THE PRICE IS NOT RIGHT
Retailers face penalties, even prison, for alleged plot of raising cost of bread in lockstep
Imprisonment. Hefty government fines. Billion-dollar class-action lawsuits.
A range of nasty outcomes await Canada’s largest grocers and bread producers if they are convicted of participating in an industry-wide scheme to fix bread prices that lasted more than 14 years.
But a large-scale loss of business from outraged customers? Unlikely, analysts say.
“The companies involved in this case control most of the market so it’s not clear where people could shift their purchase,” said Thomas Ross, a professor of regulation and competition policy in the University of British Columbia’s Sauder School of Business. “Problems with food quality, like contamination, can be devastating for companies, but an economic offence? People really do just move on.”
In the legal arena however, the fight facing Canada’s grocers and bread-producers is just beginning.
Court documents made public this week allege Canada Bread Co. Ltd. and Weston Bakeries Ltd. — the country’s top two bread producers — co-operated with major grocery retailers including Loblaw Cos. Ltd., Walmart Canada, Empire Company Ltd. unit Sobeys, Metro Inc. and Giant Tiger Stores Ltd. to fix prices on an array of bread products. The allegations from the Competition Bureau cite 15 instances of co-ordinated actions. The allegations have not been proven in court.
Financial penalties for price fixing are generally calculated at 20 cents on every dollar of sales affected by the scheme, to a maximum of $25 million, though the bureau could attach a penalty to each type of bread product involved, Ross said. Given the nationwide scope and the length of time during which bread price fixing is alleged to have played out, that figure is unlikely to recoup the full profit the companies would have made.
Bread prices rose at an average annual rate of 5.25 per cent between 2002 and 2014, compared to an annual inflation rate of 2.57 per cent for all other food purchased from stores, according to an analysis of Statistics Canada data by Kevin Grier, a food industry analyst. Those increases could not be linked to underlying factors such as the cost of ingredients.
By 2015, a loaf of bread cost nearly a dollar more than it would have if prices had followed the same rate of inflation as all other food bought in stores, he found.
There is no way to know what grocers would have charged in a truly competitive market. Nevertheless, class action suits will certainly make an attempt to figure it out. Multiple class action suits seeking billions in damages have already been launched against the targeted companies.
“In private actions, the big fight is to recover the total profit that came from price fixing,” Ross said.
The most serious consequence facing executives and other employees involved in such schemes is prison time. Canada is one of about two dozen countries, including the United States, that allows imprisonment as punishment for individuals convicted of price fixing.
“It is a very different and more effective deterrent and punishment to take away someone’s liberty, particularly a business person who’s used to a decent life,” said Spencer Waller, director of the Institute for Consumer Antitrust Studies at Loyola University in Chicago. “It’s bigger than imposing a monetary fine on a company that can usually pay it and then pass it along later in the form of higher prices or reduced dividends to shareholders.”
While U.S. employees and senior executives routinely receive two-year jail sentences for price fixing, the penalty isn’t often applied in Canada unless some form of coercion, false testimony or obstruction of justice is involved, analysts say.
However, the size and duration of the alleged bread scheme and the large number of people it affected — particularly those on low incomes — make it a unique case, said Joseph Wilson, an expert in competition law at McGill University.
“Bread is a basic food item, an essential staple food,” Wilson said. “For someone living on welfare, with a very small weekly budget, an inflated price on that bread could mean the difference between getting by and not getting by. So yes, I think it’s very possible and these considerations do go into the bureau’s analysis.”
Just how bruised corporate reputations will be at the end of the scandal — and who will take the biggest hit in terms of public relations — is a matter of debate, though analysts say price fixing cases most often end up forgotten.
Unlike the other companies targeted in the bureau’s case, Loblaw and its parent George Weston were granted immunity from prosecution after tipping the bureau off to what they say was an “industrywide” scheme. Giant Tiger, Sobeys, and Metro have all denied participating in the alleged scheme while Walmart Canada has declined to comment, citing the ongoing investigation. Michael Medline, chief executive of Sobeys parent Empire, has vowed to fight the allegations in court.
Loblaw subsequently offered free $25 gift cards to customers as a goodwill gesture.
“They got out in front of the situation and they may get some credit for being the whistleblower,” Ross said. “It’s not a great advantage, but it’s something.” Others were less optimistic. “All the players have a PR problem to be sure, but I don’t know what the public perception will ultimately be of Loblaw,” said Richard Janda, a law professor at McGill University. “They’re off the hook because they tattled on the others. Will that give them a black eye in terms of reputation? I myself don’t get a lot of comfort from hearing a company admitting to years of criminal activity.”