Recently Sobeys and Food Health Consumer Products Canada (FHCP) released a proposed Grocery Supply Code of Practice for Canada. This document is designed to set parameters for the relationship between suppliers and retailers. We know the relationship has been a challenging one for many. The animosity is stronger in the grocery department, but there is no doubt perishable departments see their share of issues.

 

With the consolidation we have experienced in the food industry, there are fewer retailers between suppliers and consumers than ever. This shifts the power in the value chain to those who control access to the consumer. In cities with produce terminal markets there are some options, but most other markets’ access to consumers is through a major retailer or food service distributor.

 

Why do we need a code of practice?

 

There are a number of issues that have been simmering and every once in a while, they boil over to really frustrate people (usually suppliers). These issues are often created by decisions coming from the retailers or are related to retailers’ execution of programs. One challenge for suppliers is they do not have a lot of options. In a consolidated market, many are concerned about the risk of losing a customer so they perceive they have no recourse but to accept the decision and figure out how to pay for it.

 

The first issue is retailers changing the rules once agreements are in place. In 2020 Walmart, United Grocers (buying group that includes Metro, Save On and other retailers) and Loblaw all told suppliers they would be implementing a new fee to reduce cost of goods. Walmart and Loblaw related these fees to initiatives in their business they believe will provide suppliers with more volume and the United Grocers expectation was to get the same discount others were getting to maintain a level playing field. This was primarily in the grocery department. This was not the first time this had happened.

 

Compliance fines are another frustration for suppliers. Retailers have implemented numerous fines related to the distribution network. Late deliveries, issues with packing slips etc. are now costing suppliers considerable money. The fines were implemented arbitrarily. Contesting them is more difficult than climbing Everest, and in some cases, suppliers believe the retailer’s own distribution center issues cause their delivery to be late.

 

Payment terms are a third issue that have caused problems in the industry. Retailers take advantage of discounts but continue to pay in 45-60 days. This can put significant cash flow pressure on suppliers and inhibit their ability to make investments and innovate. It also adds costs to service any short-term debt. 

 

There are always two sides to a story so we do have to keep that in mind. Suppliers are not always perfect and when they do have issues, retailers do not always appreciate the impact on their customers. Service level issues do add costs for retailers and also make their entire operation less efficient. When you have staff scheduled for a distribution center or a store and product does not show up when it should, they cannot do the work and it has an impact on the bottom line. Yes, they can do other things but it is not how the plan was built and it does have an impact. 

 

Suppliers also do not always see retailers as customers. Many see them as an intermediary between their great product and the consumer. From someone who has worked on both sides, this does cause issues. There are costs to running stores and when suppliers complain about the excessive margins, their complaint does not do much to build a relationship.

 

Do these issues justify changing agreements after they are made or slowing down payments? No, but they do help to turn up the heat under the simmering pot.

 

We did see more collaboration in 2020 when there was a common enemy, the pandemic. Suppliers and retailers did work together better. The focus on getting product to stores to feed Canadians was probably a breath of fresh air for both parties.

 

What does the code of practice include?

 

The proposed code of practice does include a better definition of how suppliers and retailers will do business together. 

 

The Code is rooted in five guiding principles: 

 

1. To promote fair dealing at all times and in all commercial relationships between retailers and suppliers 
2. To promote mutually-beneficial relationships where retailers and suppliers recognize each other’s need for commercial certainty 
3. To promote transparency between retailers and suppliers 
4. To provide for an effective, equitable mechanism for resolving commercial disputes 
5. To promote the efficiency, sustainability and competitiveness of the Canadian grocery supply chain, as well as to ensure that it delivers value and innovation to Canadian consumers 

 

Source:www.corporate.sobeys.com

 

There are 14 sections to the code, outlining how the two parties will operate. Items such as payments and deductions and variation to supply agreements each get their own section.

 

One of the positive aspects of the code of practice is they have included an escalation process. In the current environment it is very difficult for suppliers to get resolution to any conflicts. 

 

Will it work?

 

In my conversations with suppliers the common response seems to be “time will tell.” Sobeys have taken a leadership position to work with FHCP on this and be very public about their desire for this to be the new rules of engagement. It does separate Sobeys from the other retailers. 

 

It is interesting they decided to launch this with a relatively small part of the Canadian food industry on board. We don’t know if the other retailers were solicited or not and what their response will be. It might be a challenge to get them to adopt a ‘Sobeys’ program. It would also be interesting to understand if other industry associations were contacted such as the Canadian Produce Marketing Association. 

 

If we estimate FHCP members comprise 50 per cent of Sobeys’ sales and Sobeys have a 25 per cent market share nationally, then this code only applies to 12.5% of our industry.

 

We will keep watching to see how all of the stakeholders react.