INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 10, 2000

• 0902

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'd like to call the meeting to order. Pursuant to Standing Order 108(2), consideration of anti-competitive pricing practices and the Competition Act.

As the committee members will know, this is a continuation from a motion the committee passed last spring. We had asked the Competition Bureau to do a study. They did the study. We've met with the commissioner, we've met with Professor VanDuzer, and now we're meeting with Dan McTeague because the original motion was a result of discussions we had about private members' business that Dan McTeague had brought to the committee.

I just want to make the committee aware that we invited Mr. McTeague to appear last fall. Mr. McTeague is now a member of the committee; however, today he's appearing as a witness. I just wanted to clarify that for the record. We're not going to let him ask himself questions.

Mr. McTeague, whenever you're ready.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Madam Chair and colleagues.

I'm pleased to be here this morning to talk about an issue that is near and dear to our hearts. That is of course the efficacy and the ability of our Competition Act to respond to the ever-changing landscape in the world of business, its impact on consumers, its impact on efficiencies, the interrelationship between large and small corporations, and the ability for us to respond to ensure that, above all, we maintain the purpose and interpretation of the Competition Act.

Without going into specifics, I will mention that the most important aspect is to maintain and encourage competition in order to promote the efficiency and adaptability of the Canadian economy and in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada. I find it is very important to ensure that small- and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and to provide consumers with competitive prices and product choices.

Notwithstanding that the bureau is presiding over an act that has been in place since 1986, I believe it has done a commendable job of enforcing a very well worded document, which is in many respects practically impossible to enforce.

There are companies operating today that have considerable market dominance and control in a variety of industries. These companies are able to abuse their dominant position in the marketplace with virtual immunity from the Competition Act as it is presently constituted. The Competition Bureau investigations, given the tools the bureau had to work with, predictably find no evidence of wrongdoing. I believe we saw some evidence of that earlier this week with the issue of gasoline.

• 0905

These anti-competitive activities, whether abuse of dominant position or predatory pricing, have a considerable impact on the Canadian economy. They also hurt consumers, independent retailers, and suppliers and have a severe impact on the level of true competition in the marketplace.

As you will know, Madam Chair and colleagues, part of my concern—in fact, the bulwark of my concern—dealt with the role of truly independent retailers and independent competitors and suppliers more generally and how that affects the consumer. The market that loses independents and retailers who are quite often forced out of business results in elimination of true competition. With that comes less product choice, and all of this leads ultimately to higher prices, perhaps not immediately but certainly in the longer term.

You will recall that Bill C-235, which is still before the House, sought to accomplish a certain basis on which a wholesaler would have the responsibility under the changes to ensure that they were providing a product at the retail level that is compatible with the price at which they were selling it wholesale. That is certainly an issue with the amendments that were proposed. This very crude definition of predatory pricing would have in effect allowed any small retailer competing against their wholesaler at retail an opportunity to buy product at its minimum for the same price as the wholesaler was selling to the more general market. As we all know, selling retail is always more costly than selling wholesale.

I wanted to let you know that in the midst of all this, in the several months since that deliberation on Bill C-235 and the more general question of competition, we have tried to improve, certainly on the civil side. One of the criticisms that came with predatory pricing dealt with the criminal side of investigations and whether the criminal side has sanctions. Therefore we thought we would move more to the civil side.

Before I go on, I should point out that I will be sharing my time with my colleague Michael Kelen, who needs no introduction. Many of you will know that Michael worked with me on Bill C-235. He has been retained as my friend and my counsel in some of this. He will have his own comments to make, and from time to time we may switch back and forth with the binder.

Does everybody have a copy of this binder, Madam Chair?

The Chair: It was sent to each member's office, yes.

[Translation]

Mr. Dan McTeague: I'm very sorry that I was not able to have all these documents translated, but there were many things to do and I only received some of the documents at the last moment.

[English]

Madam Chair, I'd like to introduce Bill C-402, which was introduced into the House of Commons on December 13, 1999. It essentially deals with section 78 of the Competition Act and now provides a definition of activities that would be seen as abuse of dominant practices. Namely, those would be requiring a supplier to pay a fee to a retailer as a condition for selling a product; squeezing by vertically integrated retailers the margin available to a non-integrated person competing with the retailer—you'll notice that is a very similar change to what we are trying to accomplish in Bill C-235—and unilaterally withholding amounts owing to a supplier for some purported reason without prior agreement of the supplier.

It's clear that the reason we have done this is to deal with what I believe are two areas of competition or two industries, both gasoline and groceries, which are really the subject of focus for Bill C-235, but more importantly for Bill C-402.

I refer in tab (a) of this briefing book, Madam Chair, to my letter to you dated November 4. This letter reviews the fact that similar inquiries have taken place in governments in the U.S., the U.K., and Australia on matters relating to anti-competitive activity by retailers in the marketplace, including special hearings in the U.S. with respect to the issue of slotting fees.

I introduce that as an issue because some of the concerns that were raised in Bill C-235 were about the grocery industry. We may very well have been ahead of the Americans in terms of looking at the overall concern the Americans have brought to the fact that five dominant chains in the U.S. constitute only 30% of the marketplace. Contrast that with Canada, where two to three players may constitute as much as 80% of the retail market. The reason that is so important is, as you will see, in the confidential survey's aggregated results that I am about to introduce, which Mr. Kelen and I undertook over the past six months.

• 0910

I want to focus on the grocery industry for now, for the simple reason that we are seeing the emergence of a veritable dominant player that doesn't just constitute, in my view, an oligopoly, but something far more serious. I won't get into technical terms, but oligopsony is the power for them to impose a very strict discipline in the marketplace by using the retail magnitude in groceries to exact from manufacturers certain fees that would not otherwise be possible if they didn't have their size and their scale of strength.

Michael, has that been distributed, the survey I'm referring to?

[Translation]

Madam Chair, the document on the results of this inquiry was translated into French. This is the result of a confidential study done by my colleague counsellor Kelen and myself. With your permission, I will state for you the conclusions we drew from this investigation.

[English]

I believe everyone has a copy of it.

On August 25 we sent a letter to a number of manufacturers, promising immunity and that their names would not be revealed. I should tell you that while many responded to the survey, many did not, out of fear of reprisals.

The aggregated results are with respect to the following subject matters: listing fees, off-invoice discounts, and of course customer fines. I should point out to all of you here that these are better known as trade allowances in the industry. While there are several, we confine ourselves to the three.

If I'm to look at what's happened in the United States, concerns have been raised in the U.S. Senate by Kit Bond, who is the U.S. Senate subcommittee chair. That is in tabs (b), (f), and (q) of your binder. I'd like to read the first quote, because it's very succinct as to the conclusion of their investigation. Senator Kit Bond, on September 14, 1999, said the practice of slotting fees in the grocery manufacturing and retailing industries has become “a brutal game of high-stakes poker for small manufacturers that threatens competition, jobs and likely drives up the cost of putting food on the table for millions of American families.” I have already mentioned he is chairman of the U.S. Senate subcommittee on small business.

Listing fees constitute the first area of investigation. Listing fees per stock keeping unit—that is, SKU—have increased over the past two years by over 100%, from approximately $50,000 per SKU to $130,000 per SKU for the major supermarket chains. That is for a category B product, and it's more for a category A product. I'll define those a little later.

The listing fee differs per category. The listing fee is paid per stock keeping unit, which means if a particular product is sold in three flavours and in three sizes, there are nine SKUs. The companies surveyed annually paid listing fees varying from $700,000 to $3.9 million. I should point out that is on an annual basis. It is impossible to provide an average listing fee for stock keeping units, because there is such a range in listing fees paid per category of product.

The response in all cases was that the listing fees have grown exponentially in the past few years, and they are expected to increase again by 30% in the year 2000. I should point out these surveys were prior to the approved merger of Loblaws and Provigo, and certainly prior to the proposed merger, which has not yet been approved, between the Oshawa Group and Sobey's.

