Upstart Sugar Company Charges Bigs with Oligopoly Control

Consumers deprived of competitive prices and better packagings

By: Paul Pellizzari

  When Martin Richardson created the Richdale sugar brand, he expected that his new company could capture enough business to survive an industry known for its lack of competition. Instead he found himself, four years later, writing to the Competition Bureau. Again.
  His beef? That the dominant companies, Redpath and Lantic/Rogers allegedly control the country's sugar business because they "act collusively," or in a "consciously parallel" fashion. After an initial petition in 1998, Richdale Sugar Ltd. filed its second formal complaint to the Bureau of Competition Policy in 2000, arguing that new competitors are being squeezed out of the retail and industrial sugar industries through "exclusivity and tied selling arrangements."
 

Consumer choice is shaping up to be a novel threat

  Apparently the two corporate behemoths that control 98% of the market for a product that everyone buys are worried about a new entrant. That Richdale's volume represents a tiny portion of the whole industry does not seem to matter. Why? For starters, Richdale offers Canadians a better package, sugar in a gable carton, creating consumer choice, which is shaping up to be a novel threat.
  "I've got people looking up our phone number to call and thank me for this [gable carton]," Richardson said, but despite the enthusiastic consumer response the package elicits from those who try it, Richdale can't get a listing for its white refined sugar - the industry staple - with a major grocery chain.
  As obvious as Richdale's solution seems - sugar bags tear, spill and expose sugar grains to the hardening elements of humid air - Canadians are still pouring sugar from the same type of bags our great grandmothers used while in California, the gable carton holds more than half of the refined sugar market share. According to Richardson, Redpath and Lantic/Rogers have not changed their packages because they don't face the competitive pressures that bring innovation, and fair prices.
  In its submission to the Competition Bureau argues, Richdale claims to have suffered a number of "abuses" including the loss of a contract that could have attracted the mainstream market. Between October 1999 and February 2000, Richdale negotiated a detailed supply contract with a major Canadian grocery retailer that would have put the new brand into the mainstream. Richdale alleges that it was led to believe that this company "did not have or did not consider itself bound by exclusivity agreements for the supply of sugar," and negotiations concluded with purchase orders.
  Then, on the day prior to shipment in February 2000, the retailer abruptly cancelled the order, informing Richdale that it "had decided to stay loyal to Lantic". It agreed to buy certain specialty sugars from Richdale, because Lantic did not sell these products, but it would not purchase the all-important white sugar. Based on this sudden about face, Richdale assumes that the retailer has entered into an exclusivity agreement with Lantic. Furthermore, the complaint to the Competition Bureau asserts that it also assumes that Lantic paid the retail chain money or other valuable consideration for entering into the exclusivity agreement and preventing Richdale from entering that market.
  To prove these claims, the company wants the bureau charged with protecting consumer interests to investigate the concentration of power in the industry. After a series of acquisitions and consolidations in the 1990s, the sugar sector was basically left with Redpath Sugars, a subsidiary of the British Tate & Lyle plc, and Lantic/Rogers, which is majority owned by Onex Corp., Gerald Schwartz's public investment company. Rogers is owned by a Canadian public income trust, and both Rogers and Lantic are under common management control.
  The retail consumer market (which represents only 25% of sugar revenues, with industrial food processors accounting for the other 75%) is divided into a few large chains such as Loblaws, Sobeys/Oshawa, A&P, and all of their related chains as well as smaller grocery and convenience stores. When the large chains buy directly from the refiners, Richdale claims, they are induced to enter into exclusivity agreements that provide volume discounts and ensure the supply of all forms of refined sugar. In exchange, the retailer agrees to purchase all of its sugar from one refiner.
 

