By Michael von Massow

Does Canada need public grocery stores? The debate has moved into the mainstream since Avi Lewis became the new leader of the NDP after campaigning on a plan for government-run grocery stores.

The premise is relatively straightforward: governments would build and run grocery stores that offer pricing at levels well below those of traditional stores.

Similar ideas are gaining traction at the municipal level. Toronto city council has advanced a pilot project for four city-run grocery stores, and New York Mayor Zohran Mamdani has announced plans for five municipal grocery stores.

With food prices still elevated, the proposal for public grocery stores sounds appealing. Lewis and his advisers have suggested that government-run store prices would be 35 to 40 per cent lower than those Canadians are currently paying.

The real question is whether public grocery stores are feasible and, if so, whether they’re the most effective way to deliver relief to consumers. The evidence suggests otherwise.

Scale is everything in grocery retail

Successful food retailing requires significant distribution infrastructure to efficiently bring products to the retail location. Loblaws, Canada’s largest food retailer, has more than 2,400 stores. Empire Group, which includes brands such as Sobeys, has more than 1,600 stores. This scale allows them to achieve significant purchase volumes while lowering distribution costs.

This is also why larger retailers have been purchasing regional grocers such as Longo’s and Farm Boy. It allows the smaller chains to benefit from the purchasing and logistical infrastructure of the purchaser.

Even with those advantages, large retailers achieve relatively low margins. Operating income (revenue minus direct costs and excluding things like taxes and depreciation) generally represents between four and six per cent of total revenue.

A new government-run chain operating without that infrastructure would be starting from behind, and would require substantial subsidies to achieve the promised price reductions.

Some proposals suggest public stores could only carry staples, which would reduce the cost of inventory. While that’s true, this overlooks how grocers cover overhead: by the size of the “basket” of each customer. Basket size is the total value of everything each customer buys.

Basket size is a key metric for grocers, who often price select staples below cost to draw customers into the store. Margins on those staples are already thin, meaning government stores would require greater subsidies to achieve discounts without the benefit of higher-margin secondary products.

Examples come with trade-offs

Supporters of public grocery stores point to examples in Mexico, the United States and Canadian provinces. Upon closer examination, however, these examples highlight the challenges and costs that suggest that this path is not feasible.

Mexico has operated government-run grocery stores for years. The number of stores has declined significantly in the past decade, with only approximately 50 remaining, located predominantly in the Mexico City area.

Price tracking by Profeco, the country’s federal consumer protection office, shows these stores are less than two per cent cheaper than Walmart (the dominant Mexican food retailer) and some private grocers are cheaper still. A significant informal food sector of market stalls offers additional competition. This is nowhere near the 35 to 40 per cent savings being promised in Canada.

The U.S. military commissaries offer groceries that are almost 25 per cent cheaper on average for active service members and veterans. But federal appropriations pay for labour, rent/real estate, distribution costs and other overheads.

The annual subsidy represents approximately 25 to 30 per cent of sales, meaning the U.S. government spends more than consumers actually save, with an ongoing backlog of maintenance also increasing the deficit.

There is some suggestion that the commissaries should be privatized to achieve the efficiencies of larger chains while still providing cheaper options for soldiers’ families and veterans living close to the bases.

Provincial control of alcohol and cannabis retail in Canada is sometimes raised as a parallel. However, these models are not designed to lower prices. Instead, they are designed to collect taxes and control prices. The policy direction runs opposite to what public grocery advocates are proposing, so this comparison is invalid.

What governments are already doing

Food prices are rising for reasons largely out of the control of Canadian governments, including geopolitical events (such as the wars in Ukraine and Iran) and the climate crisis. What governments can do is cushion the impact for those hit hardest.

Canada’s GST/HST rebate program already does some of this, offsetting taxes paid on goods and services to eligible households. Beginning in July, the new Groceries and Essentials Benefit will replace the GST/HST credit. The structure and eligibility rules will remain the same, but payments will increase by 25 per cent for five years.

The program is not in the range of 35 to 40 per cent, but it’s intended to offset much of the increases Canadians have experienced over the past few years. This program provides direct and targeted benefits for those feeling the most pressure from rising food prices.

There is also a federal program in place aimed at reducing the cost of staple items in remote northern communities. Nutrition North subsidizes retailers in places that experience high levels of food insecurity and alongside high transportation costs. Research suggests that the subsidy is, on average, fully passed through to consumers.

Unlike a tax rebate, the program cannot target specific consumers, but it can target certain categories of food. Milk and bread are cheaper for shoppers, for example, but frozen pizzas are not.

The most effective path forward

Building a national chain of public grocery stores would immediately raise a question of equity: how would governments decide which communities get a store and which don’t?

The cost of building thousands of stores would be prohibitive; a few dozen would leave most Canadians without access while costing governments more per transaction that consumers would save. And, because anyone could shop there, it would dilute the benefit for those who need it most.

The money would be much better spent directly supporting the Canadians who need it most. Direct payments remain the most efficient use of taxpayer money. They can be targeted to low-income households and deployed quickly.

Nutrition North-style subsidies work well in specific areas but can’t target individual households. A card or voucher system could combine both approaches by targeting and selecting eligible food products, though the administrative costs would either dilute the benefit to recipients or raise the overall price of the program.

Even so, a well-designed voucher program would almost certainly deliver more value per dollar spent than building and operating retail infrastructure from scratch.

There are ways to make food more affordable for Canadians. Government grocery stores just aren’t one of them.

About the Author: Michael von Massow is a Professor of Food Economics at the University of Guelph.

This article originally appeared in The Conversation.

More from Retail Insider:

• Why Toronto’s 4-Store public grocery test will not work
• Government Grocery Stores Won’t Fix Food Affordability in Canada