Now, what impact is Wal-Mart having through the chain? That's a different question. Wal-Mart can buy at a lower price than anybody else because it buys worldwide. Even Canadian manufacturers are going to Bentonville, Arkansas, to plead their case, so obviously they're buying at a certain price. Then you have to back up and realize that the major distributors in Canada I talked about, in order to compete, are competing on price. They need to get that same price. That creates pressure from them to buy better from the manufacturer, so that's where the pressure comes onto the manufacturer to support their products even more, to spend more money to support the product and to get it on the marketplace.

Our people can't do that. The independent can't do that, so the independent needs to be very wily to compete in this current marketplace. It is very difficult, sir.

Is there a solution to it? As the bureau will tell you, that's good for consumers in the short run. I'll submit to you that in the long run, when all you have are major distributors to buy from, you'll lose your markets for your crops, and you'll lose the rich diversity we have in Canada in retail.

[The Chair, Conservative, Larry Miller]

Okay, your time has expired.

We now move to Mr. Bellavance for seven minutes.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Thank you for your testimony.

We are talking about competitiveness in the agrifood industry, and you are obviously a major player. In fact, you are the place where consumers go to buy food. Nonetheless, food can be found at Canadian Tire. Recently, I was impressed to see there was much more there than before. Normally, I go to the drugstore to buy certain kinds of products. Some would say that I obviously need many beauty products and medications, among other things, but nonetheless, I don't go to the drugstore to buy food. Yet there is more and more food to be found at the drugstore. Fortunately, most people still go to grocery stores to buy the food they eat every day. So you are a major player, and your testimony is very useful indeed.

Mr. Scott, you say that people in Quebec are extremely aware of the importance of local purchasing, and that's true, but I would like to make you aware of something that is becoming applicable everywhere. Just recently, in my riding, a honey producer that dealt with local groceries received a very important letter from Loblaws: the letter stated that, if the producer wanted to continue being a Loblaws supplier, it would have to go through their Toronto warehouses. That local producer was selling its honey without going through a middleman. It was a win-win situation. Since the honey didn't come from China, or anywhere else in the world, there was no long distance shipping involved and no greenhouse gas production was associated with transporting the honey.

You can see how ridiculous this is. The producer would have to provide a large quantity of honey, which it cannot do. Many producers who have been affected by this measure will have to ship their products to Toronto from Victoriaville. The products will then leave Toronto and be shipped back to the areas around Victoriaville, my area. The economics of this are absurd. You have to be certified by headquarters in Toronto before you can sell your products locally. What makes everyone so angry is that the grocer can't tell the people in his own chain that he wants a given product because he knows the product and his customers want it. The whole thing is completely ridiculous.

I know that, when you were with the Competition Bureau, you came to speak to us. Today, do you still believe that the Competition Bureau legislation can help us deal with situations like this? When I read how the abuse of a dominant position is defined, I wonder whether the example I have just given you could be qualified as abuse of a dominant position. In my view, it can.

[John Scott]

Sir, I congratulate you. You just described the key issues in this industry extremely well. Everything you said is absolutely right, and that will continue. The only thing I think you missed is how much money they asked prior to the listing of the product, because that continues. If you want to be listed through the central system, how much more money do you have to pay to do that? I think you'll see that exists as well.

On the issue of abuse of dominant position, let's go back to where we were before, which was that these issues had to be dealt with in criminal court. As of the most recent amendment that was passed, these issues are now under “abuse of dominant position”. If they are truly anti-competitive--in other words, designed to put this company out of business or have the effect of putting this company, which is a small business, out of business--then I would suggest the bureau should take a look at it.

The bureau will not take a look at it, however, under their current philosophical guidelines, which means they're only interested in the end price to the consumer. Despite the fact that the preamble to the act, which we have here, says the bureau is going to look at some modicum of protection for small business to maintain stability in the marketplace, they don't act in that regard. So as long as the bureau is only going to work on the premise of low prices to the consumer, they will not look at this.

However, the act and amendments to the act do provide for what you're talking about. There are sufficient penalties to suggest that abuse of dominant position can be dealt with now. These were good amendments, folks. Now they have to act on them, and that's going to take directive from the industry ministers responsible for it to say, “Look, part of what you do now is not just low prices to the consumer. Let's look at the long run and the impact on the small-business sector.”

There isn't a party here that doesn't talk extensively about the contribution of small business to the economy when you're going for election. It's exactly that. Let's show how we can provide some protection. That's your instrument, sir.

I'm going to use you for my future seminars, because you're good at that.

[Voices]

Oh, oh.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

They will be held in French.

[The Chair, Conservative, Larry Miller]

André.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

If I understand correctly, the tools needed to counter those business decisions do exist, but are not being properly used by the authorities.

[John Scott]

The interpretation of the bureau as to how it operates is that it's purely on low price to the consumer. We can give you lots of examples of it. For example, a few years ago there were only two wholesalers left in Ontario that as a grocery store I could buy goods from, and the last small one was being purchased by a major. We told the bureau, if you do that, the result will be that independents can buy only from this major. They said that this will be efficient and it will be good for the consumer.

As we met with the bureau three weeks ago, we said it has borne out that the independent can't operate competitively with the result. Had they looked at it in terms of protecting small business, they would never have allowed that merger to occur.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Mr. Chairman, do I still have a little time left? No? I would have no objection to continuing.

[The Chair, Conservative, Larry Miller]

Sorry, that's good.

We'll turn it over to Mr. Atamanenko for seven minutes.