Andy Coyne looks at the row between Canadian grocers and food manufacturers over fees and examines whether there is any likelihood of a mutually-acceptable solution being found.

The relationship between Canada’s major grocers and the food companies which supply them has become strained, to say the least.

A recent move by grocers to hike the fees they charge manufacturers for selling their products has created a very frosty working environment and whilst the mutually-dependent nature of that relationship means that separation is not realistically an option, there is some major bridge-building to be done.

And the question remains about whether they will be able to sort out the ongoing issue themselves or whether the country’s government will get involved. It has seemed reluctant to do so thus far.

It is not the first time food companies operating in Canada have cried foul as the country’s major grocery chains seemingly put profit before partnership.

But the latest example of their muscle-flexing has re-invigorated calls for the supermarkets’ power to be checked.

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By GlobalData

In late July, the local arm of US supermarket giant Walmart advised suppliers it was increasing the fees it charges to sell their products, both in stores and online.

United Grocers Inc., a group representing major grocers including Metro Inc. and Alimentation Couche-Tard, then told suppliers it expects the same terms as its competitors.

In response, food organisations in the country joined forces with beverage industry bodies and farming groups to call on the country’s government to take action.

The action they most desire is the establishment of a grocery code of conduct overseen by an adjudicator, of the type that exists in countries such as the UK and Australia, to maintain a fair pricing and fee structure that suits all parties. Such a code would likely require written, enforced contracts for all supply agreements, as well as rules against raising fees outside of contract negotiations.

Calls in Canada among manufacturers for a grocery code are long-standing but the row over fees this summer has reignited the debate. Whether the political will is there to create such a system in Canada is in doubt and food manufacturers, who have most to gain from its introduction, have limited ability to initiate change of this kind.

Groups representing those food manufacturers have joined forces to lobby the country’s policymakers. In a joint statement released on 6 August, seven industry groups – the Canadian Federation of Agriculture, the Canadian Beverage Association, Food & Consumer Products of Canada (FCPC), the Dairy Processors Association of Canada, Food and Beverage Canada, the Canadian Horticultural Council, and the Baking Association of Canada – warned the new fees imposed by large grocers would hurt farmers and food and beverage processors.

They suggested if all of the major grocery retailers follow suit, it could mean more than CAD1bn (US$748.5m at the prevailing exchange rate) in new costs for manufacturers.

The FCPC said: “The joint statement follows recent aggressive moves by Walmart and United Grocers to extract funding from suppliers, despite suppliers’ warnings that the new costs are unreasonable and threaten the affordability and security of the nation’s food supply. More than 90% of food processors are small businesses and the entire sector is continuing to grapple with the profound impacts of the Covid-19 pandemic.  

“The imposition of these arbitrary fees is only the most recent example of grocery retailers’ using power imbalances in the food sector to their own advantage. FCPC has long raised concerns that Canada’s consolidated grocery retail sector and the high cost of doing business contribute to rising food prices, erode Canada’s ability to attract critical investment, and limit new job creation in food and consumer goods manufacturing, as investors find greater returns abroad.”

FCPC CEO Michael Graydon added: “These arbitrary fees will wipe out processors’ slim and shrinking margins, and they will be nothing short of devastating for Canada’s farmers.” 

Walmart, quoted in Canada’s The Globe and Mail newspaper, said at the time its new fees, which have now taken effect, include a 1.25% charge for “infrastructure development” and a 5% “e-commerce development fee” for products sold online. 

In a widely-quoted statement, the grocery giant said it plans to invest in building two distribution centres, to add new technology to create “smart stores” and to renovate 150 of its 408 stores.

Walmart said the investment is intended “to generate significant growth and to make the online and in-store shopping experience simpler, faster and more convenient for Walmart’s customers”.

The Globe and Mail quoted Canada’s Minister of Agriculture and Agri-Food, Marie-Claude Bibeau, as saying the new fees are “disappointing”.

She said: “Given the scale of the costs raised here when compared to the current market-wide conditions and the impacts associated with the ongoing pandemic for both suppliers and retailers, such circumstances should be fully considered in the pending industry discussions.”

Just over a month later, the anger is still there but, with no news of plans to introduce a code of conduct, it seems the food suppliers are, once again, going to have to live with the grocers’ actions.

The FCPC, which has since joined together with Consumer Health Products Canada to create Food, Health & Consumer Products of Canada (FHCP), told just-food yesterday (22 September): “Grocery giants’ unfair practices hurt Canada and are a top constraint on growing this critical sector.”

The newly-enlarged trade body believes the problem is linked to the dominant position the major grocers have in the market. “Five companies control more than 80% of grocery and drug sales in Canada,” the FHCP says.

