Chasing the ‘Aldi effect’: Why it’s hard for discount grocers to break into Canada

The Competition Bureau believes bringing international discount grocers into Canada would drive down food prices. But the Canadian market comes some with unique barriers to entry.

A push to bring more competition into the Canadian grocery sector in the form of discount European brands such as Aldi and Lidl would face steep obstacles in Canada’s fragmented marketplace, experts say.

The Competition Bureau’s probe into concentration among Canada’s grocers released Tuesday highlighted the role international competitors could play in lowering prices as food inflation continues to cause pain at the grocery store.

The report argued that introducing international grocers such as Aldi and Lidl would push the dominant incumbents — namely Loblaw, Metro and Empire — to lower prices to compete with the discount brands popular in Europe and some parts of the United States.

The Bureau drew on a 2008 report that showed the so-called “Aldi effect” drove down grocery prices in Australia when the retailer entered the country, and even used Canada’s experience with Walmart as an example to show how a new player can disrupt the status quo.

A Reuters report from 2008 shows a move from Walmart to cut prices on food staples by as much as 35 per cent put pressure on consumers to do the same; a 2015 Bank of Canada study showed that the company’s innovative cost structures were driving down prices elsewhere in the sector.

“There is such a thing as the Walmart effect,” says Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University.

“When a new store opens, prices tend to drop — including food prices. That’s why I think everyone wants the ‘Aldi effect’ to come into the market to see this new wave of deflation with food prices.”

Of all the recommendations made in the Competition Bureau’s report, it said attracting international grocers “may be the best option” to boost consumer choice and improve prices for Canadians.