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Supplier squeeze: Loblaw in the spotlight over pricing practicesMonday, December 22, 2014 > 09:36:48
(Globe & Mail)
In a memo issued to some of its suppliers last year, Loblaw Cos. Ltd. set out an extensive set of rules concerning pricing and competitive practices.
The document provided guidelines regarding “ad matching” with other stores’ prices, “collisions” with competitors’ promotions, and it warned of a “three strikes policy” to suppliers that broke the retailer’s policies three times.
The five-page supplier memo, obtained by The Globe and Mail, was issued in 2013 and titled “Loblaw 2014 policies.”
Among the many policies in the memo, the retailer said that if a rival retailer touted the vendors’ products at a lower price, Loblaw would offer its customers the same price markdown and expect the vendor to pay the cost difference.
In its most recent memo in June, also obtained by The Globe, it said it would not accept price increases from Loblaw suppliers across the board for the rest of 2014 and 2015, with some exceptions.
“Cost changes will be conditional on [Loblaw] being able to remain profitable and competitive in the marketplace,” it said. “After four weeks, if Loblaw is not able to remain profitable and competitive, we will return to the pre-increase cost level and bill back an amount equal to the price increases.”
The policies underscore the intensifying battle in the fast-consolidating Canadian grocery sector in which Loblaw and other large players are pressing their suppliers for rock-bottom prices and ensuring they don’t lose competitive ground against their rivals.
Some practices have raised red flags at the Competition Bureau, which last month stepped up its investigation into Loblaw’s dealings with its vendors.
The bureau has issued court orders for pricing information and strategies from a host of Loblaw’s suppliers.
In court filings, the bureau said Loblaw “may have engaged in or be engaging in restrictive trade practices that have had, are having or are likely to have the effect of preventing or lessening competition substantially in one or more markets’’ related to the supply and sale of grocery products.
The bureau added that Loblaw’s terms with suppliers “may raise rivals’ costs and ultimately increase the prices Canadian consumers pay for grocery products in Canada.”
Loblaw spokesman Kevin Groh said in an e-mail that “ultimately, our arrangements with suppliers are about providing great prices to our customers and competing in a very competitive environment. We don’t believe any of our policies are contrary to a healthy and competitive marketplace.”
He said Loblaw issued an updated version of its policies in June which applies “categorically to all suppliers” (excluding those of Shoppers Drug Mart, which Loblaw acquired in March) for the balance of 2014 and 2015. The latest document dropped the “three strikes policy” reference, he noted.
The newest memo also removed certain other language, and softened pricing terms for suppliers. The earlier 2014 policies were directed only at its drugstore and health and wellness vendors.
Loblaw is far from alone in pushing suppliers for more favourable prices and terms. Merchants expect their suppliers to pay fees for everything from flyer promotions to prominent shelf space and late product deliveries.
After its $5.8-billion takeover of Safeway Canada last year, the country’s second-largest grocer, Sobeys Inc., on Dec. 24 demanded suppliers provide it with a retroactive “synergy” price cut of 1 per cent and no increases in 2014, with some exceptions. This summer, Target Canada told suppliers to give it a 2-per-cent cost break starting in March, 2015.
Some industry watchers say the Competition Bureau investigation could have ripple effects in the sector as the Canadian grocery chains consolidate and take on giant U.S. retailers such as Wal-Mart Stores Inc., Costco Wholesale Corp. and Target Corp.
“The bigger you are, the more power you have and the more you can demand,” said Tom Barlow, president of the Canadian Federation of Independent Grocers (CFIG) and a former president of Coca-Cola Enterprises Canada. “But there are really no clear rules and there’s no enforcement.”
“We don’t think this is a Loblaw issue,” Mr. Barlow added. “This is a bigger issue.”
The financial implications of grocers’ demands on suppliers can be considerable. Food manufacturers pay Canadian retailers “well over” $3-billion annually in fees for such things as shelf-stocking, volume rebates, late-delivery fines and flyer promotions, estimates Perry Caicco, managing director and retail analyst at CIBC World Markets.
“Retailers lever more of these payments out of suppliers every year simply due [to] the sheer clout of a highly consolidated industry,” Mr. Caicco said recently in industry publication Grocery Business.
