BC food costs rise while grocery retailer profits soar

On The Coast with Gloria Macarenko

Interview by Gloria Macarenko with James Donaldson regarding BC food costs rising while grocery retailer profits soar.

Gloria Macarenko: If you are approaching grocery stores a little more cautiously these days, you’re not the only one. Food costs are soaring as well for food producers. Even as customers are paying more than ever, big grocery chains like Loblaws are seeing profits increase by as much as 40% this first quarter.

For more, we have reached James Donaldson. James is the CEO of BC Food & Beverage, that’s a not-for-profit that represents the interests of BC food and beverage manufacturers. You did post an article about the Loblaws profits lately on LinkedIn. What was the reaction on social media to that post?

James Donaldson: Great question, Gloria. It was quite interesting. I post on LinkedIn fairly frequently, and I’ll typically get anywhere from 5,000 to 15,000 views. This one’s approaching 70,000. Our COO Elisa Hutton, she also shared a similar post and had about 30,000 herself. I think that really goes to show the level of frustration that our industry’s feeling right now with the imbalanced playing field that’s existing right now between the retail environment and food and beverage manufacturers. It’s frustrating, but I think that the level of engagement we got from that social media post is a really good indicator of how significant and how frustrating it is.

Macarenko: I’d like to hear more about that imbalance on the playing field. Give us some context in terms of how this increase comes into play with your members.

Donaldson: Sure. When you look at the grocery retail environment in Canada, there are five retailers that represent 85% of the market. When you look at the food industry in Canada — particularly BC, by the way — it’s a very large number of small processors. I’m not even sure people in BC understand how big the industry is.

Just for comparison, the forestry sector in BC in 2020 had $11.5b in revenue. The food and beverage manufacturing industry in BC is $11.1b. A lot of people understand the importance of the economy to the forestry sector, but they don’t always think that way about food and beverage manufacturers.

One of the main reasons is that there are 3,100 processors that make up that number. Essentially, you’ve got a very large number of small manufacturers selling to a very small number of very large customers. Of course, now that’s created a very competitive tilt where a lot of the conversation and a lot of the communication is very one-way and a lot of unilateral decisions are being made.

The really huge issue that smaller companies are having in particular — so it hits BC even more than some areas — is just even challenges in passing on price increases.

You’ve noted yourself that the prices have gone up. Retailers are taking prices up, but only a small portion of that is getting back to the manufacturers who are dealing with rising costs everywhere else with labour and supply chain, ingredient inputs, and packaging.

Right across the board, all those costs are going up. When manufacturers don’t have the ability to pass those costs as well because retailers aren’t allowing them to and they’re taking increases themselves, the margins start to erode. Then, overall competitiveness gets impacted significantly.

Macarenko: We talk about those increases to producers, to manufacturers, supply chain issues, how has the pandemic affected things like that?

Donaldson: The issues existed before that, but there’s certainly been a compounding effect. And of course, even more so in BC, it wasn’t just the pandemic for the last two years, also the flood crisis was an extreme example where we saw freight rates going up 400% in the matter of three or four days, because of course, demand far exceeded supply. So for even small companies to afford trucks, the cost of freight was going up so much that the increased cost was more than the money that they were making on the products they were shipping.

Imagine what sort of position that would put a small business and your option of not shipping — that certainly would be their option if they’re losing money on shipping, but how long can you do that before the customer is going to go and find another supplier? The challenge with having five such large retailers, if you sort of decides not to do business with them or vice versa, you can’t replace that business anywhere else because you know the number of small customers and mid-sized customers in Canada, they go with the very, very few now.

Macarenko: Okay, so you represent BC Food and Beverage Manufacturers. What has been the reaction? How’s everyone feeling?

Donaldson: Everyone’s concerned and everyone’s a bit frustrated just because there really hasn’t been any kind of a resolution. They just feel helpless. The conversations, the dialogues have been very one way — they’ll reach out to try and engage their customers to help them understand the situation, and they just pretty much get a — they don’t really hear back. And then they’ll just be told whether or not they’re going to accept a price increase.

