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Sobeys seeks ‘transparency,’ better deals in supplier pricing overhaul

Sobeys’s vendor pricing changes come as the grocer faces off with low-cost rivals that threaten to steal away business.

Brent Lewin/Bloomberg

Sobeys Inc. is moving to drop some controversial supplier pricing practices as the grocer works to streamline its operations and provide better deals for shoppers.

Marc Poulin, chief executive officer of Sobeys, said in an interview that the steps the retailer is taking with its suppliers are aimed at removing the "complexity" and administrative cost of deducting multiple payments from vendors for such things as bulk buying and flyer promotions.

The country's second-largest supermarket retailer wants to become more "transparent" and improve pricing and other aspects of the shopping "experience," such as promotions, product offerings and service, he said.

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He did not elaborate on the extent of Sobeys's potential cost cuts as a result of the changes. Suppliers – uncertain about the ultimate effects of the overhaul – wouldn't comment, saying negotiations with Sobeys are ongoing.

But the moves come as the grocer struggles to integrate its newly acquired Safeway Canada chain amid challenged financial results. As well, Sobeys is grappling with an uncertain economy, especially in Western Canada, where the retailer lacks discount formats to serve a more fragile consumer.

"As a retailer it's obviously our task to try to get the best deal possible from the vendor [supplier] because, obviously, we want to reflect that to our customers," Mr. Poulin said.

Sobeys's vendor pricing changes, which its executives presented at a private meeting with suppliers on Nov. 24, come as the grocer faces off with low-cost rivals that threaten to steal away business. Discounter Wal-Mart Canada Corp. has been bulking up on food, while Costco Wholesale Canada and Loblaw Cos. Ltd., which runs No Frills and Real Canadian Superstore, also cater to bargain hunters.

Sobeys, without a dominant discount format outside of Ontario where it operates FreshCo stores, feels the heat to raise its game.

At the same time, supplier pricing policies have come under a microscope as a result of a Competition Bureau investigation into Loblaw's rules with its vendors. Last month, Loblaw said it was revamping some of its vendor practices to achieve more transparency and less complexity.

Mr. Poulin emphasized Sobeys's latest moves aren't tied to the bureau's inquiry.

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Peter Chapman, president of grocery consultancy GPS Business Solutions, said Sobeys needs to become more competitive and lower some prices as it takes on aggressive players.

Sobeys's prices often are higher than many of those at key competitors, he said. Loblaw executive chairman Galen G. Weston predicted last month that its discount formats in Alberta could benefit from the weaker economy caused by the oil slump.

Mr. Poulin said Sobeys wants "to achieve the best offer possible for customers and the best customer experience. … Our current practices are not 100-per-cent focused on that. We are doing a lot of things that are not of direct benefit to the customer because they are administratively burdening. We want to refocus our efforts and the efforts of our suppliers."

The initiatives will be "cost neutral" for suppliers, he said. "In lots of cases, creating simplicity is a complex task."

Amid the changes, the Competition Bureau is looking into whether Loblaw's vendor terms may raise costs for rivals and increase grocery prices for consumers. The bureau launched its investigation after Loblaw's $12.4-billion takeover of Shoppers Drug Mart Corp. last year. About a year earlier, Sobeys acquired Safeway Canada for $5.8-billion.

In October, Loblaw told its suppliers it would scrap pricing rules, such as retroactive rollbacks and pressing suppliers to match lower advertised prices of rivals, starting Jan. 3, as part of an effort to streamline its operations and smooth relations with its vendors.

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On Nov. 24, Mr. Poulin and Dale MacDonald, Sobeys's senior vice-president of national procurement, met with members of the Food and Consumer Products of Canada, which represents suppliers, to discuss the company's news policies. FCPC executives declined to comment.

Wendy Evans of retail specialist Evans and Co. Consultants said the latest actions of Loblaw, and now Sobeys, could help discourage the bureau from recommending harsh federal measures, such as introducing a code of conduct to regulate the grocers' practices. Suppliers and small grocers have been pushing for a code that is similar to the one in Britain.

The bureau's investigation has been a wake-up call for big grocers to ensure they don't abuse their positions of power, she said. The bureau has singled out Loblaw in its inquiry "but almost all of the major players had been using some of those same tactics," said Ms. Evans, who has done work for small and large grocers. (Mr. Poulin stressed that Sobeys never engaged in some key practices that have come under question at Loblaw by the bureau, such as forcing suppliers to cover ad-matching costs.)

"You can only push your suppliers so far," Ms. Evans said. "They have been on the losing end for a long time … Hopefully, this will make it a more level playing field for all of the players involved."

Sobeys touched off a storm in late 2013 when it told its suppliers to retroactively shave their prices by 1 per cent after its Safeway takeover. As well, it said it was freezing almost all wholesale pricing for 2014.

Sobeys's parent Empire Co. Ltd. is to report its quarterly results on Tuesday.

Loblaw's Mr. Weston told analysts last month it is seeking "a more collaborative business" approach with its suppliers to "reduce volatility" and "improve visibility" and "reduce the amount of complexity that we engage in when we're negotiating with vendors, both on annual contract and then on short-term sort of promotional support."

He said he thought suppliers "feel supportive of the approach and it's going to be hard work to get through some of this stuff, as you change the nature of contracts, the type of conversation that you have with the vendor community. But at this point, we don't see any – in fact, we see upside just from a process efficiency point of view – and we don't see any risk to margin as a result of this at all."

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