What high grocery prices say about the dysfunction in Canada’s economy

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David Soberman is a professor of marketing at the University of Toronto’s Rotman School of Management.

Some argue that Canadians do have an option for affordable groceries at the discount chains of the major supermarket chains: No Frills (Loblaws), Freshco (Sobeys) and Food Basics (Metro). Indeed, Loblaw Cos. Inc. is piloting an ultradiscount grocery store in Ontario, No Name, that promises lower prices by stripping away even more frills.

However, the prices at these discount chains are not nearly as attractive as those found at the hard discounters in other countries (even in the U.S., Trader Joe’s and Aldi are thriving).

These hard discounters are different animals with radical cut-price tactics and often try to disrupt a market that is a little too cozy. In a country like France, the big chains such as Carrefour and Auchan are kept in check by the likes of Lidl and Aldi.

The fact that we have only poor imitations of such hard discounters is evidence that Canadians are getting a raw deal when it come to food retailing. This points to wider and deeper problems in our economy. We need to do something about this.

The measuring stick to assess whether chains like No Frills provide a good deal is often the average level of saving versus the prices at regular supermarkets. But if the prices at regular supermarkets are already too high, it doesn’t matter if there are significant savings at discount chains; discount shoppers still pay too much.

Consider the case of Loblaw’s No Name chain. Loblaw argues that the new venture will provide deeper discounts because it will be less complicated to run because they will have less variety: 1,300 individual products, compared to 7,000 products at smaller No Frills locations. By some measure, this seems similar to a hard-discount shopping experience like that of the German chain Aldi.

But in contrast to Aldi, which increases profit any time a new shopper comes through its doors, the same is not true with No Name stores. In Canada, the owners of the discount chains also own regular supermarkets. A fraction of No Name shoppers may have shopped at the parent company’s regular Loblaws supermarket so their switching to No Name might reduce profit for Loblaw. This is known as cannibalization. Typically, the parent company of multiple chains (like Loblaw, No Frills and No Name) wants to minimize cannibalization.

Hence, the incentive to attract shoppers to No Name with low prices is smaller leading to higher prices compared to the case of an independently owned discounter.

That is perhaps why earlier this year, we had news of our federal Industry Minister François-Phillipe Champagne having discussions with foreign retailers (including hard discounters).

Unfortunately, the dance that our government has with foreign retailers from time to time is reminiscent of the pirouettes than the father of the current prime minister once performed behind Queen Elizabeth. They are amusing but substantively unimportant in terms of moving Canada in the right direction. Nothing has come out of Mr. Champagne’s effort.

This leads to an obvious question: if Canada is such a “profitable” place to sell groceries why are foreign chains not already here and capitalizing on this opportunity?

When a foreign company wishes to enter Canada, it has two entry choices. The first is to acquire an existing Canadian retailer to use as a beachhead to enter the Canadian market. The second is to build a network from scratch. Neither is easy in Canada.

First, when it comes to acquiring a Canadian retailer, we have some of the most restrictive policies in the world when it comes to foreign takeovers. While many restrictions relate to specific sectors, our national angst peaked when Tim Hortons was acquired by Burger King in 2014. This makes such takeovers less palatable to regulators.

Second, an April, 2024, report of the Fraser Institute details how layer upon layer of regulation discourages investment. Between 2009 and 2018, the number of regulations in Canada grew from about 66,000 to 72,000. These regulations restrict business activity, impose costs on firms ($38.3-billion in 2020) and reduce economic productivity.

One need not look further than the context for foreign investment to understand why these foreign hard discounters might be taking a pass on Canada. In 2021-22, Canada attracted only US$119-billion in foreign capital compared to capital outflows of $276-billion. Quite simply, investing in Canada is not attractive given current economic conditions.

We, as a collection of individuals, continue to walk down the garden path of high-priced groceries because we are unwilling to force our politicians to make the changes needed to have a modern competitive economy. Stronger competition law, less restrictions on foreign takeovers and a massive reduction in the regulatory burden imposed on businesses will yield benefits not just in grocery retailing but in other sectors of the economy too.