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People shop at the Loblaws at Maple Leaf Gardens in Toronto.

Matthew Sherwood/The Globe and Mail

Tensions are again rising between Loblaw Cos. Ltd. and its suppliers after the country's largest grocer decided to start charging them a new fee in 2018 amid mounting costs in the fast-changing sector.

In a letter last week to its largest suppliers, Loblaw says it will introduce "a supply chain handling charge" of 0.79 per cent of the value of their orders that are centrally shipped to the giant retailer after Dec. 31. The fee also applies to suppliers of Shoppers Drug Mart, which Loblaw acquired in 2014.

"Shipping goods to Loblaw and/or Shoppers Drug Mart after December 31, 2017 will be considered acceptance of this new charge," says the Oct. 26 letter, obtained by The Globe and Mail and signed by Robert Wiebe, executive vice-president of supply chain at Loblaw.

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Loblaw's unilateral decision to essentially lower the amount it pays its suppliers comes after similar moves by it and other rivals over the past year or more, underlining long-running stresses in the margin-skinny grocery sector as a handful of big players increasingly dominate the industry.

Suppliers have reacted with anger to what they view as a non-negotiable wholesale price cutback that they estimate will cost them $200-million, although Loblaw says that is "vastly overstated.‎" Suppliers say Loblaw's latest deduction comes to roughly the same amount as the $190-million Loblaw has calculated it will need to cover higher labour costs in 2018 as a result of minimum-wage increases in Ontario and Alberta.

"It's so one-sided," said Michael Graydon, chief executive officer of Food & Consumer Products of Canada, which represents suppliers. "It's just sucking money out of manufacturing that is no longer available for growth, expansion and innovation."

Suppliers fear that other grocers will follow Loblaw's lead and also issue new fees or price rollbacks, as they have in the past, Mr. Graydon said. "There's a cascading effect that happens."

Loblaw spokesman Kevin Groh, however, countered that the suppliers' estimate of how much the fees will generate is "vastly overstated and not even in the ballpark of our estimates.

"Our industry is facing various cost pressures," Mr. Groh said in an e-mail Friday. "This handling fee is not related to any single one."

Loblaw's Mr. Wiebe says in his letter the new charge comes "in the face of growing supply chain costs anticipated in 2018."

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As well, the grocer over the past decade or more has poured money into its supply chain, including almost $2-billion in capital investments and the implementation of "industry-leading technology," he writes.

"Our investment has created a network that provides exceptional service levels to our stores and – ultimately – to our shared customers," he says. "Together, our distribution centre, trucking, shipping and receiving, and store teams commit to keeping your products on time, in stock, available for sale."

Mr. Groh said Loblaw has always had handling fees. "We have simply held them flat for nearly a decade, as we've invested billions to create a highly efficient supply chain." (The new fee is 0.24 per cent for the small number of suppliers that ship directly to stores.)

In the summer of 2016, Loblaw told its major suppliers it would begin in September of that year paying them 1.45 per cent less than they had previously agreed to in an attempt, it said, to lower consumer prices. Loblaw said the reduction was aimed at helping cover more than $1-billion in price increases it had got from its vendors since 2014.

Other grocers followed suit with similar initiatives, including Langley, B.C.-based Overwaitea Food Group, creating more tension with suppliers. In December, Metro Inc., the country's third largest grocer, lowered by 1 per cent the amount it paid its vendors.

The jostling comes as grocers navigate a rash of changes in the retail landscape that threaten to pinch their profits, ranging from government-imposed minimum wage hikes to e-commerce titan Inc.'s push into groceries with its $13.7-billion (U.S.) acquisition of organic supermarket chain Whole Foods Market Inc.

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"Certainly from our perspective, our priority is to be as competitive as possible, both in today's market and in anticipation of the threats that we see in the future," Galen G. Weston, chief executive officer of Loblaw, said on a quarterly conference call in July.

He said Loblaw would look at an array of ways to offset mounting costs, including self checkouts and other technological and digital tools.

Duncan Reith, a grocery consultant and former executive at Sobeys Inc, the country's second largest supermarket retailer, said Loblaw's latest supplier charge demonstrates the massive clout of the combined Loblaw-Shoppers business. "This is another example of Loblaw using that power to benefit themselves versus consumers and their vendor [supplier] partners."

Loblaw's practice of treating suppliers as "an endless source of incremental funding for retailers is short-sighted," added Mr. Reith, a marketing professor at Seneca College.

The federal Competition Bureau is investigating Loblaw's pricing practices with its vendors in an "abuse of dominance" probe tied to the grocer's $12.4-billion (Canadian) takeover of Shoppers Drug Mart in 2014. That followed Sobeys's $5.8-billion acquisition of Safeway Canada the previous year. The bureau's inquiry is continuing and separate from a criminal probe it is conducting into alleged price fixing of packaged breads among the big grocers and bread makers.

FCPC's Mr. Graydon said payment demands from grocers can come in subtle ways, such as fines for late or incomplete deliveries. He said the latest Competition Bureau investigation into bread price-fixing, which has sent shock waves through the industry, seems to be putting a spotlight on industry practices. "This environment cannot be sustained long term."

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He said suppliers' mounting payments to grocers seem to benefit the retailers' bottom lines more than reducing consumer prices. Prices for food purchased from stores grew 0.9 per cent year-over-year in September, according to Statistics Canada. In its second quarter, Loblaw's profit more than doubled to $358-million from a year earlier.

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