Sobeys Inc.'s demand for price cuts from its suppliers is having a domino effect in the grocery sector, prompting other retailers to follow suit and threatening to squeeze vendors already pinched by a weaker loonie.
A growing array of grocers and wholesalers are borrowing a page from Sobeys's playbook and calling for retroactive price rollbacks and a freeze on increases from their suppliers, according to recent grocers' letters obtained by The Globe and Mail.
Tensions are intensifying as suppliers fight back, ignoring the price ultimatums in some cases and alerting grocers that price increases are coming.
The demands and counter-demands underscore an increasingly competitive grocery segment in which every percentage point of a suppliers' cost increase can be painful to a retailer's bottom line.
Now, as U.S. discount retail titans expand in Canada and domestic heavyweights such as Sobeys and Loblaw Cos. Ltd. move to consolidate and slash costs, smaller incumbents are trying to flex their muscles.
The suppliers are facing increasing pressure as the Canadian dollar weakens against the U.S. greenback, which raises costs since much of their purchasing is done in U.S. dollars. The industry is seeing almost no food cost inflation in Canada.
The jostling was touched off on Dec. 24 when Sobeys, which closed its $5.8-billion deal for Safeway's 213 stores in Western Canada in early November, told its suppliers it was cutting its prices by 1 per cent retroactive to Nov. 3 – what it called a "synergy savings rate" – and would not accept price increases for 2014, with some exceptions.
As a result, a range of rivals and distributors wrote their suppliers in January asking for the same deals, according to letters obtained by The Globe and Mail and interviews with some players.
"We operate in a very competitive market and it is Buy-Low and Associated Grocers' expectation that the same principle of no cost increases and the 1 per cent synergy discount will be offered to both our divisions," Albert Lum, director of supply chain at Buy-Low Foods LP in Surrey, B.C., said in a letter, dated Jan. 15, to suppliers.
Buy-Low Foods, owned by Vancouver-based Jim Pattison Group, is the country's largest food wholesale distributor to independents, serving nearly 1,800 supermarket, convenience and specialty produce markets. It also runs 24 supermarkets. Mr. Lum declined to comment further, saying in an e-mail it "will deal with suppliers to ensure that we remain competitive."
Other retailers and distributors whose letters to suppliers were obtained by The Globe include London Drugs, a dominant drugstore chain in Western Canada that carries groceries; Federated Co-operatives Ltd. in Sakatoon; Horizon Distributors and PSC Natural Foods in Burnaby, B.C.; Atlantic Grocery Distributors and Powell's Supermarket in Bay Roberts, Nfld.; and Coleman Group of Cos. in Corner Brook, Nfld.
"If they're going to give this discount to Sobeys, as the major Canadian retailer in Western Canada we have to be treated equally," Wynne Powell, chief executive officer of London Drugs in Richmond, B.C., said in an interview. "It's just a question of fairness. We hate even asking for it. But if we don't we can't provide the same kind of pricing to the customers."
But some suppliers don't appear to be accepting the latest demands from grocers – at least not from smaller players. Many are still sending lists of price increases to smaller grocers, industry sources said. Mr. Powell said some suppliers have warned his officials that they may have to raise prices if the loonie stays low.
Sobeys's supplier price cuts aren't unprecedented in the industry. Both Sobeys and Loblaw have made similar demands over the past several years.
In its latest demands, Sobeys is arguing that its larger size means that suppliers can get bigger orders from it now, said Peter Chapman, president of grocery consultancy GPS Business Solutions in Bedford, N.S.
"There is some credibility to Sobeys saying, 'We are growing our volume with the acquisition of Safeway and in the past you had to deal with Sobeys and Safeway, now you just have to deal with Sobeys,'" Mr. Chapman said. "One stop to get all the combined volume."
United Grocers Inc., a major buying group for retailers such as London Drugs, Montreal-based Metro Inc., Jim Pattison Group's Overwaitea Food Group and Buy-Low, said in a Jan. 6 letter to suppliers it expects them to "respect and treat the members with equity and fairness."
UGI predicted that Loblaw would make a similar request from its suppliers as Sobeys did. Loblaw is waiting for the Competition Bureau to approve its $12.4-billion deal to buy Shoppers Drug Mart Corp.
However, Loblaw spokesman Kevin Groh said in an e-mail: "We are not among the retailers making blanket, retroactive demands and that is not in our plan."
Supplier representatives could not be reached for comment.