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On Thursday, Sobeys reports its first quarterly financial results since swallowing rival Safeway Canada.

Fred Lum/The Globe and Mail

Sobeys Inc. will be in the spotlight on Thursday when the grocer reports its first quarterly financial results since swallowing rival Safeway Canada, a takeover that already has touched off industry controversy.

About a month after the $5.8-billion acquisition closed, Sobeys demanded its suppliers provide it with 1-per-cent retroactive "synergy savings" – or price cuts – and no price increases in 2014.

Other retailers quickly followed suit with their own vendor demands. Last week, Overwaitea Food Group, owned by the British Columbia-based Jim Pattison Group -- which acquired 15 of the stores that Sobeys was forced to divest -- made its own demands. In a letter to suppliers dated March 3, it implemented a "new store startup fee" of one free case of all listed items per new store, including "all new stores going forward in each banner." (Overwaitea plans three new Calgary outlets.)

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Now, industry groups are ratcheting up pressure on Ottawa to write a code of conduct that would guide grocers and their relationships with suppliers. The move comes as the industry braces for more consolidation: the Competition Bureau is reviewing a $12.4-billion bid by grocer Loblaw Cos. Ltd. to scoop up Shoppers Drug Mart Corp., and a decision is expected soon.

On Wednesday, the Food & Consumer Products of Canada, which represents major suppliers such as Kraft Foods Group Inc. and Nestlé Canada Inc., added its voice to those calling for an enforceable code to handle situations such as supermarkets changing terms of their supplier contracts retroactively. "Grocery codes of conduct are emerging as a global trend and provide manufacturers and retailers with a more transparent, stable and fair business operating environment," the FCPC said in an e-mail.

Phil Norris, a spokesman for the Competition Bureau, said the watchdog is aware of the matter, but the Competition Act does not provide it with the authority to seek an enforceable code. A voluntary code would not be enforceable and thus ineffective, he suggested.

Jake Enwright, press secretary to Industry Minister James Moore, said the government has listened to the FCPC's arguments for a code. "We look forward to more discussions in the future."

The jockeying comes as grocers feel the pinch of heavy competition and rapid expansion by U.S. discount giants, including Wal-Mart Canada Corp. and Target Corp. On Thursday, when Sobeys' parent Empire Co. Ltd. discloses its third-quarter results, it is expected to report virtually no sales gains at stores open a year or more, a key industry measure.

U.S.-based Safeway Inc. has reported declining Canadian sales and profit in the two quarters prior to the acquisition. It is unclear how much of the weakness is tied to the core grocery business rather than foreign exchange rate shifts, profit-shearing drug reforms and corporate charges.

Michael Hutchings, a lawyer in Britain who helped spearhead a grocery code there, said even more concentration of the biggest players exists in Canada than in his country.

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He said supermarket practices of demanding extra payments from suppliers are common in markets with such concentration. Australia adopted a grocery code, aimed at stopping the top retailers from imposing retroactive and other contract changes. Otherwise "if you're a supplier that wants to stay in business, you bite your tongue and get on with it."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More


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