• 0915

Listing fees are used to exploit the dominance of the major retailers in their market. The listing fees do not relate to the actual costs of listing a new product or to the failure of a new product, if indeed it does fail.

I have pointed out the American example, but it's important to point out that the Grocery Manufacturers of America, along with Deloitte Touche, calculated the major cost components for introducing a product and deleting a product for the retailer. The retail cost per SKU per store was $13.51 for introducing a product and $10.77 for deleting a product. Although these numbers relate to 1988 in the Unites States, they show an order of magnitude such that it's clear the Canadian listing fees being charged in 1999 are, to say the least, exorbitant.

In the second area of inquiry, we had a volume of response. The major retailers are unilaterally deducting amounts off invoices that the manufacturers surveyed claim are unjust, unexplained, unsubstantiated, and arbitrary. The practice has become widespread among major retailers.

A recent example is reports that the major grocery retailers, following a merger, are reviewing each other's records and unilaterally deducting amounts off invoices to compensate grocers for discounts that their competitors received in the past but that they did not receive. These reports are about future off-invoice discounts that are expected.

For the past year, the companies surveyed reported off-invoice discounts totalling $1 million and $2 million annually per company. It's obvious that these amounts have increased substantially over the past few years. All the companies we surveyed expressed great frustration that these off-invoice discounts are arbitrary and are made without first allowing the manufacturer to consider the validity of the claim for the off-invoice discount. At the moment one manufacturer has over 200 open claims. Of the claims that have been investigated, one company reported 60% were invalid or without any foundation whatsoever.

I should give you an itemization of the various excuses for these off-invoice discounts. While they're endless, I just want to give you a couple. A retailer may suggest costs to realign shelf space for the manufacturer's product, continuation of promotional pricing, an opportunity to match redemption of coupons that were offered by a competitor of the manufacturer, discounts for lost sales due to anticipated short shipments, and an opportunity to match prices at some of these club stores we have referred to in the past.

These off-invoice discounts, one of the various forms of trade allowances in the industry, were virtually unheard of five years ago.

As a result of this, the major grocers are abusing their dominant position in the marketplace, because there is not adequate competition. This allows them to unilaterally take off-invoice discounts from suppliers. If a supplier resists, if a supplier suggests they're not interested or they simply don't like it, then the supplier is told it does not have to continue selling to that particular retailer. Of course the supplier has no choice, given that the retailer controls 30% to 40% of the marketplace. With proper competition, that supplier would not have such a high part of the market that it could abuse its dominant position.

Clearly—and I think this is the most important part for all of us as members—the effect on the consumer is higher grocery prices to compensate for these off-invoice discounts; certain suppliers cannot continue to supply the grocery retailers, which results in reduced choice of product at the supermarket; and independent supermarkets have to indirectly pay higher prices for the same product, which in turn makes them uncompetitive and threatens their future as independent competition.

The final point deals with customer fines. Beginning really only over the past three years, the major retailers have been fining the suppliers. This has become a very aggressive practice. In some of the companies surveyed, the customer fines represented 10%—I stress, 10%—of the total invoice. There is no prior agreement between the supplier and the retailer that the retailer can fine the supplier.

The fines have substantially increased over the past two years. The annual fines reported by the companies surveyed varied between $50,000 and $500,000. The average individual fine was about $300 to $400.

I can continue with that, but given that there are so many others and there's more to tell you, we want to, in the interest of time, continue with why we had to conduct this and why the bureau could not do this, or would not do this.

Grocery manufacturers and suppliers expressed profound fear of retaliation by retailers such as Loblaws and Sobey's if they participated in this survey. It's clear that there could have been some problems. While every guarantee of confidentiality was provided, these companies demonstrated great fear of being delisted by the major supermarket chains, and other forms of retaliation. With delisting, they would lose access a very high percentage of their customer base.

• 0920

It's my belief that this fear of retaliation is demonstrable evidence that the major supermarket chains have inordinate market power. The fact that a food manufacturer would be afraid of speaking out shows that his market power is much less than that of the supermarket chains. This illustrates that the market power of one or two supermarket chains has grown to the point where a particular manufacturer could not find an adequate market amongst remaining supermarket chains, therefore that manufacturer fears retaliation if that manufacturer is associated with the survey.

It's my experience, through the survey, that there is clearly not adequate competition or enough competitors in the supermarket business. Obviously, and perhaps more importantly, it is evidence that the bureau ought to use its powers under the Competition Act to investigate some of the anti-competitive pricing practices in certain industries, including the grocery industry. The fact that companies are not prepared to come forward and testify—because, of course, the excuse is that the bureau may not be able to provide them with that kind of protection—is alarming.

The bureau has the power to subpoena records from major grocers about particular matters such as listing fees and off-invoice discounts. It ought to use those. It should also conduct an independent investigation without exposing individual manufacturers to retaliation, but also urge them to conduct an audit of records to determine if major supermarket chains are charging exorbitant listing fees as an anti-competitive practice as a result of their dominant position.

The bottom line, however, is that for consumers, such practices constitute very clearly a reduction in choice, a reduction in competitors' ability to innovate, and ultimately, as a result of the control of the market shelves, a dominant position relative to the ability to control the bottom line for consumers. It's obvious that if you are at that kind of competitive disadvantage, no matter how efficient you are, you will very shortly be out of business.

I think we've seen the same thing in the gasoline industry, although from the perspective of those who control. Canada is typically characterized by a number of major gasoline companies, none of whom are strictly retailers but who are virtually integrated—that is, from wellhead to the pump—and control the product through and through.

At this point, I'll allow Michael Kelen to discuss his views as a representative from the Canadian Consumers' Association and its opposition to the grocery mergers.

Michael.

The Chair: Thank you very much, Mr. McTeague.

Mr. Kelen.

Mr. Michael A. Kelen (Individual Presentation): Thank you, Madam Chair, honourable members, ladies and gentlemen.

I'm honoured and pleased to be here to assist Dan McTeague with respect to legal matters regarding the Competition Act. As he mentioned, I did act for the Consumers' Association of Canada over the course of 1999 in opposing the proposed mergers among four of the five major grocery retailers. That opposition is set out in the last tab of the green book that Mr. McTeague has presented.

The Consumers' Association of Canada opposed the mergers of the major grocery retailers because they fear that the grocers will dominate the selling of groceries, and that will lead to higher grocery prices for the consumer and a lower choice of product for the consumer, and will also be used to drive out smaller independent grocers, which has happened already.

So the problems Mr. McTeague is speaking about, which are the subject of this committee hearing, which is to examine anti-competitive pricing practices within the Competition Act, are sensed by the Consumers' Association in groceries, and as Dan McTeague has mentioned, they've already been experienced in gasoline and in other sectors where large companies come to dominate.

• 0925

To illustrate the problem in a rather light way, to add a little levity to a subject that is actually quite difficult for people to understand and also quite heavy, in this green House of Commons briefing book under tab (j), there is an article from the New York Times entitled “Clinton's consumer rip-off”, dateline October 11, 1999, Jacksonville, Florida, written by William Safire, who is a well-known American columnist and I think he's well known to be a Republican. Even with this bias, it's interesting to see his take on what he calls “merger maniacs”.

He says in that article:

“You want to buy this new cable service that's much faster than your old modem,” my son the information architect told me. Not wanting to become the slowpoke pundit, I called my local cable company and ordered ExpressNet. A new black box cost $150 and the monthly fee was $25. Two weeks later, a disembodied voice called to say that the superspeed Internet connecting service had merged with a Texas conglomerate, and if I didn't agree to the doubling of the monthly rate, my service would end and I would be stuck with a useless $150 receiver.

He goes on to discuss his outrage. He says in the last paragraph of the first column:

Worldcom, which last year bought MCI, was now swallowing up Sprint for $115 billion. This, analysts assure us, will allow the new supergiant to compete with AT&T, which already is plunking down $58 billion for Mediaone with the smiling approval of roundheeled Clintonites at the Federal Communications Commission. Why are we going from four giants in telecommunications down to two?

