Loblaw goes public with pricing strategy

Loblaw recently sent a strong-toned letter to its major suppliers asking them to reduce prices.

Loblaw is advising its suppliers that it will reduce its payments by 1.45% for any shipments received on or after September 4th. In food distribution a decrease of 1.45% is a big deal. Loblaw is signaling its contempt towards higher food prices by defending consumers who have struggled in recent years with their mounting grocery bills.

For years, tensions between food distributors and vendors have escalated to unsustainable levels and at times have been outright nasty: retroactive billing schemes, swift contractual term changes motivated by market condition shifts, and so on.

However, this time Loblaw is doing something different and time will only tell if this new approach will be beneficial to the industry.

Loblaw is in fact bringing the Canadian public into the food pricing debate. While Loblaw’s letter was directed at suppliers, its intended audience was clearly different. The letter was written almost as if the company knew the letter was going to end up in a reporter’s inbox. In fact, in recent years, many letters between vendors and distributors have been shared with reporters. Loblaw’s letter indicates that the tug-of-war between retailers and vendors has reached a new chapter.

With this letter, Loblaw is openly advocating for consumers and condemning higher food prices. For years, Canadians have speculated that food prices are higher mainly due to a highly consolidated food distribution industry, Loblaw being the main culprit. However, Loblaw’s message clearly points fingers at the food processing sector and blames it for higher food prices. Blaming anyone for higher food prices is just simplifying what is recognized as a complex and multi-faceted phenomena.

In addition, now that quarrels between food distributors and vendors are now out in the open, it is still unclear if the Canadian public actually cares about what is happening in the industry. Consumers want reasonably-priced, high quality food products. Of course, concerns about food origins are becoming prevalent and vendors do matter. But for consumers supply chain-based transactions are immaterial. Nonetheless, Loblaw’s letter brings to light an issue worth exploring.

First, these procurement entanglements in the food industry do not only affect Loblaw. Other food distributors such as Sobeys have done this before. Simply put, this matter of dictating who is in control of the food business in the country and who can capitalize on market opportunities is strictly business. What is at stake is the viability of the industry. In recent years both Wal-Mart and Costco have made significant progress in food retailing. Both account for almost 20% of the food retailing market in Canada.

The success of non-traditional food retailers is affecting the ability of the big three, mainly Loblaw, Sobeys and Metro, to grow their businesses. Despite significant investments in recent years, food retailing has been a challenging business. Sobeys, as an example, just fired their CEO recently due to poor financial results. While Canadians have access to better food products and more variety, financial performances in the sector have been mixed. To suggest that Loblaw, Sobeys and Metro are inflating food prices is just nonsense. Loblaw is now attempting to swing the debate around.

By looking at the core issue, Loblaw may have a point. Canadian food processing has been for decades, relative to other economies, largely inefficient. Some vendors have invested heavily in new technologies, have made significant capital investments and have trained their personnel. Food processing is the largest manufacturing sector with over 290,000 employees, but it has been recording trade deficits for more than two decades.

Despite low interest rates most companies are still operating in outdated plants and are in dire need of renovations. While distributors have invested more than $5b in food stores and logistics, capital investment in food processing has been dismal and declining for more than a decade. Obviously, Loblaw’s letter also targets larger corporations, some of which are based outside our borders, yet our country’s largest private employer message has merit. Food distributors are doing their part for better cost management and they expect food processing to do the same.

Canadians tend to enjoy “David and Goliath” stories, and most want to cheer for David. In the French’s Ketchup saga, for example, the Leamington story was David. In The Earl’s Restaurant case, it was the Alberta rancher. With Loblaw and their major food suppliers, there is no David. All of the companies involved are large, publicly-traded companies that are fighting for more control and better business practices. Loblaw’s call is for a better strategic focus across the board.

The company is taking a stance on supply chain efficiency, because in the end, it can, but it is highly doubtful the Canadian public will care.