:m^Mm

■^i^^v

■i^'4',^/

mi9

'^::~

*vV.V..

Digitized by tine Internet Arciiive

in 2010 witii funding from

Tine Law Foundation of Ontario & tine Ontario Council of University Libraries

http://www.archive.org/details/reportofroydiscoOOonta

REPORT OF THE

ROYAL COMMISSION OF INQUIRY

INTO DISCOUNTING AND ALLOWANCES

IN THE FOOD INDUSTRY IN ONTARIO

SEPTEMBER, 1980

Publications

-2 ' /

His Honour Judge W.W. Leach ^'^^'^TTC^vr I^L^v.^^.! ..ir'ii^-L

Commissioner

Rodney Hull, Q.C.

Counsel _

^

V

\

.-=2k

copies of the report are available from

The Ontario Government Bookstore,

880 Bay Street,

Toronto, Ontario.

ISBN 0-7743-5436-4

Ontario

Jge W. W. Leach

mmissioner

dney Hull, Q.C. unsel

bert W. Weist jistrar and gal Research iistant

vid F. Ross search Consultant

Royal Commission of Inquiry into

Discounting and Allowances in the Food Industry in Ontario

416/598-0179

180 Dundas Street West Toronto, Ontario IVI5G 1Z8

September, 1980,

To His Honour,

The Lieutenant - Governor of

The Province of Ontario

May It Please Your Honour:

On the 7th day of February, 1979, I was duly appointed to inquire into discounting and allowances in the food industry in Ontario.

I have carried out the duties as specified in the Order-In-Council , and submit herewith my Report.

Judge W.W. Leach, Commissioner

O.C. 2537/78

Copy of an Order-In-Council approved by His Honour the Administrator of the Government of the Province of Ontario, dated the 23rd day of August, A.D. 1978.

Upon the recommendation of the Honourable the Minister of Agriculture and Food, the Committee of Council advise that the marketing of food and grocery food products, from producers or importers through to retail sale to the consumer in Ontario is an activity of importance and concern to the public of Ontario;

The Committee further advise that pursuant to the provisions of The Public Inquiries Act, 1971, Statutes of Ontario, 1971, Chapter 49, a commission be issued appointing

His Honour James Frederick William Ross District Court Judge, Thunder Bay, a Commissioner under the designation "Inquiry into Discounting and Allowances in the Food Industry in Ontario" to inquire into and make recommendations respecting,

(a) discounts, allowances, rebates or other forms of payment offered by or exacted from persons engaged in the marketing of food or grocery food products and paid or allowed directly or indirectly to purchasers thereof other than discounts, allowances, rebates or other forms of

payment paid or allowed directly to the consumer; and

(b) the effect, if any, of the practices referred to in clause (a) on price spreads or on the level of prices,

(i) paid for food or grocery food products by Ontario consumers, and (ii) paid to the farmer in Ontario for agricultural food items produced in Ontario,

and to make such recommendations generally with respect thereto as, in the opinion of the Commissioner, would be applicable to Ontario and of benefit to the people of Ontario.

And the Committee further advise that for the purpose of this inquiry,

(a) "food" means meat, eggs, poultry, dairy products, grains, fruit, fruit products, vegetables, vegetable products, maple products or honey products produced for human consumption;

(b) "grocery food product" means a manufac- tured article for human consumption derived in whole or in part from food;

VI

(c) "marketing" means marketing as defined in The Farm Products Marketing Act.

And the Committee further advise that all Government ministries, boards, commissions, agencies and committees shall assist the Commissioner to the fullest extent in order that he may carry out his duties and functions and that he shall have the authority to engage such counsel, research, and other staff and technical advisors as he considers proper.

Certified ,

"R.A. FARRELL" Deputy Clerk, Executive Council

vii

O.C. 404/79

Copy of an Order-In-Council approved by Her Honour the Lieutenant Governor, dated the 7th day of February, A.D. 1979.

The Committee of Council have had under consideration the report of the Honourable the Minister of Agriculture and Food, wherein he states that,

WHEREAS Your Honour, by Order-In-Counc i 1 numbered O.C. 2537/78 dated the 23rd day of August, 1978, authorized the issuance of a commission appointing His Honour James Frederick William Ross, District Court Judge, Thunder Bay, a Commissioner under the designation "Inquiry into Discounting and Allowances in the Food Industry in Ontario" to inquire into and make recommendations respecting the matters therein set forth;

AND WHEREAS, the said Commissioner has found himself unable, through ill health, to continue;

The Honourable the Minister of Agriculture and Food therefore recommends that the said Order-In-Counc i 1 be amended by striking out "His Honour James Frederick William Ross, District Court Judge, Thunder Bay" in the twelfth and thirteenth lines and inserting in lieu thereof,

"His Honour Wilfred Wesley Leach, County Court Judge, Judicial District of Haldimand."

