You run a grocery chain. Food prices are up, people are angry, and a parliamentary committee wants you to explain yourself. You need a number that makes you look like someone the economy is happening to.

Good news. The number exists. It's three percent.

Nothing below is illegal. Try to keep hold of that as you read.

Step 1: Split the company

Start with the lemonade stand. It clears $100 a day, and people are getting angry about the price of a cup. You need the stand to look poorer without giving up any money.

So, you buy the square of sidewalk underneath it. Then you put on a different hat, call yourself Sidewalk Management Corp, and charge the stand $90 a day in rent. Now when a customer complains, you turn your pockets out. Tough business. Crushing overhead. Ten dollars profit on the day.

At closing time you take off both hats, put the $10 and the $90 in the same bank account, and go home with $100.

The grown-up name for the sidewalk rent is an intercompany lease. The store and the landlord are separate companies, so the rent shows up as a cost on one set of books and as income on the other. The books with the cost on them are the ones that get quoted to Parliament.

Step 2: Charge yourself rent

Yes, every retailer pays rent. Walmart does. Your store will too. The difference is who gets the cheque.

The Westons run the biggest version. George Weston Limited holds the majority of both Loblaw, the grocer, and Choice Properties, the landlord, which is Canada's largest REIT. Loblaw's own paperwork shows the effect. In 2018, Loblaw handed its stake in Choice to its parent and stopped counting Choice in its consolidated numbers. Loblaw said that in 2017 figures, its reported adjusted EBITDA would drop by $576 million, because it would no longer cancel out the rent it pays Choice. Same stores, same shoppers, $576 million off the grocer's page. The money didn't vanish. It went to the other page.

Everyone else is playing the same game on a smaller board. Empire, the parent of Sobeys, Safeway, IGA and FreshCo, owns the stores and holds a large stake in Crombie REIT, which owns a lot of the buildings under them.

The Jim Pattison Group does it privately. It runs Save-On-Foods through its Pattison Food Group division, and it also runs a real estate arm, Jim Pattison Developments, that collects grocery-anchored shopping centres. Last December that arm bought Cherry Lane Shopping Centre in Penticton from Manulife, with Save-On-Foods as one of its anchor tenants. Whatever rent that store pays now stays in the group. Not every location works this way, and a private company doesn't say which ones do. 

It publishes no split between what the stores earn and what the property side earns. 

So, when someone says Pattison runs on thin margins, nothing public lets you check. Loblaw and Empire have to show their work. This setup allows you to assert narrow margins and makes verifying the claim difficult.

In every case, the store you walk into is just the front for a quieter neighbouring business.

Step 3: Put the building in a bucket

You don't want the rent sitting in just any company. You want a Real Estate Investment Trust, or REIT, a corporate vehicle designed to hold property and collect rent.

Loblaw did this in 2013, when it spun out its property holdings into Choice Properties through an IPO. A REIT generally pays no income tax at the entity level as long as it passes its income to unitholders. Rent leaves the taxed operating company as an expense and arrives somewhere that isn't taxed until the money moves again.

Whether the group pays less tax in total depends on where the money goes next, and no filing spells that out on one line. What the structure gives you is a choice about where profit appears and when it gets taxed. The corner grocer renting from a stranger doesn't get that choice.

Step 4: Keep growing the bucket

This spring, Choice announced a deal to buy about $5 billion of First Capital REIT's grocery-anchored shopping centres, part of a $9.4 billion transaction it's splitting with KingSett Capital. Management expects it to close in the fourth quarter of 2026. The landlord grows. The grocer's margin stays at three percent.

Step 5: Hire a bouncer

Owning the ground under the store lets you decide who else gets near it. When a store closes, you can put a clause on the property that bars any rival grocer from moving in. These are called restrictive covenants. 

A covenant like that still allows a gym, a dollar store or a pharmacy. It rules out the one tenant who would compete for your grocery bill. The neighbourhood ends up with an empty building and no grocery store, because the old tenant still holds a veto.

Regulators noticed. The Competition Bureau's June 2023 grocery study concluded that property controls can limit competition from new grocers and deny consumers lower prices and more choice. 

In June 2024, the Bureau obtained two court orders for investigations into the parent companies of Sobeys and Loblaw over property controls in the Halifax region. Walmart Canada and Loblaw pledged to drop controls tied to retail competition. Empire held out until the Bureau broadened its probe to a national Federal Court order, then pledged in July to stop. 

This month the Bureau announced an agreement under which Empire will not enforce existing covenants, enter new ones, or ask others to register covenants that benefit it, and will limit its use of exclusivity clauses.

Empire's position throughout was that these tools are common across industries and help development in underserved communities. A fine defence, if you ignore what the clauses did.

Step 6: Go to Ottawa

Put on a plain suit. Say that grocery is a tough business. Say three percent.

Every word will be true. That’s the trick, and it's why nobody has to lie to Parliament.

Stepping out of the bit

The covenants are going. The structure isn't, and it's getting bigger.

Here is how to read the number the next time you hear it. When an executive says margins are thin, ask whose margin. The store's, or the group's? Find out who owns the building; if the parent company is public, read its consolidated report. 

George Weston's reports break out Loblaw and Choice Properties as separate segments so that you can see both on one page. If the parent is private, notice that you can't, and ask why.

None of this needs to be illegal to be worth changing. Require these companies to report margins at the group level, and the thin-margin defence stops working. Until then, treat three percent as the store's number and ask for the other one.

They want you looking at the cash register. So, stop asking how much they make on a carton of eggs. Ask how much they make on the ground beneath it.