The bottom line of the article is that he questions whether merger maniacs are really helping competition. In fact, he's finding that these mergers are allowing fewer companies to dominate the market, and there is not more competition, but there is less competition, and in fact prices to the consumer are going up. This is an example of an anti-competitive pricing activity.

You have one Internet server being bought by another, and the monthly service charge doubles from $25 to $50. Why is that? Of course it's to pay for the merger. But it also means there is not the same competition that there was. So we're not suggesting that mergers can be stopped, but what we're suggesting—and this is what Dan McTeague's Bill C-402 is addressed at—is when companies become dominant in the market, how do we ensure they don't abuse their dominant position?

That isn't a novel thought, because of course it's already in the act under sections 78 and 79. Those are the sections dealing with abuse of dominant position. Parliament has already enacted laws against abusing dominant position, in 1996, but while the Competition Bureau has done a noble job, these sections of the act, it is respectfully submitted by Dan McTeague, need strengthening, and that's what Bill C-402 proposes to do. As well, the Competition Bureau needs more resources to enforce the civil sections dealing with abuse.

This committee passed a motion in April 1999 to conduct this inquiry to consider anti-competitive pricing practices within the Competition Act. That's the subject of this inquiry. It's an extremely important inquiry and this committee has an extremely important job, because it's competition that keeps the marketplace free. If the free marketplace is going to work properly, you have to have competition. To have competition, you have to have laws to protect competition.

• 0930

When Dan McTeague's bill, Bill C-235, was considered by this committee to try to strengthen the law against predatory pricing, it was an attempt to stop something. But under that part of the act, section 50, which covers predatory pricing, it's a criminal provision, and it's very hard to enforce. It's very hard to prove beyond a reasonable doubt that a company has intentionally tried to drive a competitor out of business with predatory pricing.

Since that appearance in April I was invited by the Canadian Bar Association to attend and be a member of a panel at its annual competition law conference, which was held in Ottawa on September 30 and October 1. I was specifically on a panel to deal with the criminal pricing practices in the Competition Act. There are six of them. I won't go through them unless you would like me to. What was clear from that panel and from that discussion at the conference was that there was a clear consensus that the criminal pricing sections of the Competition Act are virtually unenforceable.

So while this committee is looking at anti-competitive pricing practices within the Competition Act, I would submit that many of them, six of them in fact, that are provided for between sections 45 and 60 of the act are criminal provisions and they're virtually unenforceable. If you count the number of prosecutions and convictions under each section, in almost all cases it's between zero and five in the history of the act.

So the consensus of that Canadian Bar Association competition law conference panel that discussed this issue was that these sections should be moved over to the civil side of the act. That's where we come to sections 78 and 79 of the act. These are civil provisions of the act. What it allows the competition commissioner to do is to take a look at an anti-competitive activity and say “If this is an anti-competitive activity that's being caused by the abuse of dominant companies in an industry, we can refer it over to the Competition Tribunal, which will conduct a hearing into it and then make an order, perhaps ordering them to stop it”.

The first item in Mr. McTeague's new bill, Bill C-402, is about shelving fees or listing fees. If the public knew that in order to get onto a supermarket shelf a company would have to pay a fee, just for the privilege of being carried in that supermarket chain, of $100,000, not per product, but per SKU.... So if you have a product that has ten sizes or ten flavours, you may have to pay a million dollars as a one-time charge to just get on the shelf. And that isn't related to the cost of changing the computer or the cost of the men putting the product on the shelf. It's just basically the supermarket chain knows that it controls the access to the consumer. It controls the market, and it can demand that payment.

Now, you might say that the big companies can afford it. Well, it's surprising, many of these big companies are not selling half the products they sell in the United States in Canada because they can't afford those fees.

But what's important for the consumer and the Consumers' Association is that those shelving fees get translated into higher costs for the products. So that package of peanut butter or whatever goes up in price. Plus, if you have a smaller company that's making peanut butter, it can never afford to get onto the supermarket shelf, because it can't afford to pay $100,000. All of these costs end up hurting the independent competitor, who eventually gets driven out of business, so the big player gets bigger.

On the idea of examining anti-competitive pricing practices within the Competition Act, it is respectfully submitted that this committee might wish to take up the idea that came out of the Canadian Bar Association conference on this issue, and that is to put more emphasis on the civil side of the Competition Act, strengthen that part of the act, and find out from the Competition Bureau if they need more people to enforce it. That's what I think is....

• 0935

Mr. Dan McTeague: Madam Chair, on that point, I think this is where both of us want to have a merging of the ideas. Professor VanDuzer and Gilles Paquet came before this committee some time ago to talk about the notion of taking most of the pricing provisions that are currently existing under the criminal provisions and turning them over to the civil.

I want the committee to understand something, and I really emphasize the point, because it's not just my point, it's obviously that of one of the gurus of the Competition Act, Robert Nozick. He makes the point that civil provisions as we understand them, or as lawyers or reasonable people on the street might understand them, are not in fact part of the Competition Act. There is no such thing as a civil remedy that's civilly reviewable.

These kinds of activities, which might hurt an individual company, are nevertheless not proscribed or prohibited under the law. In order to get an order, which takes a long time to get, assuming the Competition Bureau is able to convince the tribunal that there is a problem under civil procedure, the order is then only made against the individual who is practising the particular offensive anti-competitive act—and it falls under matters reviewable—against the individual who has had to prove, literally by their bankruptcy or by having been eliminated, that the order by the tribunal, with the help of the bureau, only applies to that particular situation. There is no general application in law, there is no injunctive effect, and it carries with it no opprobrium.

As I've said before, and as Nozick says in the 1999 annotated notes—and I believe it's also in the 2000 ones—this reviewable practice, which we seem to be heading towards, is almost always competitively harmful, such as abuse of dominant position, and the advantage of the civil burden of proof does not outweigh the disadvantage of non-prohibition.

It is important for us to know that if we are talking about civil, then we are really talking about civilly reviewable. This committee has an obligation to understand that distinction. You can't just throw these things in the air and say we're going to have a civil as opposed to a criminal, or we can't prove criminal so we're going to go with civil because it sounds a lot better.

More importantly, we are living in a continental economy. Our American partners to the south have, virtually since the turn of the century, had an opportunity where, if a person could not get, as a result of the shortcomings of resources or for whatever reason, by their competition bureau, they would have the opportunity of taking their case to a local court of competent jurisdiction. So I support a private right of action, which among other things would allow a person to take the matter before any court that is capable of dealing with commercial law. The Americans do it. Why can't Canadians?

The Chair: Mr. McTeague, I'm going to have to ask you and Mr. Kelen to wrap up so that we can move to questions.

Mr. Dan McTeague: I understand, Madam Chair.

What I will say, then, is that I will allow him a few more seconds on this, because I believe it's important for us to—

The Chair: Thank you.

Mr. Kelen, could you wrap up, please?

Mr. Michael Kelen: I think the wrap-up of the submission by Mr. McTeague is that the industry committee ought to report, as a result of this inquiry, that there are a number of anti-competitive pricing practices that ought to be investigated by the Competition Bureau. Secondly, the civil provision of the Competition Act ought to be strengthened. And thirdly, the Competition Bureau ought to be given more resources to enforce the Competition Act.

One of the first things the Competition Bureau could do is take this aggregated survey that Mr. McTeague conducted and use it as a basis to conduct an inquiry under its powers under the Competition Act in order to look at the three anti-competitive pricing practices that were identified and quantified in the survey.

Mr. Dan McTeague: Thank you, Madam Chair.

Mr. Michael Kelen: Thank you.

The Chair: Thank you.

We're now going to turn to questions.

[Translation]

Mr. Brien.