Vlll

The Committee of Council concur in the recommendation of the Honourable Minister of Agriculture and Food and advise that the same be acted on.

Certif ied ,

"R.A. FARRELL" Deputy Clerk, Executive Council

IX

SUMMARY OF REPORT

ISSUES

The Commission, by its terms of reference, is charged with a two-fold responsibility, namely, to inquire into and make recommendations respecting,

(a) discounts, allowances, rebates or other forms of payment offered by or exacted from persons engaged in the marketing of food or grocery food products. Rebates or other forms of payment made directly to the consumer are excluded.

(b) The effect of these, if any, on the price spread or on the level of prices,

(i) paid by the Ontario consumer, and

(ii) paid to the farmers of Ontario for

agricultural food items produced in

Ontario.

SUMMARY OF CONCLUSIONS

The following is a summary of the major conclusions of the Inquiry. All of the conclusions reached in individual chapters are collected in the final chapter of the Report.

1. The system of discounts, allowances and rebates is highly developed in the food industry in Ontario.

2. There is much confusion and misunderstanding among some farmers, some processors and some retailers concerning the operation of the rebate system.

3. It does not appear that the Ontario farmer or farm prices are adversely affected by the rebate system.

4. It appears that there is no significant difference in the level of rebates granted by small or large processor/manufacturers. In other words, the rebate system is not a resolution of market power that favours either large or small processor/- manuf acturers.

5. It appears that there is no significant difference in the level of rebates received by small or large retailers. In other words, the rebate system is not a resolution of market power that favours either large or small retailers.

6. It does not appear that the Ontario consumer or consumer prices are adversely affected by the rebate system.

7. The conclusions of many reliable studies indicate that, based on his disposable income, the consumer in Ontario purchases quality foods at prices that are among the lowest in the world.

XI

RECOMMENDATIONS

1. That no further inquiries be conducted into discounting practices in the food industry, unless persuasive and substantial evidence is adduced that such an inquiry is required. Inquiries add to the cost of food to the consumer and increase his tax bill.

2. That the sale of wine be permitted by both large and small retailers.

3. That the Legislature consider the establishment of a forum, outside government, to mediate problems between the various levels in the food industry, and to clear up the confusion about rebating practices. For details, see Chapter 18, Overview of the Food Industry.

Xll

TABLE OF CONTENTS

CHAPTER TITLE PAGE

Letter of Transmittal iii

Orders-in-Council v

Summary of Report x

Table of Contents xiii

Preface 1

Acknowledgements 4

1 Introduction 7

2 The Ontario Food Chain 15

3 Effect of Rebates on Farmers 54

4 Imports and Rebates 97

5 Processor/Manufacturers and Rebates 106

6 Milk Processors and Rebates 140

7 Buying Groups and Rebates 170

8 Wholesalers and Rebates 180

9 Large Retailers, Consumers and Rebates ... 192

10 Small Retailers and Rebates 229

11 Name Brands, House Brands and Rebates .... 261

12 Cost Justification of Rebates 269

13 Concentration and Rebates 278

14 Loss Leader Selling 360

15 Listing and De-Listing 377

16 Rebates and the Law 394

17 Findings of Other Inquiries and Studies .. 463

18 Overview of the Food Industry 475

19 Compendium of Conclusions 487

Xlll

APPENDIX TITLE PAGE

1 List of Witnesses 511

2 List of Exhibits 520

3 Ontario Buying Groups 543

4 Processor/Manufacturer Questionnaire 548

5 Retailer Questionnaire 551

6 Sample of Manufacturer's Volume Rebate Schedule 554

7 Sample of Retailer's Co-Operative Advertising Program 556

8 Sample of Retailer's Product Information Sheet and Warranty 560

9 Existing and Proposed Legislation 562

10 Bibliography 584

XIV

INDEX OF TABLE AND FIGURES

Chapter 2 - The Ontario Food Chain

Figure 2-A - The Ontario Food Chain 18

Figure 2-B - Rebate Flows Through the Food Chain 27

Figure 2-C - Breakdown of Expenditure by Rebate

Group '55

Table 2-A - Frequency of Use of Rebate Types 47

Table 2-B - Average Size of Rebate Payments 48

Table 2-C - Rebate Level By Product Group 50

Chapter 3 - Effect of Rebates on Farmers

Figure 3-A - Ontario Farm Cash Receipts, 1977 57

Table 3-A - Ontario Farm Cash Receipts, 1977 58

Figure 3-B - Breakdown of Ontario Farm Cash Receipts Not Subject to Marketing Board Regulation, 1977 71

