As grocers slash prices to win bargain-hungry customers, makers of food and consumer goods are pushing back against heavy discounting of their products.
In the intensified competition, grocers have demanded price cuts from their suppliers.
Now vendors are retaliating by setting minimum advertised prices in a bid to stop retailers from using their merchandise as loss leaders.
Over the past several months, major suppliers of items ranging from Coke to Delissio pizza, Folgers coffee and Chef Boyardee spaghetti have told grocers they will pull funding for flyers and other promotions for the products – and in some cases potentially suspend or limit product shipments – unless the retailer agrees to the new pricing policy, according to documents obtained by The Globe and Mail.
The moves come amid heightened tensions between grocers and suppliers in an increasingly competitive food retail landscape that is being crowded by expanding U.S. discount giants.
The competition has forced retailers to lower prices, squeezing their margins, while also looking to lower their costs by putting pressure on suppliers. Now, the suppliers are fighting back.
The battle for aisle supremacy shows no signs of easing as the country's two biggest grocers, Loblaw Cos. Ltd. and Sobeys, owned by Empire Co, move forward with blockbuster takeover deals.
Last November, Sobeys closed a $5.8-billion acquisition of Safeway Canada. Shortly afterward, the company touched off an industry storm on Christmas Eve when it demanded retroactive price rollbacks and a freeze on increases from suppliers. Other retailers quickly followed suit.
Meanwhile, Loblaw is awaiting a green light from the Competition Bureau for its $12.4-billion purchase of Shoppers Drug Mart Corp. As the market heats up, suppliers are taking new steps to protect their turf.
"Some of the pricing dynamics have gotten so aggressive that they're detrimental to what we're trying to do – they're inconsistent with what we're trying to do," Stephen Kouri, vice-president of sales at Smucker Foods of Canada Corp., said in an interview.
Starting Jan. 6, Smucker implemented a "minimum feature selling price" of $6.97 or higher for its 642- to 975-gram packages of Folgers decaffeinated roast and ground coffee; grocers had often promoted them for less than $6. It is too early to assess the effects of its latest move, he said.
ConAgra Foods Canada Inc. has set a $1.20 minimum advertised price for its 410- to 425-gram cans of Chef Boyardee pasta meals, beginning March 15, Ian Roberts, vice-president of sales at ConAgra, said in a recent letter to retailers.
He said ConAgra is instituting "unilaterally" its new policy "in order to reduce supply chain volatility, protect our brand equity, maintain our commitment to deliver value to our end consumers and retailer partners, and better compete in the market."
If retailers want to continue to receive ConAgra's promotional funding for its key Chef Boyardee line, they must adhere to the minimum advertised price "so that the core product line is not used as a 'loss leader,'" he said. "In addition, ConAgra Foods reserves the right to restrict or suspend supply of the product line."
ConAgra spokeswoman Lanie Friedman said in an e-mail its new policy "is designed to make way for reasonable promotions and discounts, while ensuring that we continue to build equity in our brands."
Minimum advertised prices were banned in Canada until 2009, when amendments to the Competition Act decriminalized "price maintenance," opening the door to the policy, which is common in the United States.
Business lawyer Trina Fraser at law firm BrazeauSeller LLP said price maintenance is now merely a "reviewable" practice by the Competition Bureau, which can seek an order from the Competition Tribunal requiring the price maintenance to stop if it reduces competition. "So there is much less incentive now to refrain from price maintenance activities," she said.
Last September, the tribunal released its first decision on the new price maintenance provision, dismissing an application by the Competition Bureau that practices of Visa and MasterCard violated the new rules.
"Perhaps suppliers are feeling emboldened as a result of this decision and more aggressively pursuing these types of programs," she said. "With increased competition, suppliers are looking harder for ways to differentiate themselves from their competitors. One of which ways is to position yourself as a 'premium' or 'luxury' brand, and this is (arguably) undermined by retailers selling your product at heavily discounted prices."
Suppliers' minimum advertised price policies have led retailers to adopt creative strategies to draw shoppers, such as in-store features and other unadvertised discounts, said Chris Hersh, head of the competition law group at Cassels Brock & Blackwell LLP. In the U.S., e-commerce players have refrained from promoting their discounted prices on their websites, instead directing consumers to put items in their shopping carts, where they find out the prices, he said.
Suppliers are "not affecting pricing; they're affecting advertising," he said. "This is not going to stop retailers from competing on price."
The practice isn't completely new to the grocery sector. In 2012, Kraft Canada Inc. set a minimum "feature selling price" of $6.97 or higher for its large tin of Maxwell House coffee. It warned grocers it would pay for the product's promotional funding only on condition that they institute the minimum advertising price.
Tim Berman, vice-president of sales at Kraft, said in a letter dated April 11, 2012, that the company was taking advantage of the recent competition law changes. The "unilateral minimum advertised pricing (or UMAP programs) can be beneficial to both Kraft and our customers [retailers.] For example, a UMAP program can facilitate the entry of a new product into a marketplace by assuring a level playing field.
"In addition, pricing confidence may allow you to focus your resources on promoting new product on the basis of its features. UMAP programs can also help avoid the devaluation of a new or product brand in the marketplace. Of course, this letter is not intended to replace advice from your own legal department." Mr. Berman could not be reached for comment.
Other companies have rushed to adopt the measure. On Oct. 15, Coca-Cola Refreshments Canada put into place minimum advertised prices on a wide array of its beverages, according to a company notice to retailers. For example, it called for a MAP of $3.30 for a carton of 12 355-ml cans of its drinks, which can sell at a regular of about $4.50, and a MAP of 95 cents for a 2-litre bottle of Coke, Sprite or Canada Dry Ginger Ale, which last year were featured for as low as 75 cents each from the regular $1.90 or more.
Coca-Cola "reserves the right to restrict or suspend supply on the relevant package" if the retailer does not abide by the pricing guidelines, the notice said. Company spokeswoman Shannon Denny said in an e-mail it does "not provide public comment on confidential discussions with our customers regarding our business and programs."
Starting Feb. 24, Nestlé Canada Inc. rolled out feature selling prices along with even lower "hot" feature selling prices for its Delissio Rising Crust and other frozen pizzas, with a warning it will stop paying retailers their promotional allowances for the products if they fail to follow the policy, a notice to grocers says. Nestle did not comment.
As they moved to establish minimum advertised prices, Nestle, Coca-Cola and ConAgra were among companies that grappled with falling sales in Canada, researcher Nielsen Co. data show. In the 52 weeks ended Sept. 21, ConAgra's Canadian sales dipped 4 per cent to $546.8-million from a year earlier, according to recent Nielsen figures obtained by The Globe. In the same period, Nestle's Canadian sales slipped 1 per cent to $1.8-billion while Coca-Cola's sales fell 4 per cent to $965-million, the data show. Kraft sales rose 3 per cent to $2.2 billion.
"We are investing millions of dollars in building our brands," Mr. Kouri said. "To have them sold at prices sometimes that are well below our strategies and leave consumers wondering about our brands makes us feel vulnerable. It's a difficult situation."