Agriculture Committee on March 6th, 2023

[Mathieu Frigon]

About what?

[Yves Perron, Bloc, Berthier—Maskinongé, QC]

It was recommended that we ask the Competition Bureau to look into the price-setting process.

[Mathieu Frigon]

The Competition Bureau is currently holding consultations which we will be involved in. The scope of the consultations goes beyond this issue, but the Bureau will indeed determine if the act should be revised and amended.

[Yves Perron, Bloc, Berthier—Maskinongé, QC]

Thank you very much.

Mr. McCain, you, on the other hand, are here as a representative of a big company. What is your situation? Are you seeing the same type of issues that Mr. Frigon has just described for retailers, like fees, problems with getting prices increased, or similar difficulties?

[Michael H. McCain]

I've been selling to the retail market since 1979—just short of 45 years—in every major market around the world. I started my career as a retail salesman. The challenge of selling into a retail distribution system—a food service distribution system—in Toronto, New York, London or Sydney, Australia is the same. It's always challenging, whether you're selling food, jewellery, clothing or any other product into a distribution system. They demand a lot on behalf of their consumers and others, and for their own improvements. It's just the reality of the business we're in. Experienced people know how to deal with that and manage it. That's what we do. That's just the business we're in.

I would describe it like “economic gravity”. You can't change it. It is what it is. It's been that way for 50 years. It will probably be that way for another 50 years, and I'm totally fine with it. I've experienced both. I've sold products in jurisdictions with a code of conduct and jurisdictions without a code of conduct. We are completely agnostic to that.

Truth be told, I think it will have absolutely no impact on our business, on anybody else's business or on the consumer outcome. However, if the industry wants to put it in.... We have certainly sold lots of products in the U.K. with a code of conduct, the same as we have in the United States and here. We are completely and utterly agnostic, from our perspective. That's just the way it is.

[The Chair, Liberal, Kody Blois]

We'll leave it at that.

Thank you, Mr. McCain. Thank you, Mr. Perron.

We now have Mr. MacGregor for up to six minutes.

[Alistair MacGregor, NDP, Cowichan—Malahat—Langford, BC]

Thank you very much, Mr. Chair.

I'd also like to extend my thanks to all of our witnesses for appearing before our committee today and for helping to guide us through this important study.

I think it was mentioned in the opening comments that this is a very sensitive issue. I think Mr. Drouin mentioned that we are hearing from our constituents. Food is a necessary item for their families to get by, week by week. That's the thing that unites us all: Everybody eats. For people in my area on Vancouver Island, it's a painful experience every time they go to the grocery store.

One of our previous witnesses was Dr. Jim Stanford. He very helpfully provided the committee with a brief that showed the doubling of food retail profit since before the pandemic. That would have been in 2019. The fact is that food retail margins have soared, and both of these things are happening at a time when real supermarket sales volumes have actually been declining.

I just saw his Twitter feed. He saw that the Q4 information for last year was just reported, and the food retail margins for the grocers went up yet again.

Mr. Vanderpol, I'd like to start with you and DPAC. You did mention that for processors, the average profitability has been lagging behind other sectors.

Given the nature of Canada's concentrated grocery retail sector and the fact that three companies—Empire, Loblaws and Metro—control so much of it, we have definitely heard a lot of testimony about the need for a grocery code of conduct. I want to get a bit more of a sense of what it's been like for some of your smaller and medium-sized enterprises and the hurdles they face when they are trying to negotiate with a company that has so much market dominance and power that it can bring to bear. I think that's the crux of the matter. It's the inequality that exists between the two sectors here.

[Philip Vanderpol]

Thank you, Mr. MacGregor.

As you know, the business models of the processors and the retailers are very different. We're really in the business of investing in machinery, equipment and plans to process raw material into finished food products ready for consumption. Retailers are really in the business of investing in space and location to buy products to distribute and sell to consumers.

I know a lot of numbers are thrown out about comparisons of profit margins. I think you may have to look at different metrics, such as profit per dollar of total capital invested. That one may not even be perfect.

