Why A Canadian Grocery Code of Conduct is Overdue, and What It Needs to Include

The Canadian Context

For years, many of Canada’s independent grocers, food processors and suppliers have been calling for a grocery sector code of conduct like those adopted in Australia and the United Kingdom (the “UK”). But those calls have largely gone unanswered, until recently.

In the midst of the 2018 bread price fixing scandal, interest in an industry specific code of conduct rose, but Ottawa was not interested in federal regulation at the time. The price fixing issue specific to that scandal was already covered by the Competition Act (R.S.C., 1985, c. C-34) and other producer and supplier issues such as arbitrary fee hikes, good faith and fair dealing enforcement, and disproportionate bargaining power in the grocery industry were not yet considered in need of their own regulation.

Now with the extreme strain on Canada’s system created by the COVID-19 pandemic and resulting government restrictions on grocery producers and suppliers alike, a grocery code of conduct holistically regulating the relationship between producers and suppliers may finally be on the horizon.

The issue came to the forefront late this summer when Loblaws, Walmart and Metro all announced similar, some would say arbitrary, fee hikes on suppliers to offset costs being taken on by each of these major retailers to improve their in-store and digital operations.

However, these fees by retailers are effectively an attempt to offset their rising costs onto their suppliers. Moreover, these hefty fee hikes come at a time when suppliers are facing their own rising production costs and reduced capacity due to new safety protocols related to the pandemic. And with both retailers and suppliers facing modest profit margins in normal years, this passing off of costs from Canada’s major retailers onto suppliers in particular could put many Canadian suppliers out of business.

Interestingly, there was one industry leading retailer that did not follow suit. Michael Medline, as the chief executive officer of Sobey's parent company, Empire, called the fees being imposed by his industry counterparts “repugnant,” adding he is now in favour of regulation of the industry provided that any code imposes fair-dealing rules on both retailers and vendors alike. The fee hikes we saw from his industry counterparts would likely not be allowed under such regulation.

Looking to the UK’s Code

If the federal government does decide to embark on creating a Canadian Grocery Code of Conduct, such a code would likely benefit from reference to the UK’s Grocery Supply Code of Practice (the “GSCOP” or the “Code”) which was first put into development back in 2003 and has been improved over the nearly two decades since.

Canada’s grocery industry mirrors the UK’s in that, like the UK, Canada has a few main stakeholders that dominate the industry, with independent grocers sharing the remainder of the market. If anything, Canada has even more need of legislation compared to the UK as it has fewer industry leaders sharing the lion’s share of the market. The UK has about 13 industry leading chains that the GSCOP regulates. In contrast, the Canadian retail market is incredibly concentrated with just five retailers controlling 80% of the market share.

The intent of the GSCOP is to protect suppliers from some of the most punitive demands of the largest supermarket chains, but suppliers can also be in breach of the GSCOP’s fair dealing requirements. On the retailer side, the legislation is mandatory but only applies to “Designated Retailers”. To be eligible to be classed as a Designated Retailer, a company’s turnover in sales of groceries in the UK must exceed £1 billion. On the supplier side, the legislation applies to any suppliers of groceries for resale by a Designated Retailer.

The GSCOP originally had a limited impact on industry practices, as it was not mandatory and lacked enforcement authority. However, with the appointment of an independent adjudicator who has the power to investigate, arbitrate and fine retailers that contravene the Code, the GSCOP started to influence the industry in the way it was intended.

The office of the Grocery Code Adjudicator (the “GCA”) is the GSCOP’s enforcement authority. The GCA’s statutory functions are to: investigate confidential complaints from any source about how supermarkets treat their suppliers; make recommendations to retailers if a complaint is upheld; require retailers to publish details of a breach of the code; and, in the most serious cases, impose a fine on the retailer and/or arbitrate disputes between retailers and suppliers. In theory, the GCA has the power to fine retailers up to 1% of their annual turnover, not just their grocery turnover. However, in practice we have yet to see any retailers being fined for anything approaching the maximum amount even in the face of numerous reports of breaching the Code.

The Adjudicator is wholly funded by a levy on the retailers (which was £2 million for 2016/17). The performance of the GCA, and the scope of her remit, were the subject of a statutory review in 2016. The results released in 2017 resoundingly endorsed the Adjudicator’s performance and the effectiveness of the GCA as a regulatory approach to improving supply chain relations.[1]

Any Canadian grocery code of conduct should be taking advantage of the lessons learned by the UK in its 17 year development of the GSCOP. Specifically, the UK started with a voluntary Code but realized it needed teeth to have any remedial impact. It made the Code mandatory in 2008. It also started with a Code that did not have a designated enforcement authority, but realized that mandatory rules could not effect change without anyone to enforce them. In 2013, it created the office of the GCA to monitor the industry and enforce compliance.

What Canada Needs

Unlike the failed push for regulation in the wake of the 2018 bread price fixing scandal, regulation in the wake of the industry turmoil created by COVID-19 seems overdue.

On the supplier side, food and beverage associations, and dairy processor associations across the country as well as Food and Consumer Products Canada (FCPC) and the Canadian Federation of Independent Grocers (CFIC) have all been outspoken in their support for the development of a code. Retailers have traditionally preferred to maintain their control in the industry but Michael Medline’s recent support of regulation, is a telling sign that even those who benefit most from an unregulated system see the need for change. It looks like the government is finally noticing. When federal, provincial and territorial agriculture ministers met in late November this year, the recent fee hikes imposed by Canada’s main grocery suppliers was on their agenda. As the epidemic continues and the importance of stability in the Canadian grocery supply chain has became a household issue, we may begin to see small moves in the regulation of the industry.

However, if federal regulation does come to the Canadian grocery industry, we believe it needs to go further then the GSCOP has done. The UK has come far in its revision of the Code. Making the legislation mandatory and creating an enforcement authority were necessary revisions, but the GSCOP is still fundamentally a remedial regime. The Adjudicator punishes bad behaviour after it has already harmed industry stakeholders and, by extension, consumers. What it needs to do is aim to prevent that bad behaviour from occurring in the first place.

The need for a Canadian grocery code of conduct is due, in part, to the Competition Bureau’s failure to respect its own mandate. Under the preamble to the Competition Act, the Competition Bureau is responsible for (1) maintaining and encouraging competition in Canada, (2) expanding opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, (3) ensuring that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy, and (4) providing consumers with competitive prices and product choices.

The Competition Bureau has focused too heavily on impact on consumers to the detriment of all its other mandates. A Canadian grocery code of conduct that is based on the UK’s GSCOP and is remedial in nature, would only continue to serve that singular goal instead of focusing on all of the Bureau’s obligations, and especially its obligations to ensure small and medium sized enterprises have an equitable opportunity to participate in the Canadian economy rather then be driven out of it.

As Canada’s leading franchising, licensing and distribution law firm, our team of experts works closely with industry leaders including specifically in grocery retailing, distribution, and manufacturing. If you would like to discuss how our firm can help your business, please contact us.

John Sotos, Sotos LLP

John Sotos is the founding partner of Sotos LLP and a dean of the franchising, licensing and distribution bar. John has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.9806 or jsotos@sotosllp.com.

[1] Department for Business, Energy & Industrial Strategy (UK), Statutory Review of the Groceries Code Adjudicator 2013-2016, July 2017.