Do Canada’s grocers need a code of conduct?

While food prices continue to climb in Canada, grocers’ fees, in addition to low margins, haven’t helped manufacturers benefit

By Sylvain Charlebois

Professor in Food Distribution and Policy

Dalhousie University

Many Canadians are oblivious to the fact that in the food industry, suppliers need to pay grocers to conduct business. Fees were justified by merchandising costs and shelf space – things anyone would expect.

But in recent years, things changed. Companies like Loblaws, Walmart and Metro used infrastructure and capital projects to justify new fees. Fees have been imposed quickly and unilaterally. Walmart’s latest $500-million distribution centre project is partially financed by suppliers.

Grocers have been charging fees by mainly dictating how business should be conducted in food distribution. It’s their way or the highway, plain and simple. As grocers requested, suppliers and food manufacturers complied.

It was the same in the United Kingdom and in Australia, where oligopolistic powers in the grocery space prevailed – until a code of practice was implemented.

It seems Canada is now joining that club.

A draft code of practice exists now in Canada between food manufacturers and grocers – well, one grocer. Our country’s number two grocer, Sobeys (which recently acquired two key independent grocers in Longo’s and Farm Boy), felt it was time for a change. Number one and three grocers Loblaws and Metro, respectively, have always stated a code wasn’t necessary in Canada and it’s highly doubtful they will join.

Agriculture ministers across the country recently agreed to create a working group to study this important issue.

But instead of waiting for a report to be presented sometime in July, Food, Health and Consumer Products Canada and Empire/Sobeys opted to go ahead and set a standard for the industry by presenting a new code of practice. The code includes five guiding principles that essentially get all parties to commit and act in good faith as they conduct regular business. No more unilateral decisions, no more last-minute ploys; just straight, honest business.

Current market conditions have made it more challenging for food processors in Canada. Food manufacturing contributed $26.5 billion to the Canadian gross domestic product (GDP) in 2020. In the U.S., it was $766 billion in 2020 – a full 29 times larger.

As it is in the U.S., a strong food processing sector can serve as a strategic anchor for the entire industry. The supply chain isn’t as vulnerable to macroeconomic shifts and can allow the industry to better support our farmers. The mad cow crisis and our latest spat with China are good examples.

Despite the last decade seeing few new food plants open in Canada while several closed, food manufacturing was the second largest manufacturing sector in the country after transportation equipment in 2020.

Despite the financial heartaches, food manufacturing also still managed to grow its GDP contribution from 13.18 per cent in 2010 to 13.47 per cent in 2020.

But the sector can do much better.

While food prices continue to climb in Canada, grocers’ fees, in addition to low margins, haven’t helped manufacturers benefit from these rising prices. In most cases, farmers also didn’t benefit.

Some speculate that food prices may rise due to a code of practice that forces grocers to charge more to protect margins. But the United Kingdom has had a code since 2009 and food inflation there has generally been lower than in Canada over the last decade.

This code of practice is meant to change the culture of an industry in which vertical co-ordination and collaboration barely exist. It’s also very much about dealing with a broken supply-side economic model few people in Canada can appreciate.

The code of practice is obviously an unproven concept in Canada and few know if it’s going to work without other major grocers participating.

However, the current situation was no longer viable.

Strong supply chain collaboration could lead to more innovation and growth. When forced to work on issues, parties will need to share data and insights. As such, market gaps can be recognized more easily as developing and commercializing novel food products is more likely. The code of practice can create opportunities if the group remains disciplined and committed, since the code isn’t legally binding.

Independent grocers, on the other hand, will likely get some welcomed help with the code of practice. Unlike major chains, they couldn’t really impose anything on suppliers. The relationship Sobeys has now with suppliers can be used as a useful benchmark.

Only time will tell us if the code of practice works. But it’s a valiant effort. The concept is no longer just academic. Instead of letting politics dictate the industry’s good faith, suppliers and Sobeys are giving themselves some hope that, perhaps, things can be different.

Going ahead with a code of practice without everyone involved also implies that its creation would never have happened with Loblaws and Metro participating.

Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.

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