Maybe a better definition than profit margin is to look at the cash cycle or the free cash flow. That's where, as I said earlier, processors have struggled. We typically don't have the scale that some processors have, such as those in the United States. The return that ultimately results in free cash flow is squeezed. Therefore, it's harder to make new investments to get even more efficiency or automation and things like that. That's where we've been struggling. As processors, we need to do that, but it's hard to get that return on those types of investments.

[Alistair MacGregor, NDP, Cowichan—Malahat—Langford, BC]

It was mentioned by you, Mr. Donaldson—and this is a nice segue to turn to you—that you're kind of caught in the middle. Farmers have their input costs for what it takes to grow a certain product or produce a product from a certain animal. They have to sell that to you, but then you're negotiating with a large retail giant who may just say, “Well, we're buying it at this price.”

I want to focus on the situations of your smaller and medium-sized enterprises. You mentioned that we have over 8,000 businesses in Canada. That's fantastic to see. I want to see more of those particular companies succeed, but anecdotally, what have you been hearing from your members on what it's like for them to negotiate with grocery retail giants who have such command and control over that size of market?

[James Donaldson]

It has certainly been very difficult. In B.C. we don't have any really large companies. We don't have any big multinationals. As I always say, even the big companies in B.C. are relatively small on the national scope.

Yes, they are finding it very difficult. I talked to a member last week who over the last four years has almost tripled their top-line growth, but their margin has shrunk by 25%. They are happy to have that expanded distribution and expansion, not just in Canada but into other markets, but for the smaller entrepreneurial businesses that make up the bulk of our membership, it's almost impossible. There are extended blackout periods. Even when you're trying to negotiate a price increase, it could take several months to negotiate. There's not honouring payment terms. If you're a small business and you have an agreement for net 15 days to get paid, it can take 60 to 90 days. A large retailer can hold back on that money. They are making millions of dollars on interest, but that's the risk small businesses have.

I always use the adage that in the processing industry, it's not any one or two things that get you; it's the death by a thousand cuts. Small processors don't even have the luxury of withstanding a thousand cuts. They might have 30 or 40. When they don't get paid on time, it can really risk their very viability, their ability to pay their employees. Then there are also the fees and the charges.

I think probably the most frustrating thing I have been hearing from our members is that they don't have these issues if they are big enough to start exporting and going to the U.S. U.S. retailers are not giving them all the program spends and feeds and fines and retroactive payment adjustments. Here they can be supposed to be getting a cheque and they have $50,000 or $60,000 taken off for some retroactive adjustment from two or three years ago.

It's impossible to even account for those and plan for them. I think that makes it even harder. You have to really keep things very lean and have a very clear understanding of your cost centres. When the goalposts keep moving, when you don't know when you're going to get paid or how much you're going to get paid or how long it will take to get paid, it's very hard to withstand that situation.

I ran out of time in my speaking notes that I shared. I did have a couple of comments about the code of conduct, but it's not directly—

[The Chair, Liberal, Kody Blois]

Mr. Donaldson, I apologize. I gave you and also Mr. MacGregor a fair amount of runway. I have tried to be pretty generous, but unfortunately I can't give you any more runway.

Thank you, Mr. MacGregor. Thank you, Mr. Donaldson.

Colleagues, we're going to go to our second round. We started a little bit late. I have 15 minutes left that I will grant to our last folks, but I will be really tight. I will be shutting it off at five minutes, with no more leeway.

Mr. Steinley, we go over to you for five minutes.

[Warren Steinley, Conservative, Regina—Lewvan, SK]

Thank you, Mr. Chair.

Thank you to the witnesses for being here this evening.

I was going to have a few dairy questions because I'm a dairy farmer at heart. I grew up on a dairy farm in southwest Saskatchewan.

Mr. McCain, you brought up a few things that I would like to delve a little further into. First and foremost, what is the difference between your transportation costs in your plants in the States compared to your plants in Canada?

[Michael H. McCain]

It's very challenging to compare them, because they are product-specific and customer-specific in our product mix, our customer mix.