“Suppliers are starting to get fed up,” said Marion Chan, principal of TrendSpotter Consulting, which advises vendors on new products. “Something has to give.” She said some suppliers have told her they can’t afford to launch new items at big chains any more because of high fees just to get on major retailers’ store shelves.
But with the current wave of grocery consolidation, including Loblaw’s $12.4-billion takeover of Shoppers this year that triggered the bureau’s initial probe, suppliers will probably be forced to pay even more fees, Mr. Caicco predicted.
The Competition Bureau’s Loblaw inquiry, which seeks confidential information from 12 suppliers including General Mills Canada Corp. and S.C. Johnson & Son Ltd., comes in the wake of the bureau giving the green light in March to Loblaw’s acquisition of Shoppers. It placed some restrictions on Loblaw’s dealings with Shoppers’ suppliers to help prevent vendors and rivals from getting squeezed, while saying it would continue monitoring the grocer.
Loblaw’s latest supplier policies memo, which is entitled 2014/2015 Loblaw Category Policies, is similar to previous ones in making archrival Costco Wholesale a focus. Loblaw’s policy is to offer customers the same break as Costco does with its coupons, the latest memo says. And it will bill its vendors the cost difference for a discount that Loblaw takes on a product as a result of matching Costco’s coupon markdown, it says.
Robert Jackson, a retired investigator with the bureau who did not review grocery takeovers, said Loblaw’s policies “appear to at least have the potential to be anti-competitive.”
He said he shares the bureau’s concerns that the programs can discourage suppliers from selectively lowering their prices, he said.
“One could conclude that this behaviour amounts to a ‘fine’ imposed on Loblaw’s suppliers for the low-pricing decisions of its competitors,” Mr. Jackson said.
The Loblaw memos are filled with industry jargon used in everyday business dealings between suppliers and retailers.
The memos use terms such as “ad collision” and “ad match,” both practices that the bureau flagged in court documents as having the potential to limit competition.
Loblaw’s latest memo says an ad collision is a situation in which the grocer expects suppliers to keep it “profit neutral” (read: pay the cost difference) when the vendors’ item is promoted at a discount in a rival’s flyer but touted on the front page of Loblaw’s flyer at a higher price, prompting Loblaw to match the lower rate.
“When ‘Ad Collisions’ occur, they are detrimental to our Discount banner positioning and negatively impact the return on the promotional activity which is not in either of our best interests,” the memo says.
“Suppliers are expected to manage Front Page ‘collisions’ in the marketplace,” the earlier 2014 memo asserts.
An ad match in its discount stores, such as Real Canadian Superstores in Western Canada, entails Loblaw matching prices of those that are marked down in a competitor’s flyer, which pinches Loblaw’s profit margins, the latest memo says. “To ensure we achieve required margins, we expect to negotiate an Ad Match arrangement with each applicable supplier. This will be deducted automatically with a summary remitted to the vendor.”
A number of suppliers contacted declined to comment on their relationships with retailers.
Following Sobey’s price-freeze letter last year, other retailers subsequently made similar demands on their suppliers. Major vendors, including Kraft, Nestle and Coca-Cola, fought back by threatening to withdraw flyer and other promotional payments and even suspend product shipments if retailers didn’t impose “minimum advertised prices” to prevent their products from being used as loss leaders and damaging their brand image, according to industry documents.
Industry groups such as CFIG and Food and Consumer Products of Canada (FCPC), which represents many suppliers, have called on Ottawa to introduce a grocery code of conduct, such as ones in Britain and Australia, to regulate retailer-vendor relations. Federal Industry Minister James Moore is looking into the matter, a spokesman said.
The FCPC would not comment for this article. But in a submission to a House of Commons committee in 2012, Derek Nighbor, the group’s senior vice-president, said: “The offloading of costs by retailers to manufacturers in this unbalanced environment is making our manufacturing sector less competitive. In short, this makes Canada a less desirable place for both domestic and foreign investment.”
With their latest acquisitions, Loblaw and Sobeys have a combined 52 per cent of the $93.2-billion Canadian grocery market, CIBC’s Mr. Caicco estimated in a recent report. He said “industries with this type of consolidation are positioned to engineer pricing – and purchasing – for strong profitability.”