Martin Gooch says price cut demands can ultimately harm retailers’ relationships with vendors.Fred Lum/The Globe and Mail
A major grocery buying group is warning food suppliers that Loblaw Cos. Ltd. will likely follow Sobeys Inc. in demanding price cuts and price freezes from its vendors.
The warning, contained in a letter this week from United Grocers Inc., underlines a wider practice by retailers to demand breaks from their suppliers to help boost the sector's razor-thin profit margins.
On Thursday, The Globe and Mail revealed that Sobeys, the country's second-largest supermarket chain, told suppliers in December they would have to shave their prices by 1 per cent, retroactive to Nov. 3, and scrap any planned price increases for 2014. The move follows Sobeys's blockbuster $5.8-billion purchase of 213 Safeway stores in Western Canada.
Demands for price reductions or freezes from makers of food and other consumer goods are an increasingly common tactic for supermarket chains. Loblaw, for example, has taken deductions from its supplier payments – or refused to accept price hikes – to help cover such initiatives as store renovations and, more recently, costly and controversial updates to its IT systems, sources say.
United Grocers is a company that acts as a middleman on behalf of a number of retailers – including Jimmy Pattison's Overwaitea Food Group, London Drugs and Montreal-based Metro Inc. – in negotiating with suppliers. In a letter dated Jan. 6, it tells suppliers that after Sobeys's latest demands, they "will probably receive a similar request from Loblaws" and "we realize that you may face important challenges."
The grocers' demands reflect the highly competitive grocery sector, which has been squeezed over the past year by the expansion of U.S. discount titan Wal-Mart Stores Inc. and the launch of Target Corp. in Canada. Loblaw last year sealed a $12.4-billion deal to buy Shoppers Drug Mart Corp.
And as Wal-Mart continues to add more stores and food aisles, it puts heat on Loblaw and others to turn more to their suppliers for concessions.
"It's partly retailers using their buying power," said Martin Gooch, chief executive officer of food business consultancy Value Chain Management International and an adjunct professor at the University of Guelph. "They're competing in an overly saturated market, particularly in Ontario. They're looking for any way to make money."
But he said the practice goes beyond the grocery retailers, and ultimately can poison relations with suppliers. "It's not the ideal way to develop a constructive relationship with suppliers."
Some suppliers stand up to retailers and refuse to accept their terms, negotiating alternative agreements, Mr. Gooch said. But smaller suppliers often have to acquiesce to retailers' demands.
Denis Gendron, president of United Grocers, said Sobeys and Loblaw feel the heat of generating savings from their acquisitions. Sobeys has pledged to cut $200-million annually within three years and half of that within the first 12 months; Loblaw has said its Shoppers purchase would result in $300-million of savings a year by the third year after the deal closes.
"There are a lot of suppliers who are not happy," said Mr. Gendron, whose group negotiates volume rebates with vendors on behalf of retailers.
"As a company, we've committed to building long-standing, long-term relationships with suppliers," Kevin Groh, Loblaw's vice-president of corporate affairs and communication, said in a statement. "We are focused on creating mutual benefit and serving customers better as a result."
Big chains' practice of demanding price cuts or freezes isn't new. For instance, on Oct. 1, 2012, Loblaw wrote to suppliers to say it "will not accept increases in costs from our suppliers effective immediately through calendar year 2013." It cited its adoption of a new SAP system, which had begun in 2009 and is still ongoing.
An earlier Loblaw letter had asked vendors for reductions of 2 to 3.5 per cent for orders, citing the retailer's "plans for significant growth through aggressive capital spending" on new stores and major renovations in 2009.
Sobeys said in its letter, dated Dec. 24, 2013, to suppliers that it needed them "to deliver a synergy savings rate of 1 per cent of cost of goods sold to Sobeys," effective Nov. 3, as well as refrain from price increases in 2014, with some exceptions. "Current market retail pricing conditions leave no room for absorption of cost of good increases," the letter says.