Chapter 4 - Imports and Rebates

Table 4-A - Ontario's Agricultural and Food Imports

by Commodity Group, 1978 100

Table 4-B - Sources of Ontario's Agricultural and

Food Imports by Geographic Origin, 1978 ... 101

Chapter 5 - Processor/Manufacturers and Rebates

Table 5-A - Breakdown of Processors by Sales Volume ... 118

Figure 5-A - Percentage of Sales of Name and House Brand Products for 87 Food Manufacturers 120

Table 5-B - Summary of Processor Financial Statistics

Latest Period 121

Table 5-C - Summ.ary of Financial Statistics Latest 3

Period Average 122

Figure 5-B - Comparison of Average Operating Results

for 87 Food Manufacturers 123

XV

Chapter 5 (continued)

Table 5-D - Summary of Rebates Offered by Processors . . 126

Table 5-E - Summary of Rebate Levels by Group 128

Figure 5-C - Relative Importance of Rebate Groups 129

Table 5-F - Regression Analysis of Processors 135

Chapter 8 - Wholesalers and Rebates

Table 8-A - Group Sponsoring Wholesalers: Ontario

Operations 183

Table 8-B - Wholesale Sales of Ontario Food

Wholesale Firms - 1977 185

Table 8-C - Wholesaler Accounting Treatment of

Rebates 188

Chapter 9 - Large Retailers, Consumers and Rebates

Table 9-A - Ontario Food Store Market Shares 195

Table 9-B - Breakdown of Retailers by Size of

Operation 197

Figure 9-A - Comparison of Latest Period Operating

Margins for Food Retailers 198

Table 9-C - Summary of Retailer Financial Statistics .. 200

Table 9-D - Summary of Rebates Received by Retailers .. 202

Table 9-E - Relative Importance of Sales by

Retailers 203

Table 9-F - Retailer Accounting Treatment of Rebates .. 208

Figure 9-B - Profile of Average Retailer Operations,

1978 211

Figure 9-C - Compound Growth Rates, Five Years 214

Figure 9-D - Compound Growth Rates, Eight Years 215

Chapter 10 - Small Retailers and Rebates

Table 10-A - Types of Retailers and Number of

Stores in Ontario, 1979 238

Table 10-B - Distribution of Ontario Food Sales,

1974 - 1978 239

XVI

Chapter 10 (continued)

Table 10-C - Distribution of Ontario Food Sales,

1969 - 1979 242

Table 10-D - Retailer Financial Statistics, 1977 245

Table 10-E - Analysis of Rebates Received by

Retailers 247

Table 10-F - Analysis of Rebate Levels by Scale of

Retailer Operations 249

Table 10-G - Relative Importance of Sales by

Retailers 250

Chapter 11 - Name Brands, House Brands and Rebates

Table 11-A - Name and House Brand Price and Rebate

Differences 264

Chapter 13 - Concentration and Rebates

Table 13-A - Ontario Marketing Boards' Powers 287

Table 13-B - Leading Firms and Market Shares in

Processing Industries 294

Table 13-C - Summary of Rebates Offered by

Processors 301

Table 13-D - Wholesale Sales of Ontario Food Wholesale

Firms, 1977 305

Table 13-E - Group Sponsoring Wholesalers' Ontario

Operations 309

Table 13-F - Ontario Food Store Market Shares 313

Table 13-G - Ontario Food Store Market Shares 315

Table 13-H - Distribution of Ontario Food Sales 1969 -

1979 322

Table 13-1 - Distribution of Ontario Food Sales 1974 -

1978 325

Table 13-J - George Weston Limited Organization

Chart 329

Figure 13-A - Dominion Stores Limited, Organization

Chart 332

Table 13-K - Summary of Retailer Financial

Statistics 349

xvii

Chapter 13 (continued)

Table 13-L - Comparison of Operating Results of Food and Non-Food Merchandising Companies in Canada in 1978 350

Table 13-M - Supermarket Chains' Sales Per Square

Foot 352

Table 13-N - Summary of Rebates Received by

Retailers 354

Table 13-0 - Analysis of Rebates Received by

Retailers 355

Table 13-P - Relative Importance of Sales by

Retailers 356

Chapter 16 - Rebates and the Law

Figure 16-A - Investigations Under Combines

Investigation Act 399

Chapter 18 - Overview of the Food Industry

Figure 18-A - Share of Personal Disposable Income Spent on Food and Non-Alcoholic Beverages, 1951 - 1977 479

