Five big reasons behind suppliers’ mutiny against Canada’s big grocers

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An ongoing feud between Canada’s biggest supermarket chains and their suppliers erupted into public view during the pandemic, attracting the attention of legislators who are now contemplating new rules for the sector. Suppliers have been pushing for the government to intervene since Walmart Inc. and Loblaw Cos. Ltd. started charging their suppliers controversial fees last year to help cover investments in online grocery shopping during the pandemic. But suppliers have had other concerns for years. Here are their main complaints.

Big fees

It’s common for suppliers to pay listing or shelving fees to get products onto major retail shelves. In Canada, one SKU — industry-speak for a specific product flavour, or type, in a specific package — can cost up to $1 million for national distribution with a supermarket chain, according to Food, Health and Consumer Products of Canada (FHCP). “If you’re a potato chip guy, let’s say, and you’ve got 15 flavours … you’re paying a listing fee for all of them,” FCHP chief executive Michael Graydon said. “Some retailers on occasion will utilize listing fees as a revenue generator by transitioning people in and out of the mix. You’re in for a year, you pay a million bucks. Oh, you’re out this year, somebody else is in. And there’s this constant change and churn.”

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But it’s the unpredictable nature of the charges that are the real issue. Suppliers say they can’t afford to sour a relationship with a retailer in Canada’s consolidated market, so they have no choice but to pay up. Retail Council of Canada (RCC), which represents the big grocers, said retailers often negotiate with the world’s largest multinational food manufacturers. In those situations, tough negotiation can be a good thing for consumers, RCC chief executive Diane Brisebois said, adding that fees are dependent on the manufacturer’s size.

Private-label plagiarism

Food manufacturers complain that some in-store, or private-label, brands sold by grocery chains have pilfered their ideas. Suppliers will often lay out their plans to grocers for the year, including new product innovations being launched in the coming months. “We’ve seen situations where those product innovations have actually shown up as a private-label product before the actual national brand is launched, or shortly after,” Graydon said.

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But Brisebois said “to assume this is what happens may be a bit of a stretch.” She said retailers spend years developing private-label strategies and products. “I’m not sure that’s fair, because you’re assuming that a retailer, regardless of size, is able to write his or her private-label strategy within two months,” she said. “Retailers spend as much time — in fact, probably even more — in consumer research.”

Draconian fines

Grocers need shipments from suppliers to arrive on time and in full to properly manage their national supply chains. To enforce this, grocers will charge suppliers fines if, say, a truck is late to a distribution centre, or a shipment comes up short. But in the pandemic, major swings in consumer demand threw the industry’s sophisticated forecast models completely out of whack. Suppliers also had to deal with increased employee absenteeism and lost efficiency from social distancing on production lines, making it difficult to fulfil every supermarket’s orders.

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Retailers suspended fines for short shipments, but it was only temporary. By last fall, some retailers reinstated fines on shorts, which upset many suppliers who said the fees were unfair given the circumstances. Loblaw, one of the retailers to reinstate the fines, said it would use common sense and be flexible with hard-hit manufacturers that couldn’t fulfil orders. But independent grocers complained that big grocers’ heavy fines on shorts meant that manufacturers were prioritizing the major chains, with little left over for mom-and-pop stores. A source at one major manufacturer estimated that short shipment penalties amounted to hundreds of thousands of dollars in November 2020 alone. One major dairy processor, Lactalis Canada Inc., even refused to pay fines for short shipments during a second wave of infections late last year.

But RCC said short shipments cause real problems for grocery stores, especially early in the pandemic when empty shelves spooked customers and set off waves of panic buying. “If a specific manufacturer’s shipment is expected and is relied upon to fill the shelves, the grocer has not planned for other products to fill that space and so the problem becomes intensified,” RCC said in a statement.

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Late payments

Tracking down payments, and making sure fees and fines are accurate, is one of the manufacturer’s biggest challenges, according to FHCP. “I know of one particular company that is currently sitting in a deficit of over $5 million that is owed to them by one particular retailer because of delayed payments,” Graydon said. “I’ve got some mid-sized members where 40 per cent of their HR expenses are people dedicated to chasing down getting paid on time and getting paid accurately.”

Who pays for exploded pop?

Manufacturers say they are also on the hook for products that retailers can’t sell. “If the guy in shipping drops a case of pop and it all explodes and they can’t use it, it’s put in a corner for the manufacturer to pay for the writeoff,” Graydon said. “We didn’t break it. But we’re paying for it.” FHCP has also raised concerns about retailers running a specific product on promotion, even if the manufacturer didn’t consent to taking a discounted price on that product. “Any of these practices in any other business would not be tolerated,” he said.

Brisebois said RCC is looking at the complaints in light of the recent push for legislation, though she added that it’s not clear whether these are one-off complaints or widespread issues. “It really all depends on the contract conditions and the negotiations between a buyer and a seller,” she said. “To assume that some of the issues that are brought up are universal, I think, would be wrong.”

Financial Post