Mr. Pierre Brien (Témiscamingue, BQ): First let me congratulate Mr. McTeague for the very exhaustive work he has done and all the energy he has spent in carrying out this study. We all know how demanding an MP's job can be, and this is why I think that he deserves recognition for the fact that he was able to do all this work on top of that. Even if we do not entirely agree on every point, we must appreciate his effort.

• 0940

I live in a region where there are many farm producers. These producers have difficulty in getting their products sold in supermarkets because they are being charged access fees that are far too high. This practice that you have described and which consists in paying a certain amount of money to have your products put on the shelves really does exist and it is an obstacle to the distribution of new products.

Consumers protest whenever the price of gasoline goes up. They say that it does not make sense and that gas prices should be regulated. We do not see this kind of pressure or dynamics in the food market. Consumers do not seem to find that food is too expensive. They do not react in the same way and they seem to be satisfied with the considerable choice that they have. How can you explain that?

Mr. Dan McTeague: This increase in prices does not seem to have affected all the food products in our grocery stores yet.

During the Thanksgiving holiday, as Madam Chair can confirm, the price of turkey increased by about 50 cents a kilo, while there was a decrease in the price paid to producers. When there is such a divergence in prices, producers and grocers must find some kind of balance. I do not think that consumers are concerned about these increases because grocers will not necessarily relay the increase right away to the consumers, they would rather take advantage of the situation by putting pressure on producers.

[English]

What I would stress on this point is that you will not see, among a hundred items, huge increases today, tonight, or overnight, automatically. If that were to happen, I'm sure the Competition Bureau would see it as a failed merger. What I believe you will see for now is a number of manufacturers who either can't keep their product on the shelf or, as Mr. Kelen has just suggested,

[Translation]

are unable to supply all the choice products such as the ones offered on the U.S. retail market.

Chains like Loblaws and Sobeys' have their own trademark and offer a wide range of products.

[English]

Unless we have a situation in which you've actually become a manufacturer under the generic label, those are areas in which manufacturers seem best equipped and we find very little resistance. Consumers do not necessarily see a higher price immediately. What we are seeing, however, is a number of manufacturers who cannot keep their products on the shelf, or cannot get their products on the shelf no matter how efficient or innovative they may be. That is probably one of the most damning conclusions from this kind of study, given the number of people who have responded.

I hope that answers part of your question.

Mr. Kelen.

Mr. Michael Kelen: Yes, I'd also like to respond to that, because you're quite right, the Consumers' Association of Canada has said Canada is enjoying some very good grocery prices at the moment. But the fear of these mergers is that in the future—for example, in the next five years—as the competition is lessened and you have two companies controlling the market, you're going to feel it in the wallet. The consumer is going to feel it in the wallet in the form of higher prices and also lower choice. Also, the dominant players are still in the business of driving out the independent retailers.

You think we have a lot of independent grocery retailers, but in fact many of them have been purchased by the majors. For example, there's a chain called Your Independent Grocer, which is owned by Loblaws. My sister said that explains why they have President's Choice at Your Independent Grocer.

• 0945

It's a situation that is in flux, but as we all know, when you have just two or three gasoline companies that dominate the market, you don't find it surprising that gasoline prices follow—almost by the second—from one station to another. You're going to find that in groceries as well. Prices are going to go up, and there will not be price competition because there will not be competition amongst the major grocers.

So your answer, sir, is correct. Grocery prices are not a problem at the moment, with some exceptions, which Mr. McTeague referred to. But it's easily a problem down the road, and that's why the Consumers' Association intervened on these mergers.

[Translation]

Mr. Pierre Brien: My next question is also a comment. You said that some persons might not have wished to answer this questionnaire if it had been proposed to them by someone else because they might have feared reprisals, but I do not understand how you succeeded in getting all that work done with so few resources, while the Competition Bureau is unable to identify potential future problems on the food market, for instance. Investigations may get complicated if there has been an offence and there might be enormous pressure on companies, but how come the Competition Bureau is unable to accomplish the work you were able to do with very few resources?

Mr. Dan McTeague: This is a very good question. I must emphasize the fact that the same problem occurred in the United States and that the lawyers representing manufacturers also had the same difficulties in raising these issues in the public domain.

[English]

There's an understanding that once you go to the Competition Bureau, we have a situation where the first one tells, that one may be given immunity, and the rest may not. The risk for anybody who is selling a product to such a large chain is that they may ultimately find out, by one way or another, that the information was leaked.

I suggest that those who did respond to this inquiry did so because, first, I have established a record in terms of fighting on the competition front. I think I've demonstrated that in terms of gasoline. Two years ago, margins were only 2¢ a litre, and now we're seeing them at 8¢ a litre at the retail levels as a result of the decline—this is my view, of course—in independents.

There is a feeling that if these people do nothing else, if they do not tell someone now, they will be out of business very shortly. Since we have in this process, as explained by Mr. Kelen, this big march in terms of merger mania, particularly in an industry that is so important like groceries, I think some have decided that they will take the risk. I have made a legal undertaking of not divulging their names. I believe there's also, perhaps, a lesser faith in the ability for the member's privilege to be respected. No one can pry the information out of me—at least I hope not.

Mr. Michael Kelen: Also, the Competition Bureau has said that if any manufacturer wants to complain, they can come and do so in private. But they won't act on it unless that company is prepared to go public, because there's no point in their bringing a case unless they can have a witness.

But what Mr. McTeague has done is to survey these CEOs of major companies, and he has received a fairly full response. I think this information has identified a widespread problem. The Competition Bureau has the power to investigate under the Competition Act. It could do so, and if it sent questionnaires to all food manufacturers, or even more simply, to all major grocery retailers and asked them questions about how much they are charging for shelving fees, what amounts they take for off invoice discounts, and how much they fined their customers last year....

If the Competition Bureau asks the questions of everybody, those companies will be compelled to answer and they will not fear retaliation by speaking out. They will know that everybody is in the same boat. The major grocery retailers cannot delist, cannot stop all companies from providing them with products or they'd have nothing to sell to the customer. I think that's what the Competition Bureau should do.

The Chair: Thank you, Mr. Brien.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

I want to ask a few basic questions first. I respect the fact that naming the major grocers, manufacturers, and suppliers is not in order. I respect that, but can you just give me a number of how many—a total—manufacturers and suppliers were part of this? Just the number, not the names...?

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Mr. Dan McTeague: Yes. There were 27 manufacturers.

Mr. Walt Lastewka: So it's a pretty good sample.

Mr. Dan McTeague: It's a very broad sample.

Mr. Walt Lastewka: I want to focus on groceries. I don't want to mix gasoline into it. I want to talk about small business and your main points of each of the cases.

Under listing fees, you say the cost of shelf space is going up and so forth. This forces a small business; it is unable to get its product on the shelf or to get a new product on the shelf because of the cost of introduction. Is that your main point on listing fees with regard to small business?

Mr. Dan McTeague: That's correct.

Mr. Walt Lastewka: On the off-invoice discounts, did you find this similar pattern with small business with any of the small suppliers?

Mr. Dan McTeague: Every supplier we spoke to, small and large, was subjected to off-invoice discounts.

Mr. Walt Lastewka: The same thing goes with customer fines...?

Mr. Dan McTeague: Yes.

Mr. Walt Lastewka: It didn't matter—large, small, medium...?

Mr. Dan McTeague: Large and small, both, on all three points, Mr. Lastewka.

Mr. Walt Lastewka: I appreciate the work you've done on this, because I too have been doing some work on the wine industry, on shelving and so forth. I know the LCBO is an agency of the Ontario government, but would you put the LCBO in the same position? What I understand is that they themselves set the price and they set the shelf space. They've been increasing shelf-space dollars and quota. In other words, if a small winery is not able to meet a certain quota, they're automatically dropped off the list, so they can never get larger if they don't get their product on the list. Would you say that the LCBO in Ontario falls into the same category?

