Price hikes? Loblaw tells its suppliers not to bother

Suppliers should help cut prices for Canadians, latest Loblaw letter says

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Loblaw says it won’t accept price hikes from suppliers unless they can show proof the increases are due to higher input costs.

In a letter sent to suppliers, Canada’s largest grocery chain said it wants to “combat food inflation by lowering prices” for Canadians. It told suppliers it would start applying a 1.45% deduction to shipments received as of Sept. 4.

“We are confident that you will support our plan to give consumers the best possible prices. If you continue to ship after September 4 we will assume we have your support,” said the letter, from Grant Froese, Loblaw’s chief operating officer, and Mike Motz, president of Shoppers Drug Mart. Canadian Grocer obtained a copy.

Loblaw and other food retailers have been attempting to balance rising food prices with consumers who seem fed up paying more at the checkout.

READ: Loblaw forecasts grocery prices will fall

Galen Weston, Loblaw’s chief executive, spoke about that dilemma in a conference call with analysts in May in which he said that Loblaw was seeing “consumer resistance” to higher food prices.

Earlier this year Sobeys instituted price drops at its stores in Western Canada and in Quebec.

Overall food prices rose 1.8% in May, the smallest year-over-year gain since March 2014, according to Statistics Canada. That followed a 3.2% hike in April.

In the letter to suppliers, Froese and Motz wrote that Loblaw had received more than $1 billion in cost increases from suppliers since 2014 and “hundreds of millions of dollars” in “unjustified cost increase requests” since last October when the company sent a letter to suppliers stressing the need to support Loblaw’s price-value strategy.

Froese and Motz reminded suppliers that Loblaw has “invested more than $1 billion annually to improve and expand our store network for customers—to our benefit and yours. We need your assistance and investments to introduce new value and drop more prices.”

READ: Should Sobeys go discount in the West?

These types of letters aren’t unusual. Loblaw has sent similar communications to suppliers about prices in the past. So too has Sobeys. In early 2014, just months after it closed its purchase of Canada Safeway, Sobeys told suppliers to cut their prices by one per cent.

But such letters have also raised concerns among suppliers and independent grocery retailers who argue that Canada’s grocery industry is overly consolidated with power resting in the hands of but a few retail distributors—namely Loblaw and Sobeys. Both supply not only their own stores, but independent grocers across the country as well.

Some have called for the creation of a groceries code of conduct, which would regulate the power of the biggest chains over suppliers.

Such a code is in place in the U.K. where a groceries code adjudicator, Christine Tacon, has been appointed by the British government to ensure that nation’s biggest supermarket chains do not contravene the code.

Earlier this month, Tacon launched an investigation into whether big British grocers were unjustly demanding payments from major suppliers for better shelf space, and whether major suppliers were using their ability to make those payments to muscle small suppliers off good shelf positions.

Tacon also told suppliers this month that they were “signing away their rights” by agreeing to a number of small-print demands in contracts with major grocery chains.

READ: Why I’m for a code of conduct

Loblaw’s latest letter could spur other big supermarket chains to remind their suppliers that price cuts given to Loblaw are not to be made up with price hikes at their companies.

Gary Sands, vice-president at the Canadian Federation of Independent Grocers, said his organization wants to make sure independent grocers aren’t paying more either and that “cost reductions being demanded by Loblaw are provides to independents.”

CFIG says that independent grocery store sales in Canada are worth $11.5 billion a year, which Sands noted is close to the annual revenue at Metro Inc., Canada’s third largest supermarket chain.