Loblaw has agreed to sign on to new rules aimed at smoothing relations between retailers and their suppliers after years of difficult negotiations over a grocery industry code of conduct.
The rules, drafted by industry associations, aim to reduce Canada’s big grocers from bullying food producers.
The code, along with a new watchdog office, was expected to be finalized last year, but it has been stalled for months due to Loblaw and some rivals refusing to sign.
Loblaw CEO Per Bank said the company has come around after industry groups agreed to make changes to the draft.
Calls for a code of conduct gained momentum in 2020 after Loblaw and Walmart announced increases in manufacturer fees, which suppliers deemed unfair.
Among the complaints, suppliers said grocers charged penalties for running out of product, sometimes $20,000 a month, even while suppliers faced global ingredient shortages and COVID-19 outbreaks in their factories. Late fees cost as much as $1,200 a delivery, on top of unloading fees of up to $500 a pallet and “listing fees” of up to $125,000, just to get products on shelves, according to a 2021 government study.
Without a code, suppliers have no choice but to pay up, as the top five chains control around 80% of sales in Canada, and they cannot risk losing their products from those shelves.
Loblaw was concerned that a supplier could run to the watchdog if a grocer turned down a price increase. At the moment, if a grocer refuses to accept a price increase, the supplier’s only recourse is to pull its products from the shelves — as seen in the high-profile 2022 standoff between Loblaw and Frito-Lay that emptied out chip aisles across the chain.
Recent changes to code ensured that those sorts of price disputes would not be decided by a third-party adjudicator.
The changes add “clarity and simplicity” and avoid misunderstandings, according to a statement from Michael Graydon, CEO of the manufacturing lobby group Food, Health and Consumer Products of Canada, who has helped lead industry negotiations on the code.
None of the recent changes have fundamentally altered the code, said Mr. Graydon, but some of the wording was clarified. “The key principles have not changed – transparency, fair dealing,” Mr. Graydon said. “There is less ability for misinterpretation. That’s really the exercise we went through.”
The code has been designed to set out parameters for things such as fair allocation of product supply to independent grocers as well as large players with more market power; a third-party adjudicator to mediate disputes between parties; and reliable order forecasting – which can be the basis of retailers’ fines, when orders don’t match up.
The code is still likely months away from going into effect, Mr. Graydon added. Before that can happen, an adjudicator will have to be hired, industry players will require education on how to write supply agreements, and other players such as Walmart and a majority of smaller independent suppliers and retailers need to also sign on.
Loblaw, made clear on May 16th that they will only back the deal if Walmart and Costco are on board.
Costco has not made any announcements or comments on the new development. While Walmart Canada spokesperson Sarah Kennedy said the company is still reviewing the changes before figuring out next steps.
