Loblaw Cos. Ltd.'s move to reduce the amount it will pay to its major suppliers by 1.45 per cent is reverberating through the grocery sector, with other retailers asking their vendors for the same deal.
United Grocers Inc., a buying group for retailers ranging from Montreal-based Metro Inc. to Jim Pattison's Overwaitea Food Group of Langley, B.C., and London Drugs Ltd. of Richmond, B.C., has written to suppliers with requests to match whatever rate they offer to Loblaw.
"We do expect to receive any cost reduction you may decide to offer to any competitors," Denis Gendron, president of UGI in Toronto, said in a letter dated July 12 to "valued suppliers."
Overwaitea sent its own missive, dated July 7, to its suppliers. "We regret that we are writing today to advise that given Loblaw's recent decision to impose significant cost reductions and restrictions to future increases, we feel we are forced to follow suit in order to remain competitive and continue to pass the best possible costs along to our customers," said Darrell Jones, president of Overwaitea.
In an interview, Mr. Jones said his company does not like to deal with its suppliers in this way. "It is not how we do business." But he felt he had no choice.
The jockeying comes in a more consolidated grocery sector that is feeling the heat from U.S. discount titans Wal-Mart Stores Inc. and Costco Wholesale Corp., which are stealing business from traditional players as consumers increasingly seek bargains.
At the same time, suppliers' import costs have gone up because of the strong U.S. dollar, prompting them to raise their wholesale prices.
"There is a level of mistrust between suppliers and retailers," said Peter Chapman, president of the consultancy GPS Business Solutions and a former executive at Loblaw, the country's largest grocer. "As Wal-Mart and Costco continue to gain market share, there's more pressure on the others to maintain their sales."
Food & Consumer Products of Canada, which represents grocery suppliers, said in an e-mailed statement its members "are not surprised by other retailers asking for the same treatment as Loblaw, a 1.45 per cent cut in prices.
"Our members are frustrated by these actions. Suppliers work very hard to provide the best products at the best prices for Canadian consumers." Our whole industry has faced key challenges like a lower Canadian dollar, increased input costs and growing energy costs." It noted that food inflation is now below the rate of general inflation for the first time in almost two years.
Prices for food purchased from stores rose 0.8 per cent in June from a year earlier, compared with a 1.4-per-cent increase in May, and 3.6 per cent in June, 2015, according to Statistics Canada. In June, 2016, for instance, prices for fresh or frozen beef fell 3.3 per cent, marking their first year-over-year decline since August, 2010, while dairy prices dropped 2.1 per cent.
UGI's Mr. Gendron said in an interview that suppliers have told him they are "not at liberty to discuss" the matter but are "committed to treating all customers fairly."
Mr. Jones said in his letter to Overwaitea suppliers that "it is never our practice to impose unilateral sanctions against our valued supplier partners and we find ourselves now in the untenable position of being required to do so …
"As a result of Loblaw's recent policy changes, unfortunately, we feel it necessary to impose the same 1.45 per cent deduction to all inbound shipments after September 4, 2016 and take the same position on cost increases that they have, in order to keep the playing field level for consumers."
But Mr. Jones said if a supplier intends to reject Loblaw's new policy, Overwaitea "will review our approach to your accounts accordingly."
In early July, Loblaw told its major vendors it would deduct 1.45 per cent from the bill for orders received on or after Sept. 4. Loblaw said its suppliers had raised their prices by more than $1-billion since 2014 and, just since October, passed on "unjustified cost-increase requests … hundreds of millions of dollars by our calculation," Loblaw's letter to suppliers said.
"We want to work with our suppliers to put money back in the pockets of Canadian consumers," it said. "Our goal is to combat food inflation by lowering prices."
Suppliers and retailers have had an often tense relationship in past years after Loblaw and other rivals retroactively rolled back what they would pay to vendors.
The Competition Bureau continues to investigate Loblaw's pricing practices with its vendors since its 2014 takeover of Shoppers Drug Mart. (In 2013, Sobeys Inc., the second largest grocer, acquired Safeway Canada.) Last October, Loblaw told its suppliers it would overhaul its pricing practices to streamline its operations and smooth relations with its vendors.