Sobeys’ parent company teams up with manufacturers to draft code of conduct for embattled grocery sector

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One of Canada’s most powerful supermarket chains is giving legislators a blueprint on how to end bully tactics in the food chain, conceding that dysfunction between the dominant grocers and their suppliers is hurting Canadian farmers, food processors and consumers.

Empire Co. Ltd., Sobeys’ parent company, on Thursday submitted a proposal for an industry code to a government working group that is currently looking for ways to quell infighting in the grocery business.

The pitch for more restraints on big grocers — coming from one of the biggest grocers, no less — is likely to have major impacts on how the vast majority of Canadians get their food.

“I don’t love more legislation, more regulation — I don’t,” Empire chief executive Michael Medline said in an interview. “I just don’t see any other way to improve relationships in this industry, all the way from farmers to customers.”

Empire co-wrote the code of conduct with Food, Health and Consumer Products of Canada (FHCP) — an improbable alliance, considering FHCP has for years been the loudest and fiercest critic of how the big grocers treat their suppliers.

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“It is strange, a bit,” Medline said. “Sometimes I refer to us as the odd couple.”

Food producers have been in open revolt against grocers since last year, when both Walmart Inc. and Loblaw Cos. Ltd. started charging suppliers extra fees to help cover the cost of e-commerce and infrastructure upgrades during the pandemic.

So-called shelving fees and heavy fines for minor infractions such as short shipments have long been a point of contention for suppliers, who have little choice but to swallow the extra costs since they can’t risk being shut out by one of the few major grocery chains in a heavily consolidated market.

But the Loblaw and Walmart fees, coming during the chaos of a pandemic, pushed the issue to a tipping point.

FHCP chief executive Michael Graydon last summer warned of growing frustration with supermarket chains “using the manufacturers as a bank,” and called for the government to step in and implement a code of conduct, similar to one used to rein in bully tactics in the United Kingdom’s grocery business.

In his fight for a code of conduct, Graydon has found an ally in Medline, who shocked many in the industry by throwing his support behind suppliers in their push for regulation.

“Last September, my phone rang and it was (Medline). He said, ‘You know, I think it’s time,’” Graydon recalled.

Then, in a pivotal speech to the Empire Club of Canada last fall, Medline publicly slammed the Loblaw and Walmart fees as “repugnant” and said the relationships between grocers and suppliers were the worst he’d seen in his retail career.

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But now, Empire and FHCP are asking other major retailers to cooperate and provide feedback on their proposal to the government working group.

“After I made the Empire Club speech, there was not a cacophony of support, I would say,” Medline said. “In the last week, we have heard more as I think it became clearer to the industry that something is afoot … I’ve already started talking to some of our competitors about this last night.”

Loblaw and Metro Inc. did not comment on Thursday, although Metro has said it will wait to see what a code would look like before passing judgment.

“I think they’ll agree that this is good for the industry. I hope they do,” Medline said.

Walmart Canada said it supported “many of the principles” in the proposal, but disagreed that the sector needs regulation.

“Governments, retailers, suppliers and customers simply do not need a set of new complicated rules, ‘compliance officers’ and 10 different sets of provincial adjudication systems interfering with an already competitive marketplace,” spokesperson Adam Grachnik said in an email.

Small grocers, however, feel left out of the proposal, which only focuses on the major chains. The Canadian Federation of Independent Grocers (CFIG) had been working with FHCP to bring in industry regulation last year, but on Thursday said it was “disappointed” the proposal ignored independents.

CFIG vice-president Gary Sands said the announcement shouldn’t be treated as FHCP and Empire “coming down from the mount, delivering the equivalent of the 10 Commandments” for the grocery sector.

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“It’s a good thing they weren’t involved in that process, or the commandments would only have applied to the pharaoh,” Sands said in an email.

But Graydon at FHCP said focusing only on big grocers will end up solving problems for the independents, since bully tactics have historically left suppliers with less stock available for smaller stores, and less money to spend on promotions at those stores.

The draft code lays out rules of engagement on supply deals, which would be enforced through the creation of a new government watchdog.

Empire and FHCP called for government to establish an adjudicator to issue “penalties, damages or costs” for non-compliance. Retailers would also be required to have their own internal compliance officers to field complaints from suppliers.

“It’ll make the industry work better,” Medline said. “I don’t know why anyone would have any problem with fair rules that make it clear how we do business and treat each other with respect.”

I don’t know why anyone would have any problem with fair rules that make it clear how we do business and treat each other with respect

Michael Medline

Medline called the proposal a “Canadianized” version of the U.K. code, which was backed by legislation that forced grocers to abide by the rules.

Christine Tacon, the U.K.’s former grocery watchdog who enforced the code until last year, helped Empire and FHCP with the proposal.

“A lot of the things that retailers do to suppliers, the public would be horrified to know about it,” she said.

Complaints about unilateral fee increases and penalties drastically declined following the U.K. code’s implementation. Tacon said retailers found the rules made their operations more efficient.

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“One retailer used to have 33 different ways of getting money out of suppliers and they reduced it to three,” she said. “They just got rid of all the time that people were wasting on challenges, and trying to get the bottom of, ‘Well, do they owe us this much money or don’t they?’”

Tacon was one of dozens of experts and industry players interviewed by a Canadian cross-governmental working group on the grocery sector. Late last year, the federal, provincial and territorial ministers of agriculture, who meet semi-annually to discuss national food chain issues, tasked the working group with investigating fees in the grocery sector and coming up with recommendations in time for the ministers’ next meeting in July.

The group decided the sector needed government intervention well before Thursday’s surprise announcement from Empire and FHCP.

Quebec Agriculture Minister André Lamontagne, who co-chairs the working group, told the Financial Post earlier this month he had already determined that fixing the issues in the grocery business will require a coordinated government response.

After reading the proposal on Thursday, Lamontagne said it was clear his working group has “really put our finger on something” in the grocery sector.

“It’s great what’s happening now. We have a whole sector that is ready to sit and see how it can become better, for the sake of its own health and for the sake of consumers in Canada,” he said. “I think it’s a very good thing.”

Lamontagne said the draft code of conduct is “certainly aiming in a good direction,” but he added that it represented only one group’s perspective and encouraged other retailers to give feedback. The working group hasn’t yet decided that a code of conduct would be the best approach.

“It’s a very active process,” he said.

Financial Post