Tensions are rising between Sobeys Inc. and its suppliers after the country’s second largest grocer told them this week it is overhauling payment terms, leaving many of them with a bigger financial burden.
For example, Sobeys told some suppliers they would be paid in 60 days rather than 30 days; it told others they would be paid in 20 days rather than 30 days, but would have to give the grocer a 2-per-cent cash discount on the orders instead of the previous 1 per cent, industry insiders said.
In all, Sobeys alerted about 4,800 suppliers to six new payment terms from a myriad of previous ones, Michael Medline, chief executive officer of Sobeys, confirmed in an interview on Tuesday, when the terms came into effect. The vendors were told a day before about the changes, whose terms range to 90 days for some of them, a company spokeswoman said.
“This was an effort to streamline our process,” Mr. Medline said. “We had literally dozens and dozens, if not hundreds, of payment terms with different supplier-partners across the country.”
But Michael Graydon, CEO of the Food & Consumer Products of Canada, which represents suppliers, said they are disappointed and angry about what he called Sobeys’s unilateral changes to payment terms.
“It’s been pretty aggressive,” he said. “It is just an absolute process of transference of wealth from manufacturers to the bottom line of the retailer.”
Since Mr. Medline arrived at Sobeys in 2017, it has gone through a massive cost-cutting initiative it calls Project Sunrise to help recover from the losses it faced after its botched 2013 acquisition of Safeway Canada. Sobeys has slashed staff, centralized operations and is now consolidating its roster of suppliers to get rid of regional fiefdoms and respond better to customer preferences.
Sobeys’ revised payment terms come more than a year after Loblaw Cos. Ltd., the country’s top grocer, raised the ire of its suppliers by charging many of them a new “supply chain handling charge” of 0.79 per cent of the value of their orders. The fee also applied to major vendors of Shoppers Drug Mart, which was acquired by Loblaw in 2014. Other grocers followed suit with similar demands.
However, Sobeys’ latest efforts are now starting to hit many suppliers, some of whom say privately they are considering walking away from the grocer because they can’t afford the new terms, Mr. Graydon said.
He said the suppliers are particularly upset about what he said was the unilateral nature of the changes. Mr. Medline had reassured the FCPC group soon after he took the top job at Sobeys that he would not impose the types of one-sided terms on vendors that his rivals had done, Mr. Graydon said.
Mr. Medline countered that Sobeys is simply following industry benchmarks on supplier payment terms. “We didn’t just randomly set these. ... Some of the supplier-partners were not giving us as good deals as we deserved.” He said Sobeys is trying to “level the playing field” with rival grocers.
He had warned a retail industry group last year that “there would be winners and losers” in Sobeys’ process of consolidating its suppliers, Mr. Medline said.
He said his team has been in discussions with suppliers for more than a year over its “reset” of various grocery categories. The inventory overhaul is based on studies of customer product preferences as well as enhanced retailer economics, he said.
Sobeys told suppliers in letters about the payment changes it sent to vendors on Monday that they have seven business days to get back to the company if they have any issues with the new terms, Mr. Medline said. So far 11 have responded. “We try to be fair and equitable, especially with the local, small businesses. ... If it makes sense, in the rare exception, we will change it."
Errol Cerit, senior vice-president at FCPC, said Sobeys’ payment changes represent “hundreds of millions of dollars” of extra costs for manufacturers. It follows “already aggressive costing negotiations by category, that will result in fewer brand choices for Canadian consumers,” he said. “For smaller, medium-size manufacturers this change could mean the difference between staying in business or not."
FCPC is not aware of other Canadian grocers that currently pay their suppliers in as many as 60 days, he said. Spokespeople at other major grocers, including Loblaw and Metro Inc., wouldn’t comment on their terms or couldn’t be reached.
Retail consolidation is making it tougher and more expensive for suppliers to get their products stocked at the major supermarkets, hurting their ability to develop new items, Mr. Cerit said. The cost of listing and other fees to place products on store shelves jumped 22 per cent between 2013 and 2017 while remaining constant in the United States, he said.