Power Imbalance in Canada's Food Chain

Wednesday, May 19, 2021

Are supplier fee hikes the latest example of how retailers hold all the cards in this high-volume, low-margin business?

by Jackie Clark

Canada's food industry is vast and vibrant: from the farmers who grow ingredients, to processors who add value, to the retailers who sell to consumers. These key players rely on each other to deliver a variety of safe and nutritious food to Canadians. So, what happens when relationships between these players become unbalanced?

Over the summer and fall of 2020, major grocery retailers like Walmart and Loblaw made headlines when they imposed or raised fees charged to suppliers.

This action impacts "growers, retailers and everybody in between," Peggy Brekveld, a dairy farmer from northern Ontario and president of the OFA tells Better Farming. Those fees necessitate "a conversation about the food chain and how we do business with that food chain."

Food industry stakeholders are concerned about the power of retailers, she says.

"Eighty-one per cent of all grocery retail space is actually commanded by five different retailers. Because they have such significant pull, often there are challenges with one-sided contract discussions.

"An example would be how Walmart recently announced it would require suppliers to fund the chain's significant expansion costs, and there wasn't really a discussion about it."

Those decisions are often "given by the retailer rather than part of the negotiation process," Brekveld adds.

Michael Graydon, CEO of Food, Health and Consumer Products of Canada (FHCP), agrees. FHCP is a Mississauga-based organization that aims to foster a competitive and innovative environment in the food, health and consumer goods manufacturing industry through promotion, empowerment and advocacy.

"It goes back to the root cause of the problem: The consolidation of retail in this country," he tells Better Farming. "There is an imbalance of power. An imbalance that retailers exercise quite readily as they need to … to have manufacturers fundamentally invest in the retailer profitability."

Retailers "have developed a full spectrum of fines," Graydon adds.

The fines and fees are not a new problem, Dr. Sylvain Charlebois tells Better Farming. He's a professor in the school of public administration and director of the Agri-Food Analytics Lab at Dalhousie University in Halifax.

"What has changed in recent years … is that the narrative to justify these fees is very much intertwined with key strategic initiatives at retail, unlike before when fees were just being implemented to offset some of the extra operational costs that were incurred by grocers," he explains. Now, retailers are using fees to fund investments.

Potential consequences

Increased fees put more stress on the already stretched food processing and manufacturing sector.

"The pandemic is having very significant impacts on manufacturing output because labour is a big issue," says Graydon. That impact, as well as the costs associated with additional health and safety measures reduces efficiency, and retail demand is higher because of food service closures.

"In some cases, fines imposed by retailers can be as high as 40 per cent of the value of the inputs. These are millions and millions of dollars," says Graydon. "These are significant amounts of money directly supporting the retail bottom line."

Food processors may be forced to make decisions to cut costs, such as providing fewer product options, he says. Canadian consumers may see less variety on store shelves.

"The bigger, macroeconomic impact is that this is money that is now taken out of the system, no longer available for capital investment and innovation and growth and expansion of manufacturing," he explains.

"You end up with companies not using capital here in Canada to grow their plants. To the contrary, as these costs continue to escalate – because Canada is one of the most expensive markets to do business in – they consider halting manufacturing," says Graydon.

This outcome is particularly likely if they have plants in the U.S. that can supply the Canadian market, he adds.

Increasing costs are "putting more pressure on processors and the case for offshoring just builds. It's been building for many years … the exodus is likely to continue," Charlebois says.

Over "the last eight years, food processing in Canada has lost about 25,000 jobs."

Eliminating more of the Canadian food manufacturing industry "would have a negative impact on the economy, especially at a time when the economy badly needs stimulus," says Graydon.

"To get us out of this COVID-19 economic doldrum that we're in, we need a robust manufacturing sector that's going to drive it."

If solutions "aren't put in place shortly to alleviate this issue, you may start to see plant closures, which would be unfortunate," Graydon adds.

The impact of that is felt by the entire supply chain.

"Without a strong processing sector, it really becomes more difficult to support our farmers. A strong agri-food economy has the ability to add value and process its own commodities as much as possible. You're much more in control and you're much less vulnerable to macroeconomic shifts," Charlebois explains.

"The centrepiece of an agri-food strategy is processing. If you don't have a strong processing sector, the farmers are the first ones to pay," he says.

In the short term, the extra costs for processors put downward pressure on the supply chain, says Graydon. Manufacturers require those who supply ingredients, including growers, to provide more competitive pricing.

Growers who sell directly to retail feel the same, if not more acute, pressure.

"In Ontario, the growers don't have a lot of options for the point of sale. If you're a larger grower, you have to sell into the retail channel, the large grocery stores," Bill George, chair of Guelph-based Ontario Fruit and Vegetable Growers' Association, tells Better Farming.

"A lot of farmers aren't working on margins that are any bigger than five per cent. So, when a retailer implements an arbitrary fee of two or three per cent, that really starts to cut into the bottom line of the farm operation," he explains.

"Any time there are extra fees added on at the point of sale,… it really is starting to cut into the profitability of farmers, and potentially putting someone in a negative position.