When charges of retail price irregularity arise, consumers are often unaware of their own victimization

  For Richdale, the result is limited market penetration, because its white refined product can only find a listing in stores like Wal-Mart, where few people buy their sugar. Although the company has shelf space with A&P, Loblaws and Sobeys, these stores only carry low-volume specialty categories, such as brown, icing and Demarara products, which cover less than 6% of the retail market.
  Compared with the U.S., where a typical grocery store carries sugar from a number of suppliers who offer various packaging options, Canadian grocery shoppers are restricted to one brand and one packaging option. Effectively, the markets are divided up with Rogers acting as a monopoly in Canada west of the Ontario/Manitoba border, leaving Lantic and Redpath as the ruling oligopoly in the east. Another strange irony in this case is that retail prices, relative to the cost of raw sugar, are higher in Canada than in the U.S. Because the American government gives financial support to their domestic beet and cane farmers, raw sugar costs about three times as much as the raw sugar available to Canadian refiners. However, the cost of refined sugar in the store is approximately the same in both countries, and the major refiners take a healthy mark-up.

Consumers unaware
  When charges of retail price irregularity arise, consumers are often unaware of their own victimization. Who thinks twice about paying $1.99 for 900 grams of white sugar when a take-out cappuccino costs the same amount? However, when candy makers and other food producers feel that they are paying above fair market rate - because they see their input costs rise - a sector of powerful agitators emerges.
  The Canadian Sugar Users Coalition (CSUC) is worried about the effects of limited sugar competition, especially because sugar remains a tariff-protected industry. In November 2000, the Canadian International Trade Tribunal (CITT) reaffirmed the five-year imposition of a 44% duty on sugar from the US and 64% on sugar from Europe. Since 1995, Canada's anti-dumping orders have limited the importation of refined sugar, effectively removing American refiners and leaving the entire Canadian market with no meaningful competition.
  "When industrial accounts are looking at a strategy for alternatives, you know there is a genuine [competition] concern," Richardson observed.
  The CSUC argues that the control of sugar in Canada affects their cost-effectiveness, and that consumers ultimately pay higher prices for everything from cookies and confectionary to processed foods. In total, they claim that inflated costs amount to somewhere near $75 million, or about 10% for all sugar users. If a viable competitor for industrial sugar appeared suddenly and the majors lost even 15% of those sales, they would experience higher per-unit production costs as a result of lower throughput volumes. This kind of threat would be the true wake-up call.
  Richdale is requesting a Competition Bureau review of the competitive practices of Redpath Sugar and Rogers/Lantic and the imposition of appropriate sanctions. What chances its stands of seeing an investigation is a question that Martin Richardson cannot answer.
  "Every time I call [the bureau], they tell me that they only have nine investigators and that they're all out chasing planes," he said, in reference to the bureau's recent attention to the consolidation of the Canadian airline industry.
  Sugar is one of the few sectors in which a major antitrust investigation was launched. In 1980, the Supreme Court of Canada settled the oft-cited case, which involved (then-named) Atlantic Sugar, Redpath, and (now bought-out) St. Lawrence Sugar. But, unlike other areas of business regulation-such as workplace health and safety, misleading advertising, environmental abuse and even insider trading-breaches of competition are hard to prove. Evidence of wrongdoing is difficult to secure, mainly because the victims of anti-trust are the general public, millions of people who don't know that they are being denied a potential consumer advantage. Proving that a breach of trust has occurred requires inside information, usually from a small number of powerful participants, proof that is nearly impossible to obtain. For example, the landmark 1998 Archer Daniels Midland case in the US demonstrated that consumers were paying more than 3 cents extra per kilogram of the ingredient, lysine, than they were before the collusion began. The hard-copy evidence that proved this was cryptic, and the need for evidence forced informants to resort to wearing wires and other types of surreptitious tactics.
  Richdale believes it has already had an effect on the retail market. Lantic began selling a 900-gram package in a gable carton. Does this mean that the gable carton is here to stay even if Richdale were to leave the industry? Martin Richardson shakes his head.
  "If there's no competitive pressure [the majors] aren't going to change all of their production lines to produce a more expensive package," Martin Richardson laments.

Paul Pellizzari is author of Ethics in a Grocery Cart (EthicScan, 1998) and co-author of Shopping with a Conscience (Wiley, 1996), two books on corporate social responsibility. He is the editor for theinvolvedfather.com (an on-line parenting magazine), a regular columnist for the Corporate Ethics Monitor, and a contributor of freelance articles on a variety of issues dealing with business's effects on society. From 1995 to 2000, he was director of research at EthicScan Canada.

Posted: February 26, 2001

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