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Tougher decisions to come as trade war drags on

Potential price increases and a squeeze on capital investment are likely, say experts

A little more than one month into a low-grade trade war with the U.S. and Canadian grocers could soon face tough decisions about passing rising costs onto customers.

On July 1, Ottawa implemented a host of trade tariffs in response to U.S. tariffs on Canadian aluminum and steel. The Canadian tariffs covered American-made steel and aluminum as well as a host of other consumer goods, including grocery.

Politics aside, the new taxes have started to affect the costs of trade, particularly with canned goods producers.

“I’ve had a number of discussions with people who are saying canned goods are definitely feeling an impact because of the aluminum tariff,” said Karl Littler, vice-president, public affairs at the Retail Council of Canada. Pepsi and Coca-Cola have both reportedly increased prices on cans of its soft drinks, while Campbell Company of Canada expects to raise prices later this month.

Beyond that the picture is less clear. Industry leaders who spoke with Canadian Grocer said, so far, grocers seemed to be either absorbing new costs or just not accepting price increases. It’s also likely most grocers stockpiled non-perishables before the tariffs took hold, and have additional Canadian options for perishables in the middle of the Canadian growing season. But as weeks turn to months, stocks diminish and the Canadian harvest passes, retailers will feel increased pressure to place new orders with American suppliers and the tariffs will become a much more serious issue.

In quarterly financial calls with analysts last month, the CEOs of both Loblaw and Sobeys acknowledged tariffs would likely contribute to price hikes this year. “Any cost increases ultimately would have to be reflected at the price and retail but our view is, we need to find alternatives and we’re not going to easily pass tariff price increases onto our customers,” said Michael Medline, president and CEO of Sobeys parent Empire Company Ltd. Medline said some of its supply partners had already tried to raise prices because of the tariffs, but Empire refused contending it was too early for that.

READ: Loblaw says tariffs, other costs could increase food prices by year’s end

“We do know that if this continues it is obviously going to have an impact on prices,” said Gary Sands, senior vice-president, public policy and advocacy at Canadian Federation of Independent Grocers. Margins in grocery are too thin for retailers to absorb new costs long term, so they will have to increase their prices, he said. “Or you are out of business.”

In theory, most of the goods on the tariff list have non-American alternatives, said Littler. The intent is to give Canadian retailers and consumers the opportunity to avoid tariff-inflated prices. But that won’t always be the case. Orange juice seems an obvious example here with Canadians heavily reliant on either the U.S. or Brazil. “Some things can’t be substituted from Canadian sources,” said Littler.

However, in other cases, retailers will be able to put pressure on American suppliers to absorb some of the tariff costs or risk losing market share.

The government’s objective is not for Canadians to pay more for U.S. products affected by the tariffs but to switch to Canadian brands. U.S. manufacturers need to be concerned about long-term consumer behaviour changes; sticking with a non-American brand even if the tariffs are removed, said Littler.

Of course, the tariffs are also a side effect of the larger trade negotiations toward a new North American Free Trade Agreement, demanded by President Trump.

If the trade war drags on, one possible recourse could be for Canadian grocers to begin looking for suppliers from Europe and Asian markets, said Sands. Canada already has a trade deal with Europe (CETA) and is working on a new one with several Pacific nations (CPTPP). “If there are other avenues of supply, and they are cheaper, every retailer is going to look at that,” he said.

The uncertainty over NAFTA is having a bigger effect than just pricing on some imported goods, said Michael Graydon, CEO of Food & Consumer Products of Canada.

“One of the other impacts is that people are sitting on their hands as it’s related to capital investments,” he said. With so much unknown about how President Trump could upend fundamental trade relationships, businesses are unwilling to commit to big-ticket initiatives.

However, Graydon also thinks a new trade deal will be completed and not that much will change from NAFTA. “I am optimistic, and I think you need to be, that NAFTA will get done,” he said. “I am really hopeful that saner heads prevail.”

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