It’s a bit of a feeling of helplessness. But as I said before, I think when we have 90 plus thousand people respond to a simple comment about increased profits, it’s just incredibly frustrating when people are trying to employ their people. I mean, our industry represents 39,000 employees in this province. They’re all part of the community, they all shop at these retailers as well. And if they can’t continue to make proper margins where they’re paying those people, then the industry starts to evaporate, and that’s certainly what we don’t want to see.

We don’t want to see the industry being forced to consolidate like the retail industry has because if all of a sudden there are large manufacturers and the small ones go away, a lot of that manufacturing is more likely to leave BC, and that’s going to cost a lot of jobs and a lot of revenue. I mean, I mentioned $11.1b, I would hate to see half of that move offshore and other provinces or to the US with large manufacturers start to consolidate, which is what will happen.

Macarenko: Well, James, what’s the way forward here? As you see it, to levelling the field?

Donaldson: Well, I think there just needs to be more collaboration and dialogue. So one of the comments that I’ve made and something that is being discussed right now is a code of conduct. A retail code of conduct has been developed in other countries like the UK and Australia in recent years, and it’s really — it’s sort of a dispute resolution mechanism that really exists just to sort of have dialogue. That’s the biggest frustration a lot of the manufacturers have is that they can’t really even have a conversation with them, it just becomes this unilateral decision, yes or no, and without any sort of opportunity to engage.

So it sort of act as a bit of an ombudsman, and industries that had asked the government to play a role in helping facilitate this, and they are — Agriculture Canada is playing an active role in it as a facilitator, and I think it’s important that government plays a role in this because they, frankly, kind of allowed a lot of the retail consolidation that’s created where we are right now. We’re hoping that will at least be a starting point, but honestly, it really is for everybody to work in collaboration.

There are a number of different stops in the supply chain as well. It’s not just — it’s the agriculture industry, it’s the processors, it’s ingredient suppliers, it’s packaging companies, transportation, distribution warehousing — like there’s a number of touchpoints through the supply chain, and of course, over the last two years, we’ve seen sort of how vulnerable that supply chain is. And as I mentioned before, the flood’s been an extreme example of just how delicate it can be and how everything can get thrown off.

I think it really starts with the retailers though because they’re so big and they really drive and are ultimately the face of the consumer, where they go to buy their products. So if they don’t come to the table to kind of understand those different dynamics and how it affects people over the long term, it’s not going to work. And everyone can kind of share — you know, even if more pricing needs to be passed on, I think if all those different participants in the supply chain agree to work more collaboratively together, then it will.

We won’t really need to impact consumers at all. And overall, it will actually help competitiveness for our industry across the country which benefits — consumers win that way too because that means there’s going to be more choices, there’s going to be more locally sourced options available, and those things are really important to consumers because we hear about it all the time.

Macarenko: Now, what about the impact of direct delivery to consumers? We’re hearing from Stats Canada that direct delivery has been a rather popular, successful option, especially during the pandemic. People didn’t want to risk going to the grocery store, but do you see this having an effect in the picture?

Donaldson: Certainly, we’ve seen a ton of growth in it, and certainly the pandemic, has accelerated the growth of e-commerce and direct to consumer and those new channels are great. It gives manufacturers more options and more ways of engaging the end consumer. So I think that’s going to — I don’t think that’s going to go away, I think that’s going to be a great long-term solution that’s going to help small businesses.

But at the end of the day, if you’re trying to scale up, you need to be able to — and you want to grow your business, you need to be able to sell into Loblaws and Walmart, so the world — the reality is, e-commerce probably won’t be able to replace that scale. So it’s certainly a partial solution, but if you say you can’t do business [inaudible] —

Macarenko: James, I think we might have — you dipped out there. Are you still with us?

Donaldson: That a company could do.

Macarenko: Sorry, we just lost that last great roundup sentence from you. Your phone just dipped out there, so you’re saying it’s part of the picture, however?

Donaldson: However, e-commerce isn’t big enough to replace the sales, say, from a retailer the size of Loblaws.

Macarenko: I see. Thank you very much. Interesting to hear from you directly after seeing just how many posts and likes and how much engagement that post got online. Thank you very much for your time.

Donaldson: Thanks very much for having me.

Macarenko: That’s James Donaldson and he is the CEO of Food and Beverage BC. BC Food and Beverage is a not-for-profit, representing the interests of BC Food and Beverage Manufacturers.


Listen to the Segment HERE.

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