Figure 18-B - Minutes Worked to Purchase a Selection

of Food Items, 1960 - 1979 480

XV 111

PREFACE

The Royal Commission of Inquiry into Discounting and Allowances in the Food Industry in Ontario was established by Order-In-Council of the Ontario Government on the 23rd day of August, 1978. His Honour Judge James F.W. Ross, since deceased, was appointed sole Commissioner. On February 7, 1979, due to the ill health of Judge Ross, an amending Order-In-Counc il was passed appointing me sole Commissioner to complete the Inquiry. Rodney Hull, Q.C., was appointed as Commission Counsel by Judge Ross. Heather Werry was named Registrar.

Commissioner Ross, appreciating the complexity of the Inquiry, retained Laventhol and Horwath, Management Consul- tants, to assist the Commission with research, investiga- tion and financial analysis. The consultants commenced their duties in November, 1978. The Commissioner, in con- sultation with Mr. Hull, set out the format the Inquiry would take.

Many difficult decisions had to be made. To answer the Terms of Reference with any degree of certainty, the Inquiry had to ascertain, in fact, the actual amount of discounts and allowances being paid by processor/manufac- turers to retailers, wholesalers, and buying groups. These firms strongly objected to their individual figures on specific products being made public as they claimed it would impair their competitive position and would disrupt the food industry. They were not opposed to the public

knowing the actual figures but they were opposed to revealing trade secrets to their competitors.

To solve this dilemma. Commissioner Ross decided that questionnaires would be sent to a broad sampling of processor/manufacturers, retailers, wholesalers and buying groups, asking the firms to complete and return them (Appendices 4 and 5). The questionnaire asked for the specific figures relating to the various kinds of dis- counts, as well as for other information. The completed questionnaires were to be returned in confidence, to the Commission's consultants, who were sworn to secrecy. The Commission's consultants checked, collated and reported the results in an aggregate form to the Commission.

This procedure provided the Commission and the public with actual figures for discounting. At the same time, it protected the competitive position of any respondent firms. Upon continuing the Inquiry, I adopted this rational solution to a thorny problem.

Notices of the Preliminary Hearing to be held in December, 1978, were published in newspapers throughout the Province. In addition, 1,300 letters were sent by Com- mission Counsel to members of the food industry requesting submissions. Judge Ross conducted the Preliminary Hearing on December 7th. However, for health reasons alluded to earlier, he was unable to continue with the Inquiry.

I was appointed on February 7th to continue the Inquiry and I duly reconvened the Inquiry on February 14th.

Advertisements were again inserted in newspapers throughout Ontario and letters sent to various members of the food industry requesting input.

The Inquiry hearings resumed on February 14, 1979 and 50 days of hearings were held with the last day of hearings being held on October 25th, 1979. Counsel and parties represented at the hearings at this time were asked to file written submissions by December 3rd, 1979. The transcripts of evidence totalled 4,465 pages. Witnesses heard totalled 110 (Appendix 1), and 150 exhibits were filed (Appendix 2).

In writing this Report, I have considered the com- prehensive research of the consultants, the oral evidence, briefs, background material and submissions of counsel for all persons represented at the hearings.

I hoped in writing this Report that I could present it in an attractive, readable style so that the public could be better informed about discounting in the food industry. I have fallen short of this objective for two reasons. First, the food industry is one of the most complex indus- tries in our Province. Second, it possesses a jargon of its own with dialects at different levels in the food chain.

ACKNOWLEDGEMENTS

An inquiry cannot be conducted with any degree of success unless the Commission has an efficient and dedi- cated staff. I was fortunate in having such a group.

The Commission is indebted to Rodney Hull, Q.C., General Counsel, for his dedicated efforts in organizing the conduct of the Inquiry in all its aspects.

Mr. Hull was ably assisted by Robert Weist, Assistant Counsel and Registrar, who provided invaluable input to the Commission by researching many subjects requested by me to be investigated. Heather Werry was also a very efficient Registrar during her tenure with the Commission.