Mr. Dan McTeague: Probably in a far more aggravated circumstance than the ones we were looking at, Mr. Lastewka. We had assumed that with only three or four players in the grocery industry who truly are representative of where people ultimately shop for groceries.... If there is only one outlet for a grocery product or for a food product such as wine, I think the potential for aggravation of the situation would be far greater, although we did not study any particular person in that field.

Mr. Walt Lastewka: Okay. Basically what's happening in the wine industry is that the two big players have now pushed out the small players. The small players are falling off the shelves as we speak. It's a dominant position. There's only the one retailer there.

Mr. Dan McTeague: Mr. Lastewka, about a month ago I received a call from a friend who had been in business for many years supplying one of the large manufacturers. They could not come up with what amounted to payola or renting of space. They could not go through the process of competing against a much larger supplier who was quite willing to pay the freight as a result of the fact that they knew full well that by paying this large amount they would get almost exclusionary rights, in effect, rights to exclude anybody from that shelf.

The amount that was demanded was three times the traditional amount. In other words, the person went from somewhere in the order of about $30,000 a year to $90,000 a year for one SKU. Their entire profit margin was less than half of that on that one product.

They had a choice. Either they paid up until such time as the goal line would be moved further and new creative ideas would be used, or they simply withdrew the product. As a result of that withdrawal, they no longer compete.

As well, I should point out to you, Mr. Lastewka, that we didn't just do groceries.

Madam Chair, you might remember that during the summer there was a concern about a company called Pendragon Prints, which provided cards to various large chains that provide greeting cards. Both Hallmark Cards and Carlton Cards have in some respects been able to acquire, according to the article, exclusionary rights, to the detriment of these small, efficient competitors, simply because they can't pay these large sums. It was a Canadian company, by the way.

Mr. Walt Lastewka: Is it your understanding that the Competition Act, the way it's written today, is not able to do work in these three areas?

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Mr. Dan McTeague: Under the abuse of dominance section, there is no specific prohibition for this kind of activity. That's why Bill C-402 has been crafted in such a way that it provides a very specific, and I think very timely, response to something that is occurring in the industry as a result of the fact that we have had some—and I do not want to debate this point—certain inevitable mergers in this industry.

We want to make sure we do not put that chilling effect on business in terms of what decisions they make to come together. However, once they do, and they constitute a fairly important chunk of a very significant industry, we want to make sure that efficient, innovative competitors are not blocked out simply by the demand of unreasonable and totally unrelated fees that have nothing to do with the actual stocking of the product.

Mr. Walt Lastewka: I'm not sure I got an answer, yes or no.

Mr. Dan McTeague: Well, currently, in terms of the act, it's not specifically there, and I think that's why we've tried to work with it. I should point out to you, Mr. Lastewka, we have tried to work with the bureau on that front as well.

Mr. Walt Lastewka: Okay. I appreciate that very much.

Thank you, Madam Chair.

The Chair: Thank you, Mr. Lastewka.

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Thank you, Madam Chair.

Dan, I'm just trying to figure out where you're going. Regarding the two largest grocery chains that you're talking about, I know a few years ago grocery chains operated with a profit margin of 2% or 3%. What are the profit margins now? Are you aware of what type of profit margins they're grossing?

Mr. Dan McTeague: That would be a fairly close estimate of the margins. There's always a distinction between return on—what some people like to use, we heard this also in the oil industry—investment, as opposed to the real determinant of return on equity.

It depends on how much they're putting in. Clearly Loblaws has a very large dominant position in the industry. They're somewhere closer to 4% or 5%, although those numbers can change. As an integrated company.... As Mr. Kelen pointed out a little earlier, when you go into Fortino's, Your Independent Grocer, Zehrs, or No Frills, you're in fact going into a Loblaws store, and the person who is running that store, with their name on top, is in fact managing as part of a franchise operation for that very large company.

The grocery business has to be also understood from the wholesale side. The wholesaling, of course, is a much larger game. Neilson Dairies and Weston breads, for instance, are owned by Loblaws. You can look in a number of areas there where there's domination or control over several very important products.

But to answer your question very specifically, the margins have not changed significantly. I would suspect that for those margins, in terms of selling product, the focus is not on the actual product but rather on who pays the freight to get the product to the shelf.

Mr. Jim Jones: Now, the reason I asked that question is when I look at the SKUs and I look at the gross profit of say 3% to 5%, how much...? The SKU revenue they're charging for stocking the shelf would go right to the bottom line. How much does that represent in your profit?

Mr. Dan McTeague: The SKU would not go to the bottom line of the company. The trade allowances that are demanded—slotting fees, off-invoice allowance, everyday low price, co-op advertising, over-and-above funds, warehouse allowances, auto subsidy, special programs, and charities and other sponsorships—are means by which they may promote a product using your money, or another means of increasing the size of their company.

I take into full consideration the effectiveness of a Loblaws, for instance, or Sobey's, to build these companies, to make them much larger, more customer friendly. Very few Loblaws stores that might have formerly gone under names of superstores or whatever.... If you went back 20 years ago and looked at the old Loblaws stores, a lot of them were in pretty rough shape. So over time they have developed a strategy of rebuilding these stores and becoming pretty much a principal player in the distribution and selling of groceries.

The question of how much money they make in terms of how much they make on every product does not take into account how much they're able to take from a manufacturer as a condition for that manufacturer to put the product on the shelf.

Mr. Jim Jones: That's not my understanding. What you're saying here is that if I'm charging you $1 million to stock my shelves with a certain product, I still, whatever that product is, have my costs associated with selling that product. So what does that $1 million have to do with the selling of the product? It's like blackmailing that money out of you to stock your product on my shelves.

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Mr. Dan McTeague: When it comes to promoting a product, for example the cooperative advertising allowance, you as a manufacturer pay that to the company. Quite often that advertising is more of a lump sum. It's an additional trade allowance that's supposed to be used to purchase advertising within the individual account's flyer. I believe that's what you're referring to. The funds generated—and that could be anywhere from 5% to 10%—are supposed to be pooled to purchase ads.

What we've seen, though—and I think the record will clearly prove this—is that as time passed, little or no performance has been generated from these funds, and the trade simply now accepts this as part of doing business and deducts without performance. So quite often the deduction is made, even though you don't get the advertising.

Mr. Jim Jones: Okay. Is the off-invoice discount more of a volume discount type of thing, or do they take it off every item you buy?

Mr. Michael Kelen: They have volume rebates or volume discounts, and they are something else. These are just off-invoice discounts, where the manufacturer submits his invoice, let's say for $100,000 for 100,000 packages of whatever, and the retailer says they are taking off $10,000 because they've had to realign their shelf space for your product, or they wanted to match redemption of coupons. This happens a lot.

They say your product is actually being promoted by one of their competitors who are giving coupons of, say, 10¢ off a package, so they had to match that. To match that—they don't want to lose the profit they anticipated from your product—they're taking that 10¢ per package off what they had agreed to pay you. And if you don't like it, you don't have to keep selling to them.

Mr. Jim Jones: Are you anticipating, based on having only two players in the marketplace, that within a few years the prices might increase and their bottom line might be 10% instead of 5%?

Mr. Michael Kelen: That's the concern of the Consumers' Association. In fact, you'll see in the green book an article about how grocery prices are expected to increase.

In England, where they've had a greater consolidation, grocery prices are almost double what they are in the United States. You'll see an article in the briefing book by an American who says that with the grocery mergers that are starting to happen in the United States, we're going to end up with the same problem they have in England, which is prices that are twice the price. So the Consumers' Association realizes Canada has excellent grocery prices right now, but it's the future they're concerned about.

Mr. Jim Jones: Do you see any emerging trends out there that could be competition for these two majors?

Mr. Michael Kelen: It's the contrary. You heard from the Canadian Federation of Independent Grocers in April that they opposed Bill C-235. They said, I believe under examination by this committee, that 65% of their members of independent grocers were actually franchisees of the major grocery chains. So I think the trend you mentioned, Mr. Jones, is that the major grocers are buying up the independents.

