With Safeway deal complete, Sobeys demands price cuts from suppliers
The country’s second-largest supermarket chain, which added 213 stores in Western Canada when the de…The country’s second-largest supermarket chain, which added 213 stores in Western Canada when the deal closed, in early November, has told suppliers of food and other merchandise they will have to shave their prices by 1 per cent, retroactive to Nov. 3 – a move that observers say could prompt rival grocers to follow suit.
The demand reflects the tightening grip of big retailers in the grocery sector and the severe competitive tension in the food business. U.S. discount giant Wal-Mart Stores Inc. is increasing its presence in food, and Target Corp. opened a chain of Canadian stores last year. Supermarket leader Loblaw Cos. Ltd. is preparing to close its deal for Shoppers Drug Mart Corp., which will add to its purchasing heft.
In quarter ended Nov. 2, Sobeys reported that its gross margins slipped to 22.5 per cent from 23 per cent a year earlier because of heavy discounting. Other segments, such as apparel, enjoy margins that are more than twice as large, Mr. Winder said.
In its letter, Sobeys says its acquisition of Safeway Canada will provide it with a new growth platform in Western Canada, the country’s fastest-growing region, while also significantly increasing the retailer’s economies of scale. To help it gain scale, Sobeys will require the retroactive 1-per-cent “synergy savings rate” from suppliers, it says.
“This 1 per cent synergy savings rate will be deducted from payments starting the end of January 2014,” the letter says. “Retroactive savings will also be deducted. The rate applies to all branded and private label grocery products. In addition, and as you are aware, current market retail pricing conditions leave no room for absorption of cost of good increases. As such, Sobeys Inc. will not accept any cost of goods increases through 2014.”