Retail consolidation stifles innovation in Canadian food production, report says

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Retail consolidation stifles innovation in Canadian food production, report says
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A customer browses an aisle at a grocery store In Toronto on Feb. 2, 2024. To compete worldwide, Canada’s agri-food sector should grow entrepreneurship, streamline regulatory processes and get more strategic about exports, a report says.Cole Burston/The Canadian Press

Consolidation of the grocery sector stifles food manufacturing, which will hurt Canadian consumers if a trade war erupts with the United States, say the authors of a new report.

Three retailers hold 65 per cent of Canada’s grocery market share, said the report commissioned by MNP and prepared by the Agri-Food Analytics Lab at Dalhousie University.

This consolidation means farmers and others in food production have less ability to negotiate prices and have limited capacity to test new products, the report said. This, in turn, makes it hard to scale up from production to manufacturing products ready for grocery-store shelves. Canadian producers currently are largely focused on exporting raw commodities that are not ready for retail.

A shortage of manufacturing will be felt in the event of a trade war with the U.S., said Janet Music, a PhD student at the Dalhousie lab who worked on the report.

“We need to have a national conversation about food manufacturing in Canada,” Ms. Music said. “It is a real weakness.”

The Global Agri-Food report, published Monday, ranked Canada against other G20 countries. It focused on five areas: support for research and development, food security, retail and fiscal regimes, trade and environmental sustainability.

Data were collected from several organizations – including the World Bank, the Organization for Economic Co-operation and Development, and the Economist Intelligence Unit – and assessed by international experts in food economics, business and policy.

When all factors were considered, Canada ranked 11th on the list, behind developed countries such as the U.S. and several European states, as well as Russia, India and Brazil.

To compete worldwide, Canada’s agri-food sector should grow entrepreneurship, streamline regulatory processes and get more strategic about exports, the report said.

The country scored highly in some areas, in particular food security and exports, where it ranked third and fifth, respectively. Canada had an agricultural trade surplus of $13.3-billion in 2024.

But it scored lower on the issues of strategic planning and retail competition.

Major retail players “dominate the Canadian market,” the report said, leaving producers with reduced autonomy and lower returns on investment and making it difficult to scale operations or invest in modernization and innovation.

“The control is heavily balanced towards the retailer in Canada,” said Matt MacDonald, leader of the food and beverage processing practice at MNP, a national professional-services firm headquartered in Calgary.

In comparison, in the U.S., the top three major retailers control 33.4 per cent of the market, the report said. This means producers have more negotiating power over prices, Mr. MacDonald said. It also means they can trial new products at a small-scale retailer and, after they’ve analyzed sales, leverage this to reach shelves in bigger stores.

Consolidation also gives large-scale retailers significant power over supply. In the case of a shortage, large retailers can demand priority over smaller stores in their deliveries, which disadvantages independent retailers.

Large-scale retailers commonly deduct payments to suppliers based on damaged deliveries or when deliveries do not meet the quantities specified.

The Grocery Code of Conduct, which all major retailers signed in July, promises to make changes to Canada’s grocery retail landscape by helping to resolve disputes about those deductions, cost increases, lack of clarity on contracts and late payments. It also sets up guardrails on the fair allocation of product supply to independents, and it aims to create a reliable order forecasting system.

“Transparency and accountability in a lot of ways are the bedrock of a thriving economy,” said Mr. MacDonald, who is optimistic about the framework, set to take effect on June 1.

However, the code has also been criticized for being industry-led and self-regulated, reflecting a misplaced trust that the sector would police itself.

Canada needs to go beyond a code of conduct, said Sylvain Charlebois, director of the Dalhousie Agri-Food Analytics Lab.

He said the conversation about innovation and food production needs to shift from blaming retailers to talking about government policy that, more often than not, stifles businesses that try to scale up to processing and manufacturing.

In particular, Prof. Charlebois blamed Canada’s burdensome regulatory environment.

In Canada’s food sector, all three levels of government often duplicate demands and don’t work together to streamline processes, he said. This results in issues such as interprovincial trade barriers. For example, B.C. wine makers do not have direct access to Ontario consumers. Limited market access means less incentive for scale, but it also means producers ignore the needs of domestic consumers and instead focus on exports, especially to the U.S.

“It’s easier to trade with the U.S. than it is with Canada,” he said. “The vulnerability that we have built for ourselves is a product of a dysfunctional confederation.”

These shortcomings will be acute given the new U.S. administration. A trade war is bad news for a commodity-based export economy, but Canada’s regulatory environment will also look unappetizing to investors when compared with the red-tape-slashing administration south of the border.

“Government needs to empower the sector and get out of the way,” Prof. Charlebois said. “But that’s not the Canadian way.”

However, necessity is the mother of innovation, said Ms. Music, who is hopeful that the threat of a trade war might be a “painful incentive for change.”

Editor’s note: A previous version of this article incorrectly ranked Canada as 13th against other G20 countries on the Global Agri-Food report. Canada ranked 11th. This version has been updated.

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