The work of Laventhol & Horwath, Management Consul- tants, was outstanding. I shall deal more specifically with their role in the course of the Report. Suffice it to say, the Inquiry could not have been conducted efficiently without their input. Their team consisted of:

Ralph Fisher, F.C.A., C.M.C. Project Director David F. Ross, M.B.A. Research Staff Howard Mednick, M.B.A. , M.A. Research Staff Jeffrey Kantor, C.A. Research Assistant

I appreciate their co-operation and patience in explaining to me the many complex financial analyses they carried out. I am particularly grateful to David Ross, who became Re- search Consultant to this Commission, for his comprehensive research and co-operation.

I am grateful to my secretary, Mrs. Betty MacDonald, for her efforts in arranging my judicial duties during my absence at the Inquiry hearings, and for typing the draft of this report. The Commission had several secretaries, and they were all most helpful. I particularly want to thank Ms. Gwen King, Mrs. Jan Gordon and Mrs. Carroll Brooks for their efforts in typing and re-typing the Report.

The Commission received excellent co-operation from the many producers, wholesalers, processors, manufacturers, retailers and trade and farm associations. All government ministries, boards and agencies assisted, when requested. I am appreciative of the assistance of Mr. Peter Clendinneng and Mr. Roland D'Abadie of the Ministry of the Attorney General for their guidance concerning the Com- mission budget. The Ministry of Agriculture and Food, as well, co-operated fully with the Commission, when asked, in providing statistics and other information.

Many counsel appeared on the Inquiry, and without exception, conducted themselves in a highly ethical and co-operative manner. I am indebted to those persons who replied to the questionnaires and submitted briefs. The

briefs were all well prepared and presented and were invaluable in preparing my Report.

And last, but certainly not least, I thank my wife who tolerated me during the hearings and the writing of this Report. At times, she expressed the consumers' view quite forcefully!

CHAPTER 1

INTRODUCTION

INTRODUCTION

BACKGROUND OF INQUIRY

In the spring of 1978, the Minister of Agriculture and Food presented his estimates to the Legislative Assembly. A debate ensued in the Legislature, during which the oppo- sition parties questioned the Minister about the practice of discounting in the food industry. The allegations were focused on discounts pertaining to milk and fresh vege- tables .

This debate indicated there was much suspicion, fear and confusion within the industry and in the public's mind about discounting practices.

The problem was referred to the Resources Development Committee which conducted an inquiry before which witnesses were called. The Committee recommended in its report that a royal commission be appointed. This report motivated the constitution of this Inquiry.

The Minister of Agriculture and Food opposed such an inquiry as he was of the opinion that it was not needed. He expressed the view that the Inquiry would be one of the longest and most expensive in the history of the Province, but I am pleased to report that this was not the case.

TERMS OF REFERENCE

The Terms of Reference can be stated briefly as follows :

The Commission was charged to inquire into and make recommendations concerning:

(a) discounts, allowances and rebates in the food industry;

(b) the effect of these on prices paid to the farmer for agricultural food items; and,

(c) the effect of these on price spreads or the level of prices to the consumer.

This was not an inquiry into food prices. I am afraid, however, that the public felt that this was its purpose.

SCHEME OF REPORT

The food industry is very complex and not fully understood by the consumer, and, in many cases, not fully understood by persons engaged in it. For this reason, I felt it necessary to describe in detail the various links in the food chain farmer, importer, processor/- manuf ac turer , buying group, wholesaler, large and small retailer and consumer. Rebates are considered at each level. This has resulted in some repetition, but hopefully will clarify the workings of the industry to the reader.

In addition, other chapters and sections of chapters are included in the Report which relate directly or indirectly to the terms of reference. These include: Catalogue of Rebates, Cost Justification of Rebates, Concentration in the Industry, Loss Leaders, Listing and Delisting, and Rebates and the Law. Other chapters are: Findings of Other Inquiries and an Overview of the Food Industry.

At the end of each chapter I have summarized my con- clusions relating to that segment. These conclusions are aggregated with my recommendations in the final chapter.

QUESTIONS TO BE ANSWERED

1. WHAT ARE DISCOUNTS, ALLOWANCES AND REBATES IN THE FOOD INDUSTRY?

Discounting terminology is confusing to people outside the industry. Generally speaking, discounting practices involve payments that flow from food processors to the food retailers. There are many different types, and these are listed and explained in Chapter 2. Throughout my Report, the term "rebate" has been used as a generic term for all forms of discounts, allowances and rebates for the reason that this term is the most general of the three terms and the most generally used in the food industry. The terms "discounting" and "rebating" are used interchangeably throughout.

