Analysis: Stricter merger laws unlikely to cool Canada's surging food prices

Metro

18/09/2023 21:08

By Divya Rajagopal
       TORONTO, Sept 18 (Reuters) - Canada's plan to bring down
food prices by tightening regulation could backfire and fail,
raising the cost of doing business in the country without
providing relief to consumers, lawyers and economists said.
    Canada's weak competition law has been long blamed for
allowing a few players to dominate industries ranging from banks
to telecoms and groceries. Last week, Prime Minister Justin
Trudeau promised to amend the Competition Act to help bring down
prices, including removing a clause that allows companies to
pursue and defend mergers as long as they produce efficiencies
or savings, even if they hurt competition in the sector.
        The proposed amendment will drop the so-called
efficiencies defense provision, giving Canada's antitrust
regulator - the Competition Bureau - the power to block deals it
deems as increasing market concentration, irrespective of any
cost efficiencies.
    Trudeau's move comes as many Canadians reel under an
affordability crisis with food prices jumping 25% since the
start of the COVID-19 pandemic in 2020. At the same time, the
central bank's efforts to bring down inflation by raising
interest rates to a 22-year-high have pushed up mortgage costs
for homeowners and made buying a home unaffordable for others. 
    The double whammy has hit the Liberal Party's popularity,
helping opposition Conservative leader Pierre Poilievre - who
has blamed hot inflation on record spending by Trudeau's
government to support the economy during the pandemic - surge
ahead in opinion polls. 
    While amending the Competition Act answers a longstanding
request from the antitrust regulator to bring Canadian laws in
line with other developed nations, it is unlikely to cool food
inflation as it only stands to prevent future deals among
grocers, and does nothing to change the status quo of a few
players dominating the sector. 
    Omar Wakil, a partner at law firm Torys LLP who specializes
in competition law, said the proposed amendments will increase
the cost of doing business in Canada and provide no benefit to
consumers. 
    For example, one proposal includes allowing the regulator to
conduct market studies on anti-competitive practices.
    "What is clear is that the cost of market studies will be
borne by businesses that will have to pass them onto consumers,"
Wakil said. "And those costs could be significant."
    
    CONCENTRATED MARKET
    Canada's top five grocers - which include Loblaw Co  L.TO ,
Empire Co-owned  EMPa.TO  Sobeys and Metro Inc  MRU.TO , control
about 80% of the market. The top three generated C$100 billion
($74 billion) in sales in 2022, and earned a total of C$3.6
billion in profit, a 50% jump since 2019.
    But the large grocery chains have pushed back against
accusations of price gouging and blamed higher prices on vendors
passing on input costs to the grocers. On Monday, the government
said the heads of five major grocery chains had agreed to
support the government in its efforts to stabilise prices. 
    Economists also say that while food inflation in Canada has
been running above the headline consumer price inflation number,
the country - like most others - is simply suffering from higher
prices globally driven by disruptions largely caused by the
pandemic and Russia's invasion of Ukraine.
    Food inflation stood at around 35% in Germany and the United
Kingdom - well above the 25% level of food inflation in Canada
since the start of the pandemic, Scotiabank research showed.
    "Our government is taking short-term and long-term measures,
including a strong stance against future consolidation in the
sector, to improve competition and stabilize food prices," said
a spokesperson for the industry minister under which Competition
Bureau falls. 
    Derek Holt, vice president of capital markets economics at
Scotiabank, wrote in a report that Canada may have politically
tilted the field against merger proposals and that the
government's proposals could lead to unintended consequences
like higher regulatory costs and taxes that deter foreign
expansion into Canada and discourage investment.
    "As flawed as the efficiencies defense may be according to
some, what replaces it may be a completely politicized process
run according to the whims of Cabinet," he wrote.
    Antitrust lawyers also point out that the efficiencies
defense clause has been rarely used in recent M&A battles and
almost never in the consumer-facing retail business. 
    Even the most bitterly contested takeover in Canada's
history - Rogers Communications Inc's  RCIb.TO  bid for Shaw
Communications, which eventually was approved by the government
in March - did not invoke that clause. 

 ($1 = 1.3523 Canadian dollars)

 (Writing by Denny Thomas
Editing by Deepa Babington)
 ((denny.thomas@thomsonreuters.com; +1 416 301 0464;))