Mr. Dan McTeague: Madam Chair, could I elaborate on that? I think I understand part of where you may be going on that, the Price Clubs, the Costcos, and that type of thing.

It's very interesting, and I think the consumer is now picking up on this. You pay a fee of $50, $60, or $70. Those companies make the money on the fee; they do not make any money whatsoever on the product, because they do not charge a listing fee.

If you go to a Price Club or Costco—let's just call it a box store—and you come back a month and a half later, chances are you may not find the same product you purchased two months before. The reason for that is that they're sold on a very limited basis.

A company that represents 80% to 90% of the volume sold by a manufacturer, that has the capacity of having an outlet that large, might very well detect that there's a product being sold and that it's being sold at a discount rate. The large company who has such retail clout may come back to them and say, “We want the same consideration. You're going to give us the same price. We don't want people walking over to...whatever that large box store is.”

So more often than not.... this is a concern I've heard many times from people I know in Ajax and other places across your riding as well, where people say “I went out and bought that two months ago, but gee, it's not there now”, or they'll come back and buy tubs of soap and find out the price is identical to what it would be across the street at Loblaws.

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So we don't have the precision about what happens mechanically on 10,000 items at any given time, but some very disturbing trends are occurring. I hope that's helpful in terms of where you're going on that one.

I don't think the box stores are yet, or can be, effective competitors in terms of their numbers and their volume as compared with or cantilevered against the large dominant players such as Loblaws or Sobey's, as they are emerging today.

The Chair: Thank you very much, Mr. Jones.

Mr. Malhi, please.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): Thank you, Madam Chair.

Why is Canada not concerned that two grocery companies control 80% of the retail market? Also, are they not hurting the independent grocery stores and suppliers?

Mr. Dan McTeague: That's an excellent question, Mr. Malhi. It's a very tough question to answer. I'll try to be as brief as I can from my very simple understanding of the industry.

When the Competition Bureau made a decision to allow at least one merger, they did so because they felt that the relevant market was smaller competitors, small independents, if you can believe it, 7-Eleven chain stores and what not. The relevant market is not simply the big grocery store versus the big grocery store. That is the current permission that exists under the act, which I think has to be questioned.

But rather than going into deconstructing the engine, I think we have to look at the symptom of the problem, which is that a small independent retailer who's competing against a much larger chain usually finds itself unable to exact the same type of privilege as is given to a large grocery store, and not just because of their volume. Quite often a large company that has paid $1 million to put its product on the shelf of a large player will in fact try to recover that loss to their profits by going to the small ones and saying, not only are you not going to get the same consideration, but also we're not paying you $1 million. You're going to have to pay $6.99 for your product, as opposed to it being sold at the large chain for $4.99. So it necessarily puts the small retailer at a disadvantage from the manufacturer's point of view.

What's also understood is that the small independent grocer, unless they're very wise, cannot get product through wholesale. Why? It's because the mergers that have been approved and those that have been proposed also cause a shutdown in the number of available wholesalers. So there are fewer wholesalers to sell to that small independent.

The point is that in many instances we have seen—and this is beyond, really, the pitch of C-402—that small independent grocers are now being told, you change the name on your sign, you take our product, and we dictate to you the terms you're going to take, or just don't bother buying from us. So what do you do? Do you drive down to California to pick up oranges? I don't think so.

The independent grocer, who was supposed to be protected in the 1930s and the 1940s, is another element in the loss of competition. Not only is the small manufacturer unable to compete because of these fees that are being exacted, but also the small independent grocery store can't get access to product at a competitive price. Therefore, it goes out of business, allowing the large chain to further dominate.

Mr. Gurbax Singh Malhi: Just a few days ago it was mentioned in the newspaper that there was no evidence of price fixing by the gas companies. How do you respond to that?

Mr. Dan McTeague: With regard to that issue, if we're talking about conspiracy, section 45, I think it's pretty clear that when you have words like “unduly limit competition” and when you have a situation where the burden of proof is so high that even if it existed you could not find it as the act is currently written.... I think in this case here the public is frustrated.

For instance, in our ridings in our area of Toronto, Madam Chair, two years ago the Canadian Petroleum Products Institute came before the media and said, “We can survive and compete on 2¢ a litre margins because we're selling oodles and oodles of potato chips.” We know that today in Toronto margins at the retail level are closer to 6¢ or 7¢ a litre. Obviously, uniform prices are being passed off or being argued as a good, healthy sign of competition. I think it's one of the few industries where prices going up is as a result of competitive forces.

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I don't think under the current act you're going to be able to provide people with any degree of satisfaction. As long as naked per se price fixing is not illegal in Canada, as the act is currently written, those wonderful, well-meaning, and well-intentioned investigations will never, ever result in anything more than the status quo. That's really my concern, Mr. Malhi. I know there are hundreds of people, including the Canadian Bar Association, who will argue that point, but you and I represent people on the street, not the pinstripes and the blue chip companies.

Michael.

Mr. Michael Kelen: Thank you.

Mr. Malhi, section 45 of the Competition Act says that everyone who conspires, combines, or agrees with another person to limit competition, such as following prices.... That's a criminal section. There have been four contested section 45 prosecutions since 1980 and only one conviction. This is an example of one of the six criminal pricing sections under the Competition Act that are virtually unenforceable.

But Mr. McTeague's Bill C-402 will deal with the problems the independent gasoline people are having, because he has a clause called squeezing by vertically integrated retailers. When you have the two, three, or four major petroleum companies squeezing independents who try to bring price competition into the market, that squeezing will become a civil anti-competitive activity that can be reviewed under clause 78. While we've talked about groceries, this bill is also going to deal with problems in a whole lot of sectors. That specific clause about squeezing is absolutely perfect for the independent gasoline retailers.

The Chair: Thank you very much, Mr. Malhi.

Mr. Brien.

[Translation]

Mr. Pierre Brien: As a matter of fact, yesterday when the Minister of Industry was asked why the government did not intervene, he replied that it was up to the provincial governments to solve any retailing problems, and that's all there is to it. What do you think of this?

Mr. Dan McTeague: There are two ways to answer this question. My report only deals with federal measures. As you know, provincial governments have very strong positions on issues like the one you raised, and the Régie de l'énergie du Québec has set a bottom price to protect independent retailers.

In my opinion, two or three problems are arising at the same time. The first is the reduction in the number of players at the wholesale level, or the manufacturers' level. This situation was worsened in some regions of Canada by a decrease in the number of participating retailers. Our markets are much tighter and are likely to favour oligopolies where three or four players in a given region do not compete against one another. There are several reasons for this. Of course we heard the explanations given by industry, attributing this to the price of a barrel of oil on the international market. Taxes like the GST have to be adjusted each time there is a real price increase.

And then, there is the issue of margins. Let me come back to the example I gave Mr. Malhi just now. We are talking about two or three cents a litre at the retail level, but when 80% or 90% of the product and 90% of the retail market is held by three or four persons, they really control a large piece of the pie and we can compare this to what happened 10 years ago.

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[English]

Ten years ago we had Texaco taken over by Esso, for whatever reason. Petro-Canada gobbled up BP, Fina, and a number of other producers. Some of this was government policy and false doctrine in terms of the way we approached that industry, but every country in the world was nationalizing its industries back in those days. It was then accelerated by the fact that very few producers were not in the position of also supplying gasoline.

That has to be contrasted with the situation in the United States, and I think this is why we're arriving at the problem we have today. Canadians have a gas price that is priced in U.S. dollars and is translated into spot prices almost on the day on which they're posted.

I note that the rack price yesterday or this morning in Toronto was 61.34¢ per litre, but gas was being sold on the street for 67.9¢. That represents all taxes and everything in. The retailer in Toronto is now making 7¢ or 8¢ per litre. That would have been great five years ago, or even two years ago. Those margins would never be acceptable, but I have a feeling that the price you're seeing is an exaggeration in the ability for large corporations to simply demand a much higher price at the retail and at the refinery margins, when compared to more vigorous entities south of the border, where there is far more competition and where many refiners don't even sell gasoline at the retail level. I think that's part of the problem.

