With intense competition among retail grocery chains, food manufacturers are increasingly being confronted by demands to freeze or roll-back the prices at which they sell to retailers. This is, in part, due to the lower margins earned when retailers aggressively discount products to drive store traffic.
Using popular brands as so-called “loss leaders” can often cause conflicts between retailers and suppliers, particularly if the brand is positioned in the market as a premium or high quality brand. Suppliers are typically loathe to see the brand equity in which they have invested diminished when their products are heavily discounted.
When Canada’s Competition Act was amended in 2009, suppliers gained a new tool to address these concerns. Prior to the amendments, it was a criminal offence for a person engaged in the business of producing or supplying a product to, by certain specified means, attempt to influence upward, or to discourage the reduction of, the price at which any other person supplied, offered to supply, or advertised a product within Canada.
A supplier could suggest a retail price, but had to make clear that the final decision on the retail price rested with the retailer and that the relationship between the supplier and retailer would not suffer if the retailer did not accept the suggestion.
Following the amendments, this conduct is no longer a criminal offence. Suppliers can now dictate retail prices, so long as doing so does not result, or is unlikely to result, in an adverse effect on competition.
This threshold of anti-competitive harm is lower than the bar set in other provisions of the Competition Act, which require there be a substantial lessening of competition. Thus far, there has been little guidance provided on what constitutes an “adverse” effect, other than it is less than what is required for there to be a “substantial” effect.
In Canada’s Abuse of Dominance Provisions Enforcement Guidelines, the Commissioner of Competition has indicated that a market share of less than 35% will generally not prompt further investigation, and those provisions use the “substantial lessening” threshold.
A recent article in a major Canadian newspaper suggested that food suppliers are combatting pressure for discounts and price roll-backs by imposing minimum advertised pricing programs on grocery retailers.
Under these programs, a supplier relies on section 76 of the Competition Act unilaterally to dictate the lowest price at which the retailers it supplies can advertise their products. Failure to follow these programs could, under the supply program, result in a range of specified sanctions, ranging from the loss of promotional funds up to the discontinuation of supply.
Given these concerns, there have been calls for the federal government to impose a code of conduct on suppliers and retailers. Similar codes exist in Britain and Australia, where the grocery sector is highly concentrated.
At a practical level, it is unclear which federal agency would be responsible for such a code, although it should be noted that the Competition Bureau issued abuse of dominance guidelines for the grocery sector in 2002. (Those were repealed (along with other sector-specific guidelines) when the current guidelines were issued in 2012.)
Suppliers considering a supply program that would impose minimum advertising pricing requirements should exercise caution and carefully evaluate their market position prior to implementing one.
Suppliers that do not have a dominant position will generally be able to impose such programs, as it is unlikely that doing so will give rise to an adverse effect on competition.
However, the analysis is highly fact-specific and should be undertaken with care. In addition, suppliers should only act unilaterally in imposing these programs. Acting in concert with other suppliers or at the behest of certain retailers could result in a breach of the criminal prohibition on price-fixing, which can result in a fine of up to $25 million and up to 14 years in jail.
1Regulations Amending the Health of Animals Regulations, SOR/2014-23, Canada Gazette Part II, Vol. 148, No. 5
2Competition Act, s. 76.
3The Abuse of Dominance Provisions – Enforcement Guidelines (2012), section 2.3.1.
4Marina Strauss, “Canadian grocery suppliers strike back against heavy discounting,” The Globe and Mail, March 6, 2014 and “Grocers call for code of conduct between retailers, suppliers”, The Globe and Mail, March 7, 2014.
5Marina Strauss, “Grocers call for code of conduct between retailers, suppliers”, The Globe and Mail, March 7, 2014.
6Competition Act, s. 45.