Loblaws tells suppliers to drop prices in leaked letter

Loblaws is urging its suppliers to lower prices by 1.45 per cent by the first week of September, according to a letter from top execs at the company, which found its way into the National Post’s hands.

“Since 2014, our suppliers have implemented more than $1 billion in cost increases,” says the letter signed by Grant Froese, the grocery giant’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.”

The letter goes on to point out that despite the brands 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 usually sit around five per cent while food processors and manufacturers average 20 per cent.

But Sylvain Charlebois, dean of the faculty of management and professor in food distribution and policy at Dalhousie University, says he’s unsure what the leaked letter will really accomplish.

“Often the public will pick David in a ‘David and Goliath’ scenario but in this case I’m not even sure who David is… people want to advocate for the little guy but who is the little guy here, you’re looking at PepsiCo against Loblaws, these are mega companies,” he says. “There’s a bit of a (price) war going on and it has reached a new level (but) I’m not sure it’s going to accomplish anything.”

He points out that while sending letters like this is a fairly common practice in the industry, distributors seem to be more forthcoming with their pricing strategy at retail.

“They’re trying to provide a rationale to their suppliers in terms of what’s going on in their stores and what they’re seeing as well with the competition,” he adds.

Walmart Canada already made strategic price cuts on popular brand-name packaged goods in May and Sobeys Quebec reduced prices on 8,500 items by five per cent to seven per cent in April with plans to bring it to Western Canada.

Sobeys has been one of the grocers hit hardest by cost-cutting competitors, with parent company Empire reporting a $2-billion annual loss last week. The grocery company’s CEO and president Marc Poulin stepped down shortly thereafter.

“This is the result of feeling more pressure coming from Costco and Walmart – they’re up to twenty per cent of the market share now,” explains Charlebois. “Things are really shifting and (grocery stores) are feeling the heat.”

But despite Loblaws’ positioning of consumers in the centre, the price war is emblematic of the struggle between suppliers and retailers.

“The vendors, the major players, are pushing back saying that perhaps Loblaws is overstating how competitive the landscape is because let’s admit it, you are dealing with a highly consolidated industry,” adds Charlebois. “ But what has changed is there’s this willingness to bring these tensions out in the open.”