Question Period Note: Grocery Retailers Charging New Fees to Food Suppliers

With increased fees being charged by grocery retailers to food suppliers, what is being done to ensure Canadians will continue to have access to a reliable food supply at affordable prices?

1. The need for balance in the supplier-retailer relationship was discussed at our recent federal, provincial, territorial meeting, where there was unanimous agreement to establish a working group that will work in collaboration with industry to find solutions that will benefit the entire food value chain.

2. We are pleased to be taking a leadership role at the federal level by co-chairing the working group with Quebec.

3. It will start meeting as soon as possible in order to propose concrete actions at the next Ministers meeting in July 2021.

RESPONSIVE REGARDING THE GOVERNMENT OF CANADA’S SUPPORT FOR A CODE OF CONDUCT:

1. This was the first discussion among Ministers. We will evaluate all options at the federal and provincial level, in order to identify the pros and cons of different approaches and find the best action to undertake.

2. Given that this issue largely falls under provincial jurisdiction, we must work together.

RESPONSIVE REGARDING THE GOVERNMENT MODIFYING COMPETITION LAWS

1. Competition Law falls under the purview of the Minister of Industry, Science and Economic Development.
   RESPONSIVE REGARDING FOLLOWING THE UNITED KINGDOM`S APPROACH

2. I would not want to presume what the outcome of the committee’s deliberations will be, but we can learn from the UK’s experience.

3. We are looking forward to hearing more details from industry on this as well.

In July 2020, Walmart Canada announced its Vendor Investment Program, which introduced two new supplier fees (i.e. a 1.25% infrastructure development fee and a 5% e-commerce development fee) to offset investments in infrastructure and e-commerce. These fees were in addition to existing fees set out in Walmart’s individual arrangements with suppliers.

Since then, other retailers have followed suit. On October 23, Loblaw Companies Limited (LCL), the largest grocery chain in Canada, and its subsidiaries (e.g. No Frills), advised they will be increasing suppliers fees to offset investment costs to improve in-store and digital operations over the next five years. In addition, a letter was sent to their largest suppliers outlining additional expectations for investment in their loyalty, digital, data and media programs. LCL granted exemptions to these fees to smaller companies, farmers and growers. Sobeys announced on October 28 that it will not follow suit and opposes hiking supplier fees.

Supplier stakeholder organizations, as well as independent grocery retailers, have been lobbying federal and provincial governments to seek support for developing a Canadian Code of Conduct to ensure fair, transparent and predictable business practices for the agri-food industry.

Stakeholder Positions:

Canadian Suppliers:
Many stakeholders have expressed concerns with regards to the fee announcements by retailers, including Food, Health and Consumer Products of Canada, Food and Beverage Canada, Canadian Beverage Association, Canadian Federation of Agriculture, and the Dairy Processors Association of Canada (DPAC). Most recently DPAC released an advocacy paper intended to highlight Canadians’ desire for government action on this topic, citing that 77% of Canadians support government action to encourage food suppliers and grocers to adopt a Grocery Code of Conduct. Stakeholders emphasize additional fees could place undue financial pressure on Canada’s supply chain, as suppliers struggle to absorb these new costs while adapting to the continuing challenges of COVID-19. While stakeholders have expressed concerns about the impact of these fees on profit margins, an analysis of Statistics Canada quarterly data shows profit margins to be relatively stable (i.e. around 6%).

Independent Grocers
The Canadian Federation of Independent Grocers (CFIG) has advocated for a Code of Conduct in order to balance the power of retailers, encourage competition and transparency given that independent retailers do not have the same leverage with suppliers to implement fees. They have expressed concern that small independent grocers are forced to absorb some of the increased costs to suppliers, which they then must pass on to consumers. In a recent (October 28, 2020) letter to co-chairs of the federal, provincial, territorial (FPT) meeting of Agriculture and Agri-food Ministers, CFIG and other stakeholders also made the case that such practices by large retailers can “impact food security, food prices and employment” in the context of the COVID-19 pandemic.

Large Retailers
The Retail Council of Canada has indicated that grocery stores are struggling with slim margins (between 0.6% and 2.1%) and have been facing intense pressure to upgrade their e-commerce and distribution networks. They have also had significant new costs in the context of the pandemic. However, it is notable that, as opposed to Canada’s main large retailers (Sobey’s, Metro and LCL), 2019 profit margins for warehouse clubs and supercentres, have been reported to be as high as 4.5% in Canada (IbisWorld 2019). Also, an analysis of Statistics Canada quarterly data shows profit margins in the overall Retail sector to be stable at approximately 3%.

On October 28th, 2020, Michael Medline, President and Chief Executive Officer of Empire Co. Ltd. - which owns Sobeys, Safeway and FreshCo - said the fees announced by both Walmart Canada and LCL will hurt manufacturers, farmers and smaller grocers, and threaten to drive up prices for consumers. "Taken to the extreme, some of these behaviours are just plain bad for Canada," he said during a virtual event hosted by the Empire Club of Canada. Medline also supported calls for a grocery Code of Conduct.

Consumer Price Index
Based on Nieslen MarketTrack weekly retail sales data for food and non-alcoholic beverages, an average weighted price index, shows that consumer prices increased following the start of the pandemic and peaked in June-July at 3% to 4% above pre-COVID-19 levels, but by September have returned to pre-COVID-19 levels; and by mid-October the price index had risen slightly to 1% above pre-COVID-19 levels.

The price index of “fresh” goods, produce and products generally packaged in store ( includes produce, as well as in-store bakery, meat and deli counters), is more volatile, and while the price of “fresh” goods was 3% below pre-COVID during the week ending October 17th , the price index of “pre-packaged” goods remained on average at 2% above pre-COVID price level. The pre-packaged goods account for a little over two third of overall food and beverage products sales.

Federal Government Actions:
In response to COVID-19, the Government of Canada has implemented a number of food industry specific initiatives to ensure a safe, reliable food system, including:

• A $77.5 million Emergency Processing Fund to help food producers access more personal protective equipment (PPE), adapt to health protocols, automate or modernize their facilities, processes, and operations, and respond to emerging pressures.
• Farm Credit Canada’s (FCC) lending capacity to producers, agribusinesses, and food processors increased by $5 billion, which will offer increased flexibility to farmers who face cash flow issues and to processors who are impacted by lost sales.
• Increasing the borrowing capacity of the Canadian Dairy Commission from $300 million to $500 million.
• A $50 million Surplus Food Rescue Program to help redistribute existing and unsold inventories to local food organizations who are serving vulnerable Canadians.
• A $50 million Mandatory Isolation Support for Temporary Foreign Worker Program to support the farming, fish harvesting, and food production and processing sectors with incremental costs associated with the mandatory 14-day isolation period imposed under the Quarantine Act on temporary foreign workers upon entering Canada.
• A number of regulatory related changes were made, including: a temporary ministerial exemption allowed inter-provincial trade of meat and poultry products from establishments that are not federally licensed in order to alleviate any meat shortages; temporary enforcement flexibility for non-food safety labelling for some food service packaged products and shell eggs helped alleviate supply disruptions at retail and avoid food waste; and, timelines for all regulatory initiatives were delayed.

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