"The grower is such a small player in the supply chain," George adds. "They don't have a lot of negotiating power."

Ag sector officials have "made all political parties aware of the situation. Now it's a matter of sitting down and getting to agreement," George says.

The issue has garnered attention from the highest government authority in the Canadian agricultural and food system.

"Some retailers – not all – have decided to increase their fees in a significant way," Marie-Claude Bibeau, the federal minister of agriculture and agri-food, tells Better Farming. "Of course, our farmers are very worried about that. They are often price-takers and don't have a lot of flexibility in terms of the price they can ask for their product."

Potential solutions

When considering solutions, "capital is key," Charlebois says. "Processing, like anything else in agri-food is a high-volume, low-margin business, so you need capital and you need investments."

"How do you foster an innovative culture inside an agri-food sector?" Charlebois asks. The Canadian agri-food system needs "an innovation agenda with governance, because a lot of innovation will happen in processing, so without innovation it's hard to build a sector."

Capital investments can foster innovation, but some stakeholders are also asking for governance. The ag industry approached Ontario's premier and provincial and federal ag ministers about the potential for regulation.

"Hopefully, we can get some retailer code of conduct that can prevent arbitrarily implementing these fees," George says.

"I met with my provincial and territorial colleagues in November.… We decided to make it a priority and to create a working group that is co-chaired by (Agriculture, Fisheries and Food) Minister (André) Lamontagne in Quebec and myself," Bibeau explains to Better Farming.

"We have to investigate the situation, understand it better, look at what has been done in other countries, consult the experts, consult the farmers and all the suppliers, and also consult with the retailers to understand the big picture."

The agriculture ministers "agreed that it would most probably fall under the provincial responsibility in terms of legislation or enforcing whatever regulation that might follow, so this is why we thought working together would be the best approach," Bibeau adds.

Code of conduct

Other regions in the world, such as the United Kingdom, have faced similar challenges, explains Graydon.

"The government stepped in and implemented a code of conduct," he says. The code "basically put a framework in place as to how business needed to be conducted between retail and manufacturing."

The goals were fairness and accountability, Graydon adds.

"It's worked tremendously well," he says. "The manufacturing profitability improved, and the amount of capital investment and innovation went up.

"Funnily enough, the retail profitability also improved because it was much more focused on efficiencies from farm gate to shelf, and it translated very positively. And most importantly, the consumer benefited because the code helped moderate price increases," says Graydon.

When considering food prices, "in Canada, we're experiencing anywhere from three to five per cent food inflation per year. In the U.K., it's closer to 0 to 0.4 per cent," he adds. "Australia has done the same thing with the same results, and many of the countries in the European Union are moving forward with the same thing. In every case, it was a win-win-win."

However, in Canada, "retailers aren't prepared to consider a code because they have it in their mind that it's going to be detrimental to their profitability," Graydon says. "When in fact it's going to be very positive, I think."

Significant support exists "in the agricultural industry for a grocery code of conduct," says Brekveld. A code "is really about ensuring that there's flexibility in the negotiating of commercial terms."

Adopting a code of conduct "wouldn't eliminate the negotiation process," she explains. "It simply would set some standards. It would provide clear guidelines for retailers and manufacturers, and it would allow for a dispute resolution process to be available when either side sees concerns."

The OFA hopes a code of conduct "will help encourage innovation and give space for companies to innovate because they'll have more dollars available for it," Brekveld adds. Processors "would be able to innovate in the product, or in new products."

A national grocery code of conduct "is an option that we are considering. We are looking at other countries that have put this in place," Bibeau says. The working group is investigating if a code would need to be "supported by some type of legislation or regulation or enforcement" to be effective.

A code of conduct is "one of the options that is being analyzed but it is too soon to anticipate the recommendations of the working committee," Bibeau adds.

Canadian context

To understand the potential of a code of conduct, one must consider unique aspects of the Canadian food system.

Codes of conduct have "been used in Australia and the United Kingdom, but the context is very different in both cases. Both are island countries," Charlebois explains. Canada borders the United States, a major competitor in the food industry.

"If you make your domestic products less competitive and less attractive, grocers are just going to go and buy products elsewhere, from processors who are not subject to the code of conduct," Charlebois says.

"I think there's a Canadian context that needs to be appreciated in order for that code to work. My position on this is that it is time to look into it, but whether or not it is possible to implement in Canada is still, in my mind, uncertain."

Plan moving forward

Politicians are aware of the issue, "it's just a matter of now keeping the pressure on it," George adds.

The agricultural and food industry is continuing to advocate for a solution.

"The Canadian Federation of Agriculture has partnered with FHCP, and the OFA is working on this issue as well," says Brekveld.

Strong coalitions have formed around advocating for a resolution, agrees Graydon.

"The agricultural community is a vital part of the supply chain. They have a vested interest in getting change and their voice is really welcome through these coalitions, and their influence within the agricultural and economic portions of government," he says.

Though the government says it's too soon to share results of its analysis, "this is a matter that I care about and we'll see what we can do at the federal level to support our food industry," Bibeau tells Better Farming. BF