Sobeys will reject new supplier requests for price hikes: CEO

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The chief executive of Sobeys parent company Empire Co. Ltd. EMP-A-T says his stores will not accept the latest price-increase requests from some multinational food and beverage suppliers, calling the requests “ridiculous,” “unfair” and “distressing.”

CEO Michael Medline said on Thursday that while the majority of price hikes suppliers have asked for over the past couple of years have been justifiable, as inflationary pressures affected manufacturers’ costs, Empire cannot agree to recent requests from some of its largest suppliers.

“It’s not the right thing to do. And if that results in a few holes in our shelves, we believe that Canadians will more than understand,” Mr. Medline said on a conference call with analysts to discuss the company’s quarterly earnings. “… We’ll fill it with other goods in our store, including our own [private-label] brands.”

As grocery retailers have faced scrutiny over whether they are doing enough to fight food inflation, executives have grown more vocal about other parts of the supply chain that contribute to rising prices. In recent months, executives at Loblaw Cos. Ltd. have also criticized the cost increases coming from multinational consumer-packaged-goods companies. During an appearance before the House of Commons agriculture committee, Loblaw chairman Galen Weston pointed to a number of major food manufacturers who have indicated in their earnings reports that they have benefited from price increases.

For context, the number of cost-increase requests that Empire received in the second quarter was one-fifth the volume of requests that came in at the same time last year, chief operating officer Pierre St-Laurent said on Thursday’s call. But even as pressure abates, a few suppliers are failing to understand that consumers’ capacity to pay more has reached its limit, he said.

Growth in grocery prices slowed in October, when prices were up by 5.4 per cent on an annual basis. That was a significant improvement compared to peak increases of more than 11 per cent in late 2021 and early 2022. But even as food inflation slows, shoppers still face significantly higher grocery bills than they did a couple of years ago.

The situation has resulted in political pressure for Canada’s largest grocers. In October, Empire was among the chains that complied with a request from the federal government to submit plans to stabilize prices, though some critics pointed out the plans mostly included strategies the sector already employs, such as discounts and price matching. Like other food retailers, Empire reported that its internal measures of food inflation have fallen slightly below the food price growth tracked by Statistics Canada’s Consumer Price Index.

Michael Graydon, CEO of supplier-industry group Food, Health & Consumer Products of Canada, said that most cost-increase requests are the result of higher costs the suppliers are facing. He cited rising costs of commodities and labour, as well as expenses related to regulation such as new labelling requirements on packaging.

“Even the multinationals are experiencing cost increases,” Mr. Graydon said. “It’s not as if this is a massive profit grab. In many cases, it’s cost recovery.”

On Thursday, Mr. Medline said that when Empire’s own costs go up, the company must absorb some increases and cannot pass everything on in higher prices on shelves. In the past, he added, suppliers also did not pass on every cost increase to the retailers.

“We have to find ways to save money, and we’ve got to eat some of it if we have to,” he said. “That’s the way you do business.”

Mr. Medline’s reference to possible holes on the shelves has a high-profile precedent: Early last year, a dispute over cost increases led packaged-goods giant PepsiCo Inc. to cut off shipments of its Frito-Lay products to stores owned by Loblaw. While the dispute dragged on, Loblaw filled gaps in its shelves with its own President’s Choice and No Name brand potato chips, as well as with products from other suppliers.

On Thursday, Empire reported sales and earnings growth in its grocery business in the second quarter, while income from investments and other operations led to an overall decline in profits.

The Stellarton, N.S.-based retailer reported that net earnings fell to $181.1-million, or 72 cents a share, in the quarter ended Nov. 4, compared with $189.9-million, or 73 cents a share, in the same period last year.

Empire recorded a $20.6-million insurance recovery related to a cybersecurity breach that hit the company last November. It also recorded $16.8-million in restructuring costs related to a plan to improve efficiencies. Not including those items, adjusted net earnings were lower at $178.3-million, or 71 cents a share.

Sales and adjusted earnings per share both came in below analysts’ estimates for the quarter. Empire’s stock price fell by more than 11 per cent on Thursday.

The company, which owns chains including Sobeys, Safeway, IGA and FreshCo, reported that sales and profits were up in its grocery operations, with adjusted net earnings in the food retailing segment rising 8.5 per cent to $171.5-million. Income from its investments and other operations declined, mostly because fewer property sales led to lower equity earnings from Empire’s interest in Crombie Real Estate Investment Trust.

Same-store sales – an important industry metric that tracks sales growth not tied to new store openings – grew by 2.2 per cent in the quarter, or 2 per cent excluding fuel. That was slower growth than a year ago.

Empire’s sales grew by 1.4 per cent in the second quarter compared with the prior year, to nearly $7.8-billion. Grocery sales were up, especially in the company’s FreshCo discount stores. But some growth was offset by the effects of Empire’s sale of its 56 gasoline stations in Western Canada in the first quarter, leading to lower fuel sales in the second quarter compared with the prior year.