Loblaw Cos. Ltd. has told its suppliers that it will charge more fees to get their products on shelves, escalating an already tense standoff between supermarkets and food producers. On October 22 Loblaw sent letters informing suppliers of the extra fees while also asking them to “keep in mind” that it is investing $6 billion over the next five years to upgrade its stores and e-commerce operations. The fees will take effect on Jan. 3.
But a prominent industry association, Food, Health & Consumer Products of Canada (FHCP), criticized the fees for appearing to mimic a controversial new fee program from Walmart Canada that riled manufacturers this summer. “It’s just absolutely ridiculous,” FHCP chief executive Michael Graydon said on October 23rd. “You’ve got a lot of multinationals just throwing their hands up and saying, ‘Look, you know, I’m not sure Canada is worth the effort from a manufacturing perspective.’”
Loblaw, however, said the new fees were necessary, in part, to help keep food prices low because suppliers keep pushing to raise what they charge grocers. Loblaw said it sent several versions of the letter to different suppliers, some with different fee structures, but noted that small manufacturers and farmers would be exempt from the new fees.
The grocer said it will charge its largest suppliers an extra 1.2% on the cost of goods sold, as well as a customized fee to cover some costs associated with loyalty offers and online promotions. “As we face pressures, one option is higher prices for customers, but we don’t want to take that approach as Canadians are facing enough financial pressures,” Thomas said. “Instead, we’re asking primarily our biggest suppliers to help us keep prices low.”
Suppliers and supermarkets have for years clashed over fees, but some say the issue may have reached a tipping point, especially after Walmart Canada enraged its suppliers with a new type of charge in July. The retailer imposed the fees — 1.25% on the cost of goods sold to the retailers, plus an extra 5% on e-commerce — as a way to offset the cost of a $3.5-billion investment to modernize its stores and distribution network.
Walmart said the fees were a fair trade-off for suppliers, since the investment would lead to sales growth. But FHCP warned at the time that Walmart was setting a dangerous precedent in the sector by asking suppliers to help cover the costs of new investments.
Days after the Walmart announcement, United Grocers Inc., a national buying group that negotiates supply deals on behalf of Metro Inc., Save-on-Foods, Alimentation Couche-Tard Inc. and other retailers, told its suppliers in a letter that it would expect the same discount that Walmart is imposing on them.
The Canadian Federation of Independent Grocers (CFIG) has been fighting escalating fees in the grocery sector, arguing that when big chains squeeze suppliers at the margins they end up spending less with independent grocers. The CFIG, along with FHCP and other industry associations, used the highly public spat with the supermarkets this summer to ramp up pressure on the government to intervene.
“We have an oligopoly in food retail in Canada,” Sylvain Charlebois, a professor of food distribution and policy at Dalhousie University said. “It’s been very difficult for food manufacturing and it also puts smaller independent grocers at a disadvantage.”
He expects to see more private food labels in grocery stores and fewer food manufacturing jobs in Canada. “Food manufacturing is really the centerpiece of our entire agri-food sector and it’s slowly eroding as a result of all of these measures.”
The groups wanted Ottawa to bring in a code of conduct that would regulate relationships between suppliers and grocers. But the federal government has since clarified that it doesn’t have jurisdiction over the grocery sector and encouraged the provinces to examine the issue.
The head of Sobeys Inc. says the grocer won’t follow its Canadian competitors in unilaterally hiking supplier fees, calling the practice “hard to believe and repugnant.” Michael Medline, president and chief executive of Sobeys and its parent company Empire Company Ltd., said the move by some grocery retailers to impose fee increases on suppliers has left consumer goods companies feeling bullied.
“This is the worst relationship I’ve ever seen in my couple of decades in retail,” he said. “I don’t think it’s healthy … some of these behaviours are just plain bad for Canada.” Medline added: “It discourages innovation in terms of products. It hollows out our country in terms of head offices for (consumer packaged goods) companies and jobs.”
Medline said it’s time for a code of conduct in the grocery industry – the first CEO of a major grocery chain in Canada to publicly support the idea. “I don’t think a government unilaterally coming in and putting in legislation will probably help, because it’s a very complex industry and I don’t want unintended consequences,” Medline said. “It’s time that we got together as an industry and had a set of very simple, value-driven ground rules so that we don’t get in this mess and that we have a very healthy food supply chain.”