In Canada, a big chunk of our product coming out of Manitoba, for example, is exported. It's mostly containerized and includes an ocean freight component that's not comparable to a product sold out of central Canada in our plant-based business. It's not comparable.

[Warren Steinley, Conservative, Regina—Lewvan, SK]

What would your trucking costs be, just for freight on trucks? What would a trucking cost comparison be?

[Michael H. McCain]

They're comparable.

[Warren Steinley, Conservative, Regina—Lewvan, SK]

Okay.

In 2019 Maple Leaf Foods decided to open a plant, or invest in a plant, in Shelbyville, Indiana, instead of investing in a plant in Canada.

Can you tell me what went into that decision and what some of the taxes or some of the incentives were that made you decide to invest in Shelbyville, Indiana, instead of in a plant in Canada, especially with the pulse food? I would believe there would be more opportunity to have access to pulse crops in Canada or—

[Michael H. McCain]

No. Ninety-five per cent of the business is in the United States. It's not a Canadian business. It is a U.S. business, It's 95%, maybe 98%.

The economics of the plant-based protein business are about outbound freight, not inbound freight. For the outbound freight, we located in Indiana because it was smack dab in the middle of our market. The freight economics were black and white. That was the logical place to locate it.

[Warren Steinley, Conservative, Regina—Lewvan, SK]

Perfect. Thank you very much. I appreciate that.

You said in some of your comments that inflation is a worldwide phenomenon, but your three recommendations are very much within the federal government bailiwick. It was fiscal discipline, labour—and you talked about labour again in a subsequent question—and bureaucratic obstacles.

A few people have talked about how it's a made-in-Canada phenomenon with inflation, and your three recommendations focus on issues that this federal government could tackle if there is a political will. In your opening comment, you said it was more of a world phenomenon, but how come your recommendations focus strictly on a made-in-Canada situation, especially around the fiscal discipline and making sure that you could get inflation under control if we had that fiscal discipline?

[Michael H. McCain]

My recommendations in public policy would be focused on the things that we can control and not on the things that we can't control. Those are a few things that we can control.

With respect to fiscal discipline, I think that should obviously be done in the context of global economies.

With respect to labour, I think that is something that is completely within our control, and we can assist in that vein.

Regulatory competitiveness is something that governments for the last 20 years should have been more focused on, and in the next 20 years, I think, should focus more on.

[Warren Steinley, Conservative, Regina—Lewvan, SK]

Thank you very much; I appreciate that.

I have a minute and a half left. I have two more questions.

First, what are your biggest concerns around competitiveness in Canada? Labour is one of them. Would the tax regulatory system be your second-biggest concern?

[Michael H. McCain]

No. I've never made a business decision or locational investment on the basis of tax regimes. They're close enough; they don't make a difference.

The biggest things that we can focus on would be labour, labour availability and overall regulatory competitiveness.

[Warren Steinley, Conservative, Regina—Lewvan, SK]

You've said that a few times—overall regulatory competitiveness. Can you break that down for me in 30 seconds? What would you say is our weakest link when it comes to competitiveness in Canada?

[Michael H. McCain]

The challenge of regulatory competitiveness.... I'll use a metaphor. The one that I use commonly is that it's a ton of feathers. We've analyzed this on virtually every link in the value chain. There's no one item in there that's any more than a feather. If you have a ton of feathers, it's still a ton. The problem is that identifying any one feather almost feels trite, but in aggregate it's very significant. We can demonstrate that on many different layers.

[The Chair, Liberal, Kody Blois]

Thank you, Mr. McCain. Thank you, Mr. Steinley.

We now have Mr. Turnbull for five minutes.

[Ryan Turnbull, Liberal, Whitby, ON]

Thanks to our witnesses for being here tonight.

I'll probably focus exclusively on you, Mr. McCain.

I appreciated your opening remarks and the bold vision that you have created for Maple Leaf Foods, specifically with regard to sustainability. I want to ask you a little bit about that and connect it to food price inflation.

Would you say that Maple Leaf Foods has shifted its corporate strategy significantly in the last decade to hold itself to a higher standard when it comes to social and environmental responsibility?