10

2. HOW DOES THE REBATE SYSTEM AFFECT ONTARIO FARMERS? See Chapter 3.

3. IS THE REBATE SYSTEM A RESOLUTION OF MARKET POWER?

A concern in the public mind is that whoever wields the greatest power receives the most favourable discounts. This theory could apply in two ways. The first application is that large processors may be able to resist pressure to grant discounts more successfully than small processors.* The second application is that small retailers may be unable to exact as fair a rebate as large retailers. Chapters 5, 9, and 10 will review both of these theories in light of the evidence received.

4. ARE REBATES PASSED THROUGH TO THE CONSUMER?

This is the area of most interest to the public. I will deal with this issue in Chapter 9.

5. ARE LARGE RETAILERS ABLE TO CONTROL PRODUCTS SOLD BY REBATES?

This question is dealt with in Chapter 15.

*"Processor" means original manufacturer of a food product. The terms "processor" and "manufacturer" will be used

interchangeably in my Report.

11

CONDUCT OF THE INQUIRY

The Inquiry had two major aspects:

(a) public hearings, and

(b) investigation and research by Inquiry staff and consultants.

The hearings were conducted at 180 Dundas Street West,

Toronto, and were open to the public and news media. Any

person who had an interest in the Inquiry was entitled to

be represented by counsel or to appear personally at the hearings.

Most witnesses presented a brief, copies of which were filed with the Commission and were distributed to counsel, news media and other interested parties. Mr. Hull examined the witnesses to elicit the evidence required to answer the terms of reference. Counsel, or other persons present, were then given the opportunity to cross-examine and re- examine the witnesses. Counsel, in most cases, were most co-operative in following my request not to duplicate the questioning. The evidence given at the hearings was recorded and transcribed.

CONSULTANTS ' ROLE

As previously stated, this Inquiry could not have been conducted with any degree of efficiency without the input of the consultants, Laventhol & Horwath.

The consultants conducted a questionnaire survey of processors, wholesalers, buying groups and retailers to

12

ascertain the facts necessary to properly respond to the terms of reference. The processor/manufacturer question- naire (Appendix 4) was sent to 123 firms. These firms represent a large proportion of that segment of the indus- try. The retailer questionnaire (Appendix 5) was sent to 25 firms. Included in the list were all major food chains in the Province as well as several prominent minor chains. The consultants also carried out a survey of ten small non-chain independents. Wholesalers and buying groups were also thoroughly surveyed.

The completed questionnaires were analyzed by the consultants and followed up with interviews to clarify any apparent discrepancies. In addition, the consultants attended at the hearings to ascertain that the oral evi- dence was in accord with the replies. They carried out extensive research and interviews of all sectors of the industry. From time to time during the Inquiry, I called upon the consultants to research certain issues raised at the hearings.

Upon completion of their survey, the consultants pro- vided me with a comprehensive study of their findings. I have used many parts of this study in my Report as it re- flects accurately the actual picture of discounting in the food industry.

After reading other reports of inquiries into the food industry in Canada, I have concluded that the consultants' research was the most extensive and thorough that has been conducted to date.

13

BASIS FOR REPORT

My report is based on:

(a) evidence from the hearings including exhibits, briefs and oral testimony;

(b) the consultants' report; and,

(c) investigations conducted by myself and Inquiry staff.

14

CHAPTER 2

THE ONTARIO FOOD CHAIN

15

THE ONTARIO FOOD CHAIN

GENERAL

Food is vital to our lives. As we partake of a meal, our main concerns are flavour, quality and quantity; the emphasis varies with the individual.

Prior to consumption, the average consumer's acquain- tance with food is when he purchases it from the retailers' shelves. He has little knowledge, and understandably so, of how it reaches the shelf.

The food industry operates daily in the midst of public awareness as to prices and quality at the retailer level. In these days of inflation, public awareness is particularly heightened. This public concern is not applicable, to such a degree, to other industries that serve our material needs.

Several witnesses testified that the food industry is one of the most complex in our province. I heartily agree. Before turning to the main focus of this Inquiry, it is essential to have a basic understanding of the various levels in the various food distribution systems. Figure 2-A is a simple graphic portrayal of the food chain from producer to consumer.

In the first instance, all food, other than synthetic food, is produced by a farmer. In most cases, food

16

consumed in Ontario is grown by an Ontario farmer. Because we reside in a northern climate with a short growing sea- son, we must import certain foods from other countries. For example, the farmers of California, Arizona and Florida produce many of the fruits and vegetables consumed in Ontario in the winter months. This subject is dealt with more fully in Chapter 4, Imports and Rebates.

