Grocery code of conduct could encourage investment, innovation: advocates

Two of the grocery code of conduct’s biggest advocates say they believe it could spark more investment and innovation by food manufacturers in Canada, hedging against shortages and price volatility in the future.

“The code is not a silver bullet or a panacea for every problem globally,” said Michael Medline, chief executive of Sobeys parent company Empire Co. Ltd.

“But when you look at what the code can achieve in the medium- and long-term, it should lead to lower prices, shorter supply chains and more choice for Canadians.”

The grocery code of conduct is a voluntary agreement for suppliers and retailers meant to create guidelines for fair dealings and level the playing field for smaller businesses. Work on the code began in response to calls from some in the industry to address fees charged by large retailers to suppliers.

Though Empire and Metro had expressed early support, there were several months of uncertainty over whether the other major grocers would be on board, with government pressure ramping up and threats of making the code mandatory. Loblaw, Walmart Canada and Costco confirmed their support earlier this year.

Talk of a grocery code predated the COVID-19 pandemic, but the proverbial straw that broke the camel’s back came in 2020 when Walmart and Loblaw introduced new fees for suppliers to help pay for infrastructure investments.

Not long after, Medline became the first major grocery executive to call for a grocery code of conduct, saying the “unhealthy” relationship between suppliers and retailers was discouraging innovation and investment in Canada.

Medline worried not only about whether such fees were fair, but also about an “exodus” of manufacturers from Canada, resulting in lost jobs, risks to prices, and longer supply chains.

“I was worried that … if the industry couldn’t clean itself up, that government was going to get involved,” he said.

Medline told The Canadian Press in a joint interview with Michael Graydon, CEO of the Food, Health & Consumer Products Canada association, that the industry can only benefit from clearer rules over negotiations and disagreements.

Graydon led the group that created the code and now chairs its interim board.

He said the grocery retail industry in Canada has consolidated over time, resulting in a power imbalance between retailers and suppliers. Graydon believes the cost implications of that imbalance for suppliers has resulted in a reduction in capital investment and innovation.

One of the code’s provisions deals with forecasting and ordering, with the aim to bring more discipline to the process and reduce compliance fines for short orders, Graydon said. He believes the code could lower costs for manufacturers by reducing the number and scale of fines they face from retailers.

There are some large companies whose Canadian manufacturing capacity is much less than it used to be, said Graydon, as it’s been moved to the U.S.

“If that financial security and economic certainty is there, then I’m hopeful we’re going to see much more economic investment and innovation and capital investment in their plans from those big multinationals.”

The code is set to be officially in place next June, with the creation of an office to oversee it underway.

Hiring for the grocery code adjudicator has begun, and the team is working on a more detailed dispute resolution process, Graydon said. There will be mechanisms for arbitration and binding arbitration, but he’s hoping most disputes will be ironed out before it comes to that.

The fact the code is voluntary means the adjudicator won’t be able to levy any fines, said Graydon. But he thinks that the threat of “name and shame” can be powerful, as can the threat of the code being made mandatory by the government if its effectiveness isn’t proven.

Medline and Graydon say some companies, both manufacturers and retailers, are already changing their behaviour in anticipation of the code. They’re both hopeful the code will over time transform relationships within the food industry and spark more confidence in companies to invest in their Canadian operations.

“Over (a) longer period of time, I want to see a better industry where manufacturers want to do business here,” Medline said.