Loblaw sends strongly worded letter to major suppliers, asks group to lower costs

Republish
Reprint

Hollie Shaw | July 6, 2016 | Last Updated: Jul 6 1:05 PM ET
More from Hollie Shaw | @HollieKShaw

Peter J. ThompsonLoblaw President Galen Weston helms the company's 2016 AGM.

TORONTO — Loblaw president Galen Weston, who observed in May that consumers were getting fed up with rising food prices, now wants his company’s largest suppliers to shoulder a bigger part of the inflationary burden.

In a strongly worded letter to its large suppliers this week, Loblaw is asking the group to cut costs by 1.45 per cent for shipments received by the country’s largest grocery chain on or after Sept. 4.

The move comes after Loblaw told its suppliers last October that it intended to reform and simplify its pricing practices in order to smooth out friction between the two parties and provide greater cost clarity.

“Since 2014, our suppliers have implemented more than $1 billion in cost increases,” says the letter to suppliers, obtained by the Financial Post. The letter is signed by Grant Froese, Loblaw’s chief operating officer, and Mike Motz, president of Shoppers Drug Mart.

“Even more concerning, despite our expectations and efforts to offer value to Canadian consumers, we have continued to receive unjustified cost-increase requests since our October communication — hundreds of millions of dollars by our calculation.

“Despite our efforts to absorb the costs, our low margins have forced us to pass many of these increases on to consumers on your behalf.” Food margins for grocery retailers are usually in the five per cent range; for food processors and manufacturers, they average about 20 per cent, according to industry data.

Loblaw’s missive comes as the price war escalates between Canada’s biggest grocery retailers and as consumers increasingly seek out discount food options after two years of rising food prices. A lower loonie helped to fuel the inflationary trend, particularly in categories such as fruit and vegetables, for which 81 per cent of the produce consumed in Canada is imported. In such an environment, people’s food budgets don’t go as far.

Kevin Groh, Loblaw spokesman, said in an email the letter to suppliers is not meant to be adversarial.

“We have been simplifying our relationship with suppliers and this is just the latest in that dialogue,” he said. “It’s a reminder of the important role suppliers play in our ability to offer customers great prices in our many stores.”

Groh said the initiative is part of the retailer’s move to ramp up its “fight on food inflation, supported by economic conditions and the price expectations of customers. This meets the demand for value, combats years of inflation and cost increases, and should benefit all involved — first and foremost our customers.”

Tony Caldwell/Ottawa Sun/Postmedia NetworkConsumers are increasingly seeking out discount food options after two years of rising food prices.

Weston revealed in May that food sales at Loblaw were “slightly disappointing” in the first quarter, with same-store sales rising just 2.6 per cent.

In recent quarters, the Loblaw president told analysts that the retailer had been able to pass on some of the inflationary food price increases to customers, but was operating cautiously due to consumer price sensitivities, particularly in certain regions of the country and in food categories such as produce.

He also spoke of Loblaw’s need to ensure that the price gap did not get too wide between its discount and conventional store formats.

Prices of fruits, vegetables and nuts rose nine to 10 per cent in 2015, and meat prices were up five per cent, according to the University of Guelph’s Food Institute, which predicts overall food inflation rates will rise two per cent to four per cent this year in Canada.

Our low margins have forced us to pass many of these increases on to consumers on your behalf.

In the May conference call, Weston also noted the industry outlook was improving, with inflation appearing to be heading down. Statistics Canada reported that overall food price inflation was 1.8 per cent in May compared with a year earlier.

Loblaw told the suppliers that it will reject any cost-increase request from them that is not related to higher input costs — costs related to external factors such as foreign exchange, higher fuel costs or commodity increases.

“We understand that there have been economic challenges justifying some cost increases,” the letter says. “That is no comfort to Canadian consumers who have paid the price of sustained inflation. We think that the burden of inflation needs to shift. We want to work with our suppliers to put money back in the pockets of Canadian consumers.”

The letter goes on to say that the retailer has consistently invested its own money when lowering the price of suppliers’ products in its stores, and now needs suppliers’ “assistance and investment to introduce new value and drop more prices …If you continue to ship after September 4 we will assume we have your support.”

Retailers have been fine-tuning their pricing moves in recent months as competition has increased among the major players.

Walmart Canada has made strategic price cuts on certain popular brand-name packaged goods in order to boost its price perception among consumers, and Sobeys, too, reduced prices by five per cent to seven per cent last month on 8,500 items at its IGA stores in Quebec and will roll out the program to other areas of Canada in the coming months. Sobeys said last week that it has renegotiated the allowances it receives from its suppliers, allowing it to lower shelf prices and overall costs and improve consumer perception of the chain’s prices.