Mr. Brien, we're here in Ottawa today and gas prices are 2¢ per litre less than what they are in Toronto because there's access to independents. There are a number of independents here. They're far greater in number, and certainly in terms of the volume that they sell in the Ottawa region, than in Toronto. It's the same phenomenon that may also be reproducing itself in your area.

The Chair: Thank you, Mr. Brien.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you. I have one short question.

You triggered me onto something about the 7-Eleven stores. In my area, 7-Eleven Avondale stores number, I think, 114 stores throughout the Hamilton-Niagara area. You talked about the manufacturers and suppliers forcing their prices much higher to cover their losses with the majors. I think that was your point.

Have you done any comparisons and gathered information from 7-Eleven? There are many names throughout the country of smaller stores that number more than just one or two stores, in the neighbourhood of hundreds of stores.

Mr. Dan McTeague: I have spoken to a number of people from smaller chains throughout southwestern Ontario. These are truly independents who, through smaller distributors of groceries, find that they cannot get the purchasing power of the larger ones. More often than not, they find themselves in a very unhealthy situation. For instance, there's a very noted situation in Marathon, Ontario. An independent store in tiny Marathon found it couldn't sell products like bananas. Bananas were being sold up there, as an example—and I believe you'll find that in tab....

To give the short answer, Mr. Lastewka, you can look at tab (h) and tab (l). It's a very good explanation of what happens: “Food fight sparks debate: Marathon grocer feels Loblaws squeeze”.

It's not that the squeeze occurs with Loblaws actually going over and saying that you're a small person and you're buying from their wholesaler. The products the person purchases at a wholesale price are ten times more elevated than the price being offered by a competitor across the street on a number of very key items.

I think the article itself is very self-explanatory. In terms of small variety stores and convenience stores, needless to say, that's exactly why they're there. It's convenience. You will sometimes pay a higher price, but they are increasingly finding that they no longer have the ability to offer products at a price competitive to that of a grocery store.

Mr. Walt Lastewka: Mr. Kelen, you talked about consumers being concerned about prices of the future. You said we do have good food prices, although they change drastically from region to region. I know when the Hamilton-Niagara region is compared to the Ottawa region, it's much more expensive in Ottawa. Do you have data on the...? Some areas do this on an ongoing basis, and I know the media down our way does it. They take a basket of groceries and they compare it from time to time to see what changes.

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Mr. Michael Kelen: In the course of my work last year for the Consumers' Association, that issue never came up, so I was not presented with that information. However, we mentioned that grocery prices in the United Kingdom—and there are articles in the green book that Mr. McTeague presented—are twice the price compared to what they are in Europe, and even more compared to what they are in the United States or Canada. The Competition Commission in the U.K. is conducting an inquiry into the grocery retailing industry in the U.K. to try to find out why grocery prices in the U.K. are twice what they are versus other places. It just so happens that the consolidation is, of course, extremely high in the U.K. There's not much competition. I think that will be the conclusion of the Competition Commission of the U.K. And again, there are references to that in the green book.

Mr. Walt Lastewka: Okay, thank you.

The Chair: Mr. Jones.

Mr. Jim Jones: Dan, I do respect and admire your tenacity and your interest in this area, but what you're doing here has widespread ramifications. The retail industry is rapidly changing. For example, when Home Depot came in, Home Depot played havoc on the traditional small business person who serviced that area. Are we getting cheaper prices from Home Depot? I think we are when they're compared to what we got before. Chapters came in and played havoc on the small bookstores. Now Amazon.com and those types of companies are playing havoc on the big boxes over the Internet.

At one time when Computer City sold personal computers, they sold them almost door to door. Then they sold them in stores. That's sort of the way a lot of the computer manufactures.... With Dell computers, their whole model is over the Internet. So I think there are always going to be continuing changes. Maybe this might be applicable to the retail or the grocery-type industry, but when you change the laws, you're changing the laws or the rules for everyone.

I think we're going to see huge changes in the ways businesses operate, especially in retail. I even think there's probably going to be... If Loblaws and.... Who is the other major chain?

Mr. Dan McTeague: It's proposed that Oshawa Group will be purchased by Sobey's. Sobey's, of course, is part of Empire foods, out of Stellarton, Nova Scotia. And there's Dominion, of course, and there are also others out west.

Mr. Jim Jones: But I also believe that if they are starting to rip off the consumers, the U.S. big chains will start to move into Canada. They'll make sure that if there are huge profits to be made, they will come in and make sure they take their fair share too.

Mr. Dan McTeague: I think you put too much confidence in that happening, Mr. Jones, because for someone to simply walk in and provide sunk costs.... If you have that large a position or head start, an advantage, it's very difficult for someone to simply come in and wait out the bigger player. If in fact they're of equal size, the bigger player may, as a manoeuvre, simply drop the prices to the point where it becomes uneconomical, and the person never gets to recover their sunk costs. That's a very important point not just in economics, but also in practical reality. It's one of the reasons, in the gas industry, for instance, there have been no new players, with the exception of ARCO out on the east coast.

I want to stress that I'm not concerned about economy of scale or a large-sized Home Hardware taking on Home Depot. The aggravating problem here is when that individual or company is able to exact a fee that they wouldn't otherwise be able to exact from a manufacturer were they not of such colossal size. That fee is not related to promoting efficiency. It has nothing to do with the stocking of the product.

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I have a feeling that it's easy to say we can turn around and someone else will come in and rescue the consumer. The consumer does not see the short-term detrimental effect of competition, which ultimately and ostensibly results in a lessening of competition, an infrequency of people being able to compete ultimately or to get back into the industry. Down the road, consumers are paying, because there's no way to compare your product against A and B. To that point, I think it's extremely important for us to get a grip on what's happening in this industry, as the Americans have done.

If you read the books I have provided you, concerns have been expressed by the U.S. Congress with respect to this issue, as well as by the Australian Parliament and the U.K. Parliament. This is obviously not a national phenomenon. However, the pretext under which the Americans are coming into this issue is that they're concerned that five grocery chains now constitute 30%. I can tell you that in eastern Canada, in your province and in mine, three players constitute well over 85% of the grocery business.

So it's not the wisdom of the Americans, because this is something you and I have been talking about for some time. I think the situation is far more aggravated and accentuated in Canada.

I believe Mr. Kelen would also like to make a point on that, Mr. Jones. It's a good question.

Mr. Michael Kelen: Yes, I think it was a very good question, Mr. Jones. Bill C-402 and Dan's concerns aren't just about groceries or gasoline. They're also about big companies not being allowed to abuse their dominant position when they become dominant. So it is not about companies getting bigger. That's all right; just don't let them abuse that.

The Competition Act already has a section against abuse of dominant position. What Mr. McTeague has identified is that this section needs to be strengthened and the Competition Bureau needs to given more resources. It's about Home Hardware, it's about Chapters. We've heard what Chapters is doing to the small independent bookseller. It's the same problem.

This issue is not about groceries, it's not just about gasoline. It's about large players becoming dominant and abusing their dominant position. We're not against mergers in this situation; we're against abuse of dominant position. As Parliament has already recognized, that is something that has to be dealt with. We're saying the Competition Act is weak and needs to be strengthened. The Competition Bureau needs more resources and it should be directed.

The Chair: Thank you.

We have a vote in about 25 minutes and I still have Madame Jennings and Mr. Pickard, so I'm going to ask them to be brief.

Madame Jennings, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you, Madam Chair.

Thank you very much for your presentations. I'd like to thank you, Dan, for this excellent briefing book. It's probably one of the best briefing books I've seen since I was elected in 1997. It's certainly equal to the quality of any I've seen provided by government agencies, etc.