“The resulting power imbalance allows grocery giants to impose unfair practices that drive up costs, drive away investment, limit job creation, and leave consumers with fewer, less innovative, more expensive choices in grocery and drug stores. Costs to get products on Canadian store shelves and keep them there have surged more than 20% in recent years, while remaining flat in the United States.”

The FHCP argues the situation is leading to lack of product development in Canada. “More than 80% of new branded products on Canadian store shelves were developed abroad, representing lost investment, innovation, and growth that has fled our shores,” it says, adding “75% of leading food manufacturing executives say their companies do not have plans to expand operations in Canada and 50% are looking to invest elsewhere”.

The FHCP says the latest fee hike from grocery chains is “merely the latest in a long list of demands made by retailers over the past five years”. It adds: “These unfair practices were a problem long before the pandemic, and retailers’ new aggressive moves are particularly troubling as suppliers continue struggling with Covid’s dramatic impacts on health, safety, productivity, and costs.”

Unsurprisingly, perhaps, it is renewing its call for the introduction of a code of conduct, which it labels a FAIR Practice Code for Canada (FAIR being an abbreviation for Fairness and Accountability in Retail Practice).

“It is long past time for both federal and provincial authorities to take seriously the negative consequences of unfair practices by Canada’s grocery giants,” the FHCP says. It suggests a similar code in operation in the UK – which has been in place since 2009 – “benefits the entire supply chain and allows both retailers and suppliers to spend more time and resources on product and process innovation, rather than conflict and inefficiencies”.

It is a mantra taken up by another industry body, the Dairy Processors Association of Canada (DPAC).

“The fees that Walmart and subsequently United Grocers introduced were a tipping point for food and beverage manufacturers,” Mathieu Frigon, its CEO and president, tells just-food. “Right now, every company is dealing with shifting markets because of the Covid-19 and food suppliers, in particular, are trying to deal with the spin-off effects of restaurant closures. 

“To have new fees introduced which further reduce food manufacturers ability to invest in the innovations and efficiencies needed to adapt to new market realities is unbelievable. There is no way that retailers should have expected suppliers to react to new fees with anything less than anger.”

Frigon admits to a large extent food manufacturers just have to live with the grocers’ actions. “Realistically, there is little that food manufacturers can do on their own,” he says. He adds “trust is low” because of what he calls a “system imbalance [that] allows for one group to unilaterally dictate the terms of business”.

And, like the FHCP, he believes measures like a grocery code of conduct would be “an important first step in improving the relationships between retailers and their supplier”, adding: “Canadian processors are seeking a similarly balanced and competitive grocery retail environment which benefits everyone in the food chain from the farm to the consumer – this is something that the current relationship does not provide.”

It seems food manufacturers and the groups representing them are speaking through hope rather than expectation. Frigon says: “We are hopeful that [the] government in Canada will see how important it is to introduce grocery codes of conduct to ensure fairness in our food supply chain.”

Sector watchers are more blunt when assessing the prospect of a code of conduct being introduced.

Dr. Sylvain Charlebois, senior director in the Agri-Food Analytics Lab at Canada’s Dalhousie University, says he “seriously doubts it will happen”, adding: “Oligopolistic powers are not going to disappear anytime soon in Canada”.

But he does hold out some hope at the prospect of change.

“With Covid, producing and processing food domestically could be recognised as public priorities in the future. Given the politics at play in Canada, a nationalised food distribution system, a publicly-owned and operated food supply chain, may be more achievable than a code of practice. It would be extreme, but quite possible. But in my mind, a code, with proper consideration, would be more practical,” he says.

In terms of justification for the retailers’ actions, Charlebois has little truck with the grocers’ claims they need to hike fees to fund essential, consumer-linked expenditure.

“It’s a tactic, downloading costs onto vendors. It’s been going on for years. They have done it for green packaging and for many other reasons. This was just the last straw,” he says.

just-food invited Walmart Canada and United Grocers Inc. to contribute to this article but neither had replied at the time of writing.

However, Karl Littler, a spokesperson for the industry body the Retail Council of Canada suggested to the country’s Financial Post newspaper a code of conduct could mean higher cost groceries. “You want to be careful what you wish for,” he said.

Littler suggested supermarkets have operated on thinner margins than growers and food processors.

“It’s not surprising that the food processors would like higher profits,” he told the newspaper, “but it’s not something that we view the government should put its thumb on the scale on behalf of one party in this commercial negotiation.”

Dr. Charlebois suggests any thoughts that grocers and manufacturers had reached a new understanding against the backdrop of Covid-19 should now be dismissed.

“Relationships were not great at the start of the pandemic. Given how the food industry worked together during the worse of the panic-buying phase, many thought the industry turned the page,” he says.

“Apparently not.”