We recently learned that Frito-Lay, a brand owned by giant PepsiCo Canada, stopped selling to Loblaws after the retailer refused requests by Frito-Lay to increase their prices.
Food manufacturers, when selling products to grocers, suggest retail prices. With low profit margins, labour shortages, packaging issues and supply-chain woes, inflation has been violently disruptive to manufacturers.
It’s not the first time this has happened. But the scale of this stop-sell is unprecedented, and the manoeuvre by PepsiCo tells us that food manufacturers in Canada have had enough of grocers changing the rules to their advantage.
Unlike other industries, food industry suppliers will pay clients to do business. It’s such a strange environment for the neophyte. Manufacturers pay listing fees to have the privilege of selling to grocers.
It’s always been that way. But in recent years, grocers have arbitrarily charged more fees and, in some cases, reduced suggested prices without consent. That’s a nightmare for manufacturers, who need market discipline to protect brand equity.
As a food producer, the last thing you want is a price war involving your products. If things were free, we wouldn’t have much of an economy or jobs to support Canadians. So maintaining supply-chain order is critical to our entire food ethos; jobs and economic growth are at stake.
Frito-Lay products are made in Canada, using potatoes grown by Canadian farmers.
The rift between PepsiCo and Loblaws is long overdue. And make no mistake: many other manufacturers and grocers are involved in similar tug-of-war disputes. It’s happening in dairy and bakery, so many food categories are impacted by this. Reporters just happened to learn about the PepsiCo instance, likely because someone wanted the public to know.
Canadians may be puzzled by the news. Why would Loblaws be blamed for keeping prices lower for consumers?
The answer’s not simple. For grocers, the game is easy since they have all the power. Almost 90 per cent of all the food Canadians buy is sold by just five retailers. Grocers want to remain competitive and will defend their margins the best they can against market rivals. It’s an oligopoly.
And if Loblaws gets a lower price, that doesn’t mean Canadians benefit all the time. They may sometimes, but shareholders are often the big winners.
But don’t expect empty shelves in the chips aisle or other sections of the grocery store any time soon. And if they do show up, they won’t be there for long. Grocers will find ways to fill shelves with other brands, including their house brands. Given the current market conditions and the fact that the food inflation rate is over six per cent, consumers will trade down and seek more house brands. Grocers know it, so the time may be right for them since they have the power and many weapons at their disposal.
Ever since the COVID-19 pandemic started almost two years ago, many food manufacturers – including PepsiCo Canada – have thought of selling food directly to consumers. They could control market conditions and gain more authority over their brands.
The pandemic has made the supply chain more democratic and inherently more virtual.
In terms of store merchandising, PepsiCo is one of the best companies out there. It masters the middle mile to support in-store merchandising for grocers. The company is incredibly efficient: it could extend its fleet of trucks to connect manufacturing plants with consumers. This is a definite possibility, but the transition from business-to-business to business-to-consumer is never easy. Many companies have failed miserably during the pandemic while attempting to pivot.
For years, during supply-chain games, food manufacturers had to blink first. PepsiCo’s move signals that the sector is tired of and desperate to stop supply-chain bullying.
The industry desperately needs a code of practice, so companies can go to an arbitrator to avoid more market disruptions. This dispute over chips is concrete evidence of how supply-chain wars can impact consumers directly. We need supply-chain peace; we need an authoritative code.
Some people may feel they can simply live without PepsiCo products, or other products for that matter. That’s fair enough but remember: fewer manufacturing options for grocers will eventually mean higher retail prices.
Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.
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