Loblaw Companies Ltd. recently sent a letter to major suppliers advising them that it will pay 1.45 percent less for any shipments received on or after Sept. 4. The tactic signals a major shift in the food retail industry.
In food distribution, a decrease of 1.45 percent is a big deal. Loblaws, as it is known on storefronts, is signalling it will fight for market share. The move should also benefit consumers, who have struggled in recent years with mounting grocery bills.
For years, tensions between food distributors and vendors have escalated. At times, it has been outright nasty. Tactics include retroactive billing and swift contractual changes driven by market shifts.
But this time the retail food giant is bringing the Canadian public into the debate. While Loblaws’ letter was directed at suppliers, the intended audience was clearly much broader. The stern letter was written as if the company knew it would end up in a reporter’s inbox. In fact, in recent years, many letters between vendors and distributors have been shared with reporters. But Loblaws’ letter indicates that the tug-of-war between retailers and vendors has reached a new chapter.
Loblaws is now openly advocating for consumers and condemning higher prices. Canadians have long wondered if food prices are higher mainly due to a highly consolidated food distribution industry, Loblaws being the main culprit. However, Loblaws’ message clearly blames the food processing sector for higher prices. Of course, that is just a simplification of what is a complex, multi-faceted industry.
So now that that distributors-vendors quarrel is out in the open, does the Canadian public actually care?
Consumers want reasonably-priced, high-quality food. They are also concerned about food origins and vendors choice. But for most, supply chain details are immaterial.
Nonetheless, Loblaws’ letter puts the focus on an issue worth exploring.
Food procurement entanglements don’t just affect Loblaws. Other distributors such as Sobeys have been down this route. Simply put, dictating who is in control of the food business and who can capitalize on market opportunities is strictly business. And the viability of the industry is at stake.
In recent years, Walmart and Costco have made significant inroads in food retailing. Both account for almost 20 percent of the food market in Canada. The success of these non-traditional food retailers is hindering the ability of Canada’s big three – Loblaws, Sobeys and Metro – to grow.
So despite significant investments in recent years, food retailing is challenging. Sobeys, for example, just fired its CEO after poor financial results. In fact, while Canadians have access to better and more varied food products, the sectors’ financial performances have been mixed.
Loblaws, Sobeys and Metro have not inflated food prices, despite suggestions to the contrary. Loblaws is attempting to make that point clear.
Canadian food processing has been, relative to other economies, largely inefficient for decades. Certainly, some vendors have invested heavily in new technologies, made significant capital investments and trained personnel. However, although food processing is the largest manufacturing sector, with over 290,000 employees, it has recorded trade deficits for more than two decades.
Despite low interest rates, most companies still operated in outdated plants in dire need of renovations. While distributors have invested more than $5 billion in stores and logistics, capital investment in food processing has been dismal and declining for more than a decade.
Obviously, Loblaws’ letter also targets larger corporations, some based outside our borders, yet the message from our country’s largest private employer has merit.
Food distributors are doing their part for better cost management and they expect food processing to do the same.
Canadians tend to enjoy David and Goliath stories and most cheer for David. The French’s Ketchup saga, and the Earl’s Kitchen and Bar case are good examples.
But in the clash between Loblaws and their food suppliers, there is no David. All are large, publicly-traded companies fighting for more control and better business practices. Loblaws’ call is for a better strategic focus across the board.
The company is taking a stance on supply chain efficiency because, in the end, it can. Only lower prices at the till will cause Canadian consumers — who are the real Davids in this story — to care.
Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.