Many Canadians are oblivious to the fact that in the food industry, suppliers need to pay grocers to conduct business. Fees were justified by merchandising costs, shelf space, things anyone would expect. Yet in recent years, things changed. Companies like Loblaw, Walmart and Metro were using infrastructure and capital projects to justify new fees. Fees were imposed quickly, unilaterally. Walmart’s latest $500 million dollar distribution center project is partially financed by suppliers.
Grocers were charging fees by mainly dictating how business should be conducted in food distribution. It was their way or the highway, plain and simple. As grocers requested, suppliers and food manufacturers complied. It was the same in the United Kingdom and in Australia where oligopolistic powers in the grocery space prevailed. That is, until a code of practice was implemented. It seems Canada is now joining that club.
Indeed, a draft code of practice exists now in Canada between food manufacturers and grocers, well, one grocer. Our country’s number two grocer Sobeys, which recently acquired two key independent grocers in Longo’s and Farm Boy, felt it was time for a change. Number one grocer Loblaw and Metro, whose number three, have always stated a code was not necessary In Canada, and it’s highly doubtful they will join.
Agriculture Ministers in the country recently agreed to create a Working Group to study this important issue. Instead of waiting for a report to be presented sometime in July, both Food Health and Consumer Products Canada and Empire/Sobeys opted to go ahead and set a standard for the industry by presenting a new code of practice. The code includes 5 guiding principles which essentially gets all parties to commit and act in good faith as they conduct regular business. No more unilateral decisions, no more last-minute ploys, just straight, honest business.
Current market conditions just made it more challenging for food processors in Canada. Food manufacturing contributed $26.5 billion to the Canadian GDP in 2020. In the U.S., it was $766 billion in 2020, which is 29 times larger. That’s right, 29 times. As it is in the U.S., a strong food processing sector can serve as a strategic anchor for the entire industry. The supply chain is not as vulnerable to macroeconomic shifts and can allow the industry to better support our farmers. The Mad Cow crisis and our latest spat with China are good examples.
Despite the last decade seeing few new food plants open while several closures were reported, food manufacturing was the second largest manufacturing sector in Canada after transportation equipment in 2020. Despite the financial heartaches, food manufacturing also still managed to grow its GDP contribution from 13.18 per cent in 2010 to 13.47 per cent in 2020. But the sector can do much better.
While food prices continue to climb in Canada, grocers’ fees, in addition to low margins, have not helped manufacturers benefit from these rising prices. In most cases, farmers did not benefit from recent food price hikes. Some may speculate that food prices may rise due to a code, forcing grocers to charge more to protect margins. The United Kingdom has had a code since 2009, and food inflation in the country has generally been lower than here in Canada over the last decade.
This code is meant to change the culture of an industry in which vertical coordination and collaboration barely exists. It is also very much about dealing with a broken supply-side economic model few people in Canada can appreciate. The code is obviously an unproven concept in Canada, and few know if it’s going to work without other major grocers participating. However, the current situation was no longer viable.
Strong supply chain collaboration could lead to more innovation and growth. When forced to work on issues, parties will need to share data and insights. As such, market gaps can be recognized more easily as the execution of developing and commercializing novel food products is more likely. The code can create opportunities if the group remains disciplined and committed as the code is not legally binding.
Independent grocers, on the other hand, will likely get some welcomed help with the code. Unlike major chains, they could not really impose anything on suppliers. The relationship Sobeys has now with suppliers can be used as a useful benchmark.
Only time will tell us if the code works. But this effort is a valiant one. The concept is no longer just academic. Instead of letting politics dictate the industry’s faith, suppliers and Sobeys are giving themselves some hope that, perhaps, things can be different. Going ahead now with a code, not having everyone involved, also implies that the creation of a code of practice would have never happened with both Loblaw and Metro participating. Plain and simple.