Frito-Lay chips head back to Loblaw, after long and public feud between food giants

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Deliveries of Lays, Doritos and other PepsiCo Inc. brands will start trickling back to Loblaw stores on Monday, after the two companies settled a dramatic dispute over the price of chips.

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PepsiCo stopped shipping its wide array of snacks — including Quaker products and the Frito-Lay family of potato and corn chips — on Feb. 12 after Loblaw Companies Ltd. refused to pay higher prices. The two sides resolved the dispute last week, according to a memo sent to stores on Friday, but the last two months might have permanently changed the snack landscape across Loblaw’s 2,400 stores.

The spat opened a rare window into the inner workings of the Canadian grocery business, at a time when suppliers are constantly fighting to get retailers to take on more of the burden of inflation. PepsiCo said it has been facing “unprecedented pressures” from the surging cost of freight, packaging and ingredients. But Loblaw framed the situation much differently, suggesting this was a case where its internal analysis of a supplier’s price increase led to a “difficult” conversation that ended in the supplier pulling its shipments.

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All of this was happening in the middle of a reckoning on power imbalances in the food sector. Through the pandemic, suppliers complained that a handful of dominant grocers were using their market position in Canada to extract unfair fees and fines from food producers. Walmart and Loblaw levied new fees to help pay for upgrades to their e-commerce operations, which jumped in popularity during the lockdowns. And suppliers said some retailers were charging hefty penalties for light shipments, even though factories were struggling just to keep operating amid COVID-19 outbreaks and global supply chain disruptions.

At the behest of government, the industry has been drafting a code of conduct that would implement new rules of engagement for suppliers and grocers. As part of that process, PepsiCo and Loblaw will find themselves back at a negotiating table together. Cara Keating, president of PepsiCo Foods Canada, is one of three dozen executives expected to participate in an industry roundtable on the code of conduct this month, along with several Loblaw representatives.

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Industry leaders say it’s not totally uncommon for a supplier to cut off a retailer when pricing discussions break down, but it was abnormal to see a standoff like this drag on so long, and so publicly.

The fact that the two sides were at loggerheads was obvious to any shopper in a snack aisle at Shoppers Drug Mart, No Frills, Provigo or any other banner in the Loblaw network. That was likely due to a nuance in the Frito-Lay delivery model, which uses its own drivers to bring product to store as needed rather than ship to a Loblaw distribution warehouse. So Loblaw had little supply left in its national pipeline when PepsiCo shut off deliveries, industry insiders suggested. Whole sections of snack aisles were suddenly empty.

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To cope, Loblaw relied more heavily on its store brand of chips, as well as Old Dutch and Neal Brothers Foods, based just outside Toronto in Richmond Hill, Ont.

Co-founder Peter Neal estimated that Loblaw ordered roughly 50 per cent more of his chips during the dispute. “We had people working a whole lot longer than they normally would,” he said in an interview on Monday. “They had empty shelves, which is not a good thing for a consumer … We were able to fill some gaps for them.”

The extra volumes meant Neal Brothers was promoted to the main snack aisle at Loblaw stores from its typical home in the specialty food section — akin to a prospect on a farm team getting called up to the majors. Neal said he expects the resumption in PepsiCo shipments means his brand will get bounced back to specialty foods. But he said the brand benefited from the extra exposure and his team is working to pick up some extra shelf space in Loblaw stores.

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“I think they’re impressed with our sales,” he said, adding that he never thought the situation would lead to a permanent placement in the main snack section. “You would hope a retail partner would not forget what you did and be there to offer you something, some good will. But business is business. It’s hard to tell where things will go.”

On Friday, Loblaw encouraged stores “to continue to support any brands they added to their assortment during the service disruption with Frito Lay,” according to a copy of a memo obtained by the Financial Post. “Loblaw has not made any commitments with Frito Lay regarding shelf space, so you are not required to allocate the same amount of space to them that they had before the service disruption.”

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Loblaw said the memo went out before the deal was confirmed, and details around shelf space were not accurate.

But in a statement Friday night, Loblaw spokesperson Catherine Thomas noted that the mix of product in the snack aisles will feature “new Canadian flavours” — a possible reference to Loblaw’s increased reliance on Canadian brands like Neal Brothers. (In an added wrinkle, PepsiCo makes chips in Canada while Neal Brothers makes chips in the United States and salsas in Canada.)

“We’re happy to once again have a wide assortment in our chip aisle,” Thomas said, “with a mix of new Canadian flavours and classic favourites, at varying prices to suit our customers’ needs.”

It’s not yet clear who blinked or how the dispute ended. Both Loblaw and PepsiCo refuse to discuss specifics, though PepsiCo spokesperson Sheri Morgan said the disagreement was “mutually resolved.” Morgan called the last two months “a challenging time.”

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“We are committed to our Canadian manufacturing and operations and look forward to resuming distribution of our products from coast to coast in the coming days,” she said in an email on Friday.

Loblaw said shipments will resume April 11, and the company expects to be fully stocked in time for the Easter weekend.

“All along, this was about providing value to our customers,” Thomas said.

But manufacturing advocates have noted that the dispute was over the price that Loblaw pays to PepsiCo, not the price on shelves. The retailer ultimately decides the price on its shelves, and theoretically could absorb some increases by taking slimmer margins.

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Food prices in stores rose by 7.4 per cent in February, compared to last year, according to the latest Consumer Price Index from Statistics Canada. Both Loblaw and Frito-Lay North America have recently reported significant profit gains. In its last earnings report, on Feb. 24, Loblaw said it expects to boost profits in 2022, predicting that earnings per share will increase by “low double digits.” Meanwhile, Frito-Lay North America’s fourth-quarter operating profit increased 10 per cent year over year, PepsiCo reported on Feb. 10.

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