Between the farmer and the consumer is a variety of organizations whose actions and decisions affect the pro- ducer. The colloquial expression for these organizations is "the middlemen." Figure 2-A illustrates some of these institutions. In fact, the figure is too simplistic because it does not depict the important role which transportation companies, financial institutions and advertising agencies play in the food distribution system.

I shall now deal briefly and generally with the main components in the food chain. Specific figures and sources will be presented and discussed in the chapters devoted to each link in the food chain.

THE FARMER

Ontario farmers produce a wide variety of food pro- ducts of excellent quality. In 1978, Ontario farm cash receipts for the various products amounted to more than $3 billion. This subject is dealt with in detail in Chapter 3, Effect of Rebates on Farmers.

17

FIGURE 2-A

THE ONTARIO FOOD CHAIN

Farmer

1 I

'Marketing Board I

_

i

Packer

J Processes

r

I

Broker

^

Buying Group

Wholesaler

I

Retailer

I

Consumer

NOTE: Broken line box indicates that the organization generally does not take delivery of product.

18

The Ontario farmer markets his produce in a variety of ways. The majority of Ontario farm cash receipts are from products which are sold pursuant to Ontario marketing board regulation.

The remainder of Ontario farm cash receipts comes from products which are not under marketing board jurisdiction. Farmers sell their products in a variety of ways -- at roadside stands, at the Ontario Food Terminal, to packer- shippers, to processors, to retailers, directly or through brokers.

In 1978, Ontario imported agricultural products worth just less than $2 billion. This represents an amount equal to over one-half of the value of Ontario farm cash receipts. Ontario accounts for about 40% of all Canadian agricultural imports.

Imported farm products may also pass through a variety of middlemen before arriving on the retailer's shelf. The Ontario buyer either contacts the out-of-province producer directly or his local agent, and arranges for the produce to be imported across provincial boundaries. For further information, see Chapter 4, Imports and Rebates.

THE PACKER

The packer buys fresh produce from the farmer, pre- pares it for market, and then sells it to wholesalers or retailers, either in or out of the province.

19

In the fruit and vegetable area, certain growers also pack for themselves and other growers. These firms are called grower/packers.

THE PROCESSOR/MANUFACTURER

A food processor or manufacturer purchases farm pro- ducts from the farmer or farm marketing organization. He transforms this original product into various food products and sells to wholesalers or retailers.

The function of the manufacturer/processor varies with the food commodity. For example, a meat processor pur- chases livestock and dresses it for sale as fresh meat or processes it for sale as cured or canned meat. Flour and cereal product manufacturers mill wheat and other cereal grains into flour and cereals. The fluid milk processor, commonly known as a "dairy", purchases raw milk from the Ontario Milk Marketing Board and processes it for many dairy products.

These are just a few illustrations taken from the multitude of food processors and manufacturers.

THE BROKER

A food broker deals in the sale of food and related products for food producers, usually within a specific geographical area.

20

Many food producers, mainly manufacturers and pro- cessors, retain food brokers to arrange the sale of their products to the wholesale and chain retail buyers. This is an advantage to the producer who does not have to retain a permanent sales force to serve a market.

Food brokers generally handle most products sold in grocery outlets except certain perishable products such as eggs and milk.

The importance of the food broker in the food chain is indicated by the fact that food products sold by Ontario food brokers may amount to as much as 43% of the total food sales in Ontario.*

The function of the food broker varies and depends on the contract with his principal. Food brokers are usually paid on a commission basis.

THE BUYING GROUP

The buying group is a group of wholesalers or retailers who join together to purchase food products.

The buying group, though owned and controlled by its

member shareholders, is generally an incorporated legal entity separate from them. One major exception is the buying group known as Intersave which is a division of Loblaw Companies Limited.

* As estimated by the Ontario Food Brokers Association in its sales survey, January 14, 1980, undertaken at the request of the Commission.

21

The main advantage of joining a buying group is that buying groups can obtain higher levels of volume rebates on purchases than shareholding members could obtain buying individually.

The buying group does not deal with all levels of the food chain but only with those suppliers that offer volume rebates and private label products. Buying groups carry out a variety of functions for their members. These functions and the impact of buying groups are developed more fully in Chapter 7, Buying Groups and Rebates.

THE WHOLESALER

A wholesaler purchases a product in large quantities, warehouses it, and then resells it to a retail outlet on demand. This description is applicable to both grocery wholesalers and fruit and vegetable wholesalers.

Major grocery wholesalers, such as National Grocers Company Limited, M. Loeb Limited, Oshawa Group Limited or Lumsden Brothers Limited, generally have two types of selling operations:

(a) The traditional type, in which the re- tailer orders his goods by phone or telex and the wholesaler loads and transports the goods by truck to his customer.

