Loblaw to charge largest suppliers a new handling fee

The largest suppliers of Loblaw Companies Ltd. will have to pay a new handling fee, the company said.

Suppliers using Loblaw's distribution centres will pay 0.79% on the cost of goods they sell to the company, while those shipping directly to stores will pay 0.24%, said spokesman Kevin Groh in an email, adding the fee doesn't apply to the company's small suppliers.

"We have always had handling fees," he said. "We have simply held them flat for nearly a decade, as we've invested billions to create a highly efficient supply chain."

Groh could not immediately provide information on existing fee rates, however, he said this fee is in addition to existing ones.

"In the end, our company, suppliers and customers benefit from products making it to our shelves efficiently and consistently."

Players in the Canadian grocery industry often charge suppliers various fees. Suppliers may pay listing fees, for example, to have their product stocked.

Loblaw started sending letters last week informing the suppliers who would have to pay the new fee, Groh said.

The move could result in about $80 million in savings for the company, wrote BMO analyst Peter Sklar in a note sent to clients on Friday.

In the short-term, the program could save $160-million before taxes, he said, but that's unlikely in the long-term as vendor co-operation will wane. Suppliers will work hard to claw back the charge in future price negotiations, he said, and slash the expected savings in half.

Loblaw can't validate estimates, Groh said.

Sklar said he found the letter "strongly worded, as it discourages suppliers from discussing the new fee with Loblaw merchants." He believes that's an attempt to minimize suppliers' negotiating abilities.

"While these types of 'asks' can improve Loblaw's earnings in the short term, our concern is that longer-term relationships with, and innovations by, suppliers could be impaired," he said.

Groh said suppliers could continue to discuss merchandising strategies with the company's merchants.

The move comes shortly after the company announced it would lay off 500 office workers including various executives. At the time, Groh said the grocery industry faced a variety of pressures, but the layoffs weren't a response to a single one, including a rising minimum wage.

Grocers are grappling with rising minimum wage laws in certain provinces, and pressure from discount retailers and Amazon's acquisition of Whole Foods.

Loblaw has sent at least one other letter similar to this to suppliers in the past.

In July 2016, the company told suppliers it would apply an automatic 1.45% price deduction on all shipments it receives beginning Sept. 4. It also said the grocer would reject any future cost increases from suppliers, unless they are related to higher input costs.

The Competition Bureau is investigating Loblaw programs, agreements and conduct related to pricing strategies and programs with suppliers.

The investigation started with a review of Loblaw's proposed acquisition of Shoppers Drug Mart in 2014. While the bureau reached a consent agreement with Loblaw that required it to sell certain stores and imposed some restrictions, the bureau continued to investigate its supplier practices.

The bureau is also separately investigating allegations of price fixing in the bread aisles of major grocer's, including Loblaw, Sobeys, Metro and others who have said they are co-operating with the investigation.