A Loblaws store at Lakeshore Blvd. East and Leslie St. in Toronto. Large grocery chains have used their role as anchor tenants to limit other business activities around them.Fred Lum/The Globe and Mail
Rachel Wasserman is a fellow at the Canadian Anti-Monopoly Project and Social Capital Partners and the founder of Wasserman Business Law. Keldon Bester is the executive director of the Canadian Anti-Monopoly Project and a fellow at the Centre for International Governance Innovation.
In April, it was announced that First Capital REIT, a widely held public company and one of Canada’s largest outdoor shopping centre landlords, entered into an agreement to split up and sell its portfolio to Choice Properties REIT and private asset manager KingSett Capital.
Choice Properties is closely held and controlled by George Weston Ltd., which owns a 62-per-cent interest in Choice as well as the grocery giant Loblaws. As Canadians call for more competition in grocery, our largest grocer is preparing to cement its dominance over one of the most important inputs to that competition. Loblaws is also far more than a grocery store, it’s also a pharmacy, clothing store, bank and, through Lifemark, one of Canada’s largest providers of paramedical services, including physiotherapy, massage therapy and more.
First Capital REIT acquired by Choice and KingSett for $5.2-billion after its turnaround
While we often think about grocery competition in terms of price and variety, real estate is the real core. Good luck competing if you can’t set up shop in prime locations. Large grocery chains know this and have used their role as anchor tenants to impose property controls that limit the business activities of the properties around them.
A CBC Marketplace investigation revealed that a Halifax Loblaws had the right to prevent the dollar store next door from selling big brands as loss leaders or even selling them at all. And it’s not just Loblaws. A Metro in Waterloo, Ont., restricted what food products a neighbouring Shoppers Drug Mart could sell and prohibited larger restaurants from opening too close. A Sobeys in Winnipeg prohibited anyone else from selling food on the landlord’s adjacent land without Sobeys’ permission, which could be “unreasonably and arbitrarily” withheld.
The Competition Bureau is investigating the use of these controls, but outside of a rural community in Alberta, progress on their removal has been scarce.
While Loblaws talks a good game on property controls, stating in a statement to Marketplace that their removal would “mean more stores, more discount options and a more competitive market for Canadians,” many of their restrictive provisions remain common. The company told Marketplace it had “released” 150 property controls across Canada and would eliminate more when “other grocery retailers agree to do the same.”
Loblaw ‘fighting back’ against price hikes and seeing strength in discounted food sales
As per the published terms of the First Capital deal, Choice has agreed to acquire $5-billion of primarily grocery-anchored shopping centres, with Kingsett acquiring the outstanding securities and $4.4-billion of shopping centres and high-street retail. Loblaws is First Capital’s largest tenant, accounting for approximately 10 per cent of its rental revenue and 36 per cent of its grocery store leases. Choice Properties and Loblaws are even more directly linked, with Loblaws making up nearly 65 per cent of Choice’s rental revenue. Dollarama, Choice’s third largest tenant only accounts for 1.6 per cent, with Walmart and Sobeys coming in at eighth and ninth respectively, and each representing only 0.6 per cent of rental revenue.
A benefit pitched to Choice unitholders is increasing its third-party retail tenant exposure by nearly 50 per cent. This would increase the combined company’s negotiating power over third parties less close to the George Weston Ltd. family. Just one example, this closeness has afforded Choice the right of first offer to acquire any property Loblaws seeks to divest or is given an opportunity to purchase.
This transaction would give Choice control over at least 50 more of their competitors leases, further entrenching Choice Properties as the largest grocery landlord in Canada, with control over more than 650 retail plazas across Canada.
The transaction is motivated by First Capital’s troubles after a rapid period of aggressive expansion. But the cost of misplaced corporate optimism should not end up hurting Canadians at checkout. Preserving a competitive commercial real estate market is critical not just for Canadian consumers but also the entrepreneurs who wish to compete without the thumb of property controls on the scale.
Given the transaction size and clear public interest, the Competition Bureau should conduct a thorough review of this deal to determine its effects on the commercial real estate market and the knock-on markets that depend on it. The Competition Bureau has already identified real estate as a key vector to grocery competition and property controls as an impediment to that competition serving Canadians.
As Canadians brace for another wave of price shocks, grocery competition is top of mind. This means attention on competition in the largely unseen markets that enable grocery competition is more important than ever. The average Canadian shouldn’t know the state of commercial real estate or food processing markets. They need to know that regulators are protecting their best interest in these markets.
As governments look to deliver greater affordability, this seemingly benign exchange of corporate assets risks setting those efforts back. The Competition Bureau should act decisively to protect competition in a market foundational to greater grocery competition.