I'm going to go directly to the issue. First, the confidential survey you did is very interesting. On page 4 of your presentation you say the Competition Bureau ought to investigate. I haven't had a chance to review the various provisions of the Competition Act as relates to the authority and powers of the Competition Bureau. Can you refresh my memory? In the present state of the act, does the Competition Bureau actually have the authority to investigate on its own initiative?

Mr. Dan McTeague: The short answer is yes. The more in-depth answer—

Ms. Marlene Jennings: So the Competition Bureau would have the authority, on its own initiative, to investigate any one or all three of the anti-competitive pricing practices you identified?

Mr. Dan McTeague: Well, not specifically. These are simply proposed prohibitions. These are concerns within the industry. They're not specifically identified under section 78.

Ms. Marlene Jennings: No, I understand that.

Mr. Michael Kelen: The essence of the act is that under part 1 of the Competition Act, under the title “Investigation and Research”, the director of the Competition Bureau, now the commissioner, has the power to cause inquiries to be made into such matters as he considers necessary and to inquire into them with a view of determining the facts. He has the power to subpoena records.

Ms. Marlene Jennings: Has the Competition Bureau ever addressed the issue of why up to now it has not conducted an investigation into the types of anti-competitive pricing practices that you identify in your presentation?

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Mr. Dan McTeague: I think there's a concern expressed among those who did come forward and who did speak to me that they believe the bureau did not have the resources or necessarily the legislative horsepower to enforce an anti-competitive act if they had determined it had occurred. This is again a notional response as to why people would not go to the bureau.

It's also echoed throughout in that it's not just a phenomenon in Canada. In the U.S. there is similar aversion to witnesses coming before the bureau. In the case of the United States, in September people were actually behind screens with digitally enhanced voices.

Ms. Marlene Jennings: I read that.

A voice: And hoods.

Mr. Dan McTeague: Yes, and hoods. It sounds a little bit like something out of—

Ms. Marlene Jennings: I'm going to interrupt you, because I really do want to get to a couple of harder things.

With the legislation that's currently in place, the Competition Bureau has the authority, on its own initiative, to investigate or to research an issue relating to anti-competitive pricing practices. Under that authority, the bureau can subpoena records, whether it's an investigation or research. So that's one.

At the present time, with the authority it has, can it provide protection to alleged victims of those types of practices while an investigation or a research is underway?

Mr. Dan McTeague: Can it provide protection? I believe it can.

Ms. Marlene Jennings: I mean anonymity.

For instance, there are other statutes, tribunals, and commissions that have investigative authority, and there are provisions within their enabling statute that allow them to protect certain information because it could risk the integrity of the research or the investigations.

I'm just trying to understand why, other than human resources or financial resources, there has not been movement by the Competition Bureau at least to research this in such a way that there will be hard facts. Go and get the invoices from the Loblaws or Sobey's or whatever. Go and get those invoices and then go and subpoena the manufacturers and find out what their actual costs are. Is there a discrepancy? Does it appear to be systemic? Is there any explanation for it?

Mr. Michael Kelen: Section 10 does say: “All inquiries under this section shall be conducted in private.”

Ms. Marlene Jennings: Thank you.

So whether or not the evidence or the facts that are uncovered during such a hypothetical investigation would be sufficient to prosecute under the criminal provisions is not the issue. If, for instance, the burden of proof at the level of the criminal prosecutions is too high, even if the facts were there for whatever reason, it would still provide ammunition. The conclusions of such an investigation, I would assume, would still provide ammunition to perhaps support the types of amendments you're proposing.

Mr. Dan McTeague: We've called it civil, Madame Jennings, and we hope it is civil, not civilly reviewable.

Ms. Marlene Jennings: Yes. I understand the difference.

Mr. Dan McTeague: I think this is a very important note for the bureau and ultimately for those on this committee, which will hopefully be drafting recommendations.

Most people believe the cost of bringing a case forward with the current burden required of proving they've been put out of business means they're simply not in business. If it's on the civil front, they actually believe that in the process of an investigation enough information will be given to the person accused of having conducted an anti-competitive act that they will find out. Notwithstanding the outcome, the retaliation will be so severe that they won't be in business any more. So they're damned if they go ahead with this, but not necessarily damned if they don't.

Ms. Marlene Jennings: Thank you.

The Chair: Mr. Pickard, please.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you, Madam Chair.

Dan, I want to compliment you as well on the detail you've put forward. There's absolutely no question that you've devoted an awful lot of time and energy in order to make a case.

There's one area I'm having a bit of trouble with. I know the shelving cost, the squeezing of small retailers, has been going on for a long time in Canada. There's no question about that. As many as 12 years ago I talked with small manufacturers in my area, and they could not gain access to shelf space. They were squeezed out by companies like Kraft and others who said, “If you put your product on this shelf, in fact, we have 50 products in the store and there's a problem with that product.” So they squeezed them out. In fact I could give you several examples of that. I can also give you examples of small retailers in certain chains being squeezed out of the same situation—and this is a long period of time back, at least 12 years, if not long before that.

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I have seen some of those groups move from Ontario to other provinces trying to restart and go. It's in the tomato industry, the pasta industry, and others that I have had direct experience with. But in fact, even though practice has been going on for a long time, and I think many of us realize that, we still have low grocery prices in Canada in comparison to many other countries of the world.

Is it a problem that is going to evolve and become more predominant in 10 years, or is there some other reason the retail prices the consumer is paying have remained low? Why have the practices we are very concerned about—and I think we should be concerned about the; don't get me wrong on that—not pushed us into a higher-priced market?

Secondly, we talk about the number of large retailers in the grocery chain business. As we all know, there is a very limited number in Canada now, and it has been a practice that they have taken up and eaten up a lot of the small people in the market. Still, we haven't seen that large an increase. We might have seen it in some products. Dan mentioned turkey. Turkey was sold as a loss leader for many years in Canada, the same as milk and bread and other commodities.

The Chair: Mr. Pickard, I am sorry, but we are going to ask for—

Mr. Jerry Pickard: Why haven't we seen that change in Canada?

Mr. Dan McTeague: Jerry, briefly, the determinant of an anti-competitive act is not necessarily or always on whether the price goes up. Any competitive act can be in and of itself an anti-competitive act because it has occurred irrespective of the outcome on innovation or consumer choice. That's ultimately what we believe is happening. It's going to happen.

I think the way you are able to keep the prices low is number one. Getting the manufacturers and the farmers to pay the freight, you're seeing depressed prices for a lot of commodities. This issue is not simply about groceries; it's about everything behind that, right back to the farm gate.

That's as brief as I can make it, Madam Chair.

The Chair: Thank you very much.

Mr. McTeague and Mr. Kelen, we appreciated your presentation today.

I have one quick question. You talked a lot about the United States competition statutes and what makes them different from Canada's. There was some brief discussion about their enforcement as well. Do you not think many small businesses in the United States are experiencing the same anti-competitive behaviour as their Canadian counterparts are, even in spite of the United States statutes?

Mr. Dan McTeague: Yes, it is happening there. I think that's why we brought this forward and said it's part of an international phenomenon. Governments are only starting to learn about this.

I was surprised that I was the only member who actually thought this was an issue. But I think you will appreciate that the vehemence with which Bill C-235 was attacked, not so much by the oil industry but by the grocery industry on the eve of their large mergers, was very telling.

I believe our bureau is aware of that. I believe there are a number of recommendations that may ensue as a result of that. I also believe, though, that in an environment where most other countries enjoy a far greater degree of retail competition, the fact that it is so intense now in Canada makes the argument and the case for moving a little quicker than most other countries, given the nature and the makeup and the landscape of retail grocery distribution in Canada.

The Chair: Thank you.

Thank you very much again, Mr. McTeague and Mr. Kelen, on behalf of the committee, for your very detailed presentation and for your appearance here today. Obviously the committee is going to have to take a look at where we go from here.

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We had agreed we would meet with Professor VanDuzer and you, and we will take this back to our steering committee and make further determination on where we go.

Thank you very much.

The meeting is now adjourned. I remind everyone that there is a vote.