(b) A more recent type of operation is called "cash and carry". The retailer or his

22

agent attends at the warehouse, selects his goods, pays cash and transports the goods to his store.

The fruit and vegetable wholesaler purchases directly or through a broker from Ontario packers and growers and from American and other foreign produce firms. In most cases, these wholesalers distribute from refrigerated warehouses to every type of retailer from independents to the large chains.

THE RETAILER

The food retailer sells to the consumer who is the last link in the food chain. Ontario has a wide variety of food retailers ranging from large chains to "ma-pa" stores.

The retailer purchases from every level of the food chain.

In order to answer the terms of reference it was necessary to focus on the "chain store organizations." Statistics Canada defines this term as any organization operating four or more retail outlets, and I have adopted this definition for my Report.

In Ontario, this definition includes the large chains such as Dominion Stores, Loblaws, Steinberg's and A & P with many outlets and smaller chains such as Knob Hill Farms with five outlets. The definition also includes the

23

chains of so-called "convenience stores" such as Becker's or Mac's Milk.

Any firm not meeting the definition of chain store organization is automatically classified by Statistics Canada as an "independent" and such terminology is adhered to in this report.

The distinction between chains and independents will be more fully considered in Chapter 13, Concentration and Rebates .

ORIGIN AND RATIONALE FOR REBATES AND ALLOWANCES

Since merchandising began in the free enterprise system, buyers and sellers have negotiated special arrange- ments. This is based on the natural desire of a buyer to purchase as cheaply as he can and that of a seller to realize as high a price as he can. For example, a buyer usually expects a cash discount if he pays within a speci- fied time. He also looks for a volume discount if he purchases a certain quantity. Today, with the growing complexity of all industry, discounting practices have also grown more complex and confusing.

The food chain has several links engaged in discount- ing — the producer, processor, wholesaler and retailer. Discounting affects profits and since everyone is in business to make a profit, discounting is of importance to the whole food chain.

24

Farmers and importers are the sources of raw food. Generally, rebates are not significant at this level. See Chapter 3 for the effect of rebates on farmers.

Rebates are paid almost exclusively by sellers of manufactured products. The distinction between processing and manufacturing is not important for this Report as both processors and manufacturers use rebates in the same way.

Rebates are received by retailers, wholesalers, buying groups, consumers and occasionally, by other manufacturers. Rebates, in some cases, are paid to the consumer directly in the form of coupons. Such direct payments are expressly outside the terms of reference of this Inquiry. In any event, the bulk of rebates move through the chain to the consumer, as explained in Chapter 9.

In order to get their products on the retailers' shelves, processors have developed a system of rebates and allowances paid to the wholesaler or retail chain. These are considered "incentives" for good shelf space and reduced prices to the consumer.

The retail level of the food chain depends on high volume of sales and frequent rotation of stock. Retailers used the word "velocity" on many occasions throughout the Inquiry to describe the basis for success in their opera- tions.

Most witnesses for the retail chains described rebates as "earned cost reductions." They submitted that on volume

25

discounts, they "earned" the rebate because a manufacturer who can produce and ship in quantity is realizing a reduc- tion in cost which should be passed through to the consu- mer. Large volumes maximize the productivity of the manu- facturer's plants and facilitate financing.

Retailers also submitted that they earned the adver- tising and service rebates. Upon the creation of a new product, manufacturers grant introductory allowances. The rationale for this allowance is that the manufacturer should pay for a new product's introduction as shelf space is limited and the retailer has to remove a profit-making product to make room for it. Larger manufacturers can stimulate consumer demand by national advertising. Smaller manufacturers cannot afford such advertising and often buy advertising in the wholesalers' or retailers' advertising programs.

The wholesale and retail levels of the industry make day-to-day management decisions as to the products to be listed or delisted. See Chapter 14, Listing and Delisting.

TERMINOLOGY - CATALOGUE OF REBATES

REBATE FLOWS

Figure 2-B is a simplified view of the rebate flow through the food chain. The figure indicates the flow of goods from the farmers and importers to the consumers. As

26

FIGURE 2-B

REBATE FLOWS THROUGH THE FOOD CHAIN

Farmers

Importers (Raw Food)

Marketinq Boards Processors/Manufacturers ) Importers (Finished Products)

Buying Group

Wholesalers

Retailers

Consumers

NOTE: Arrows indicate rebate flows,

27

indicated previously, rebating is insignificant from the farmers' and importers' level to the processors' level. Rebating appears to start at the processors