Proposed Grocery Supply Code of Conduct

The first joint proposal by grocery and manufacturing leaders for a Grocery Supply Code of Conduct for Canada (the “Proposed Code”) is a step in the right direction for the Canadian grocery industry, but there is room for improvement.

Background

Empire Company, which owns Sobeys, Safeway, and FreshCo. (“Empire”), and Food, Health and Consumer Products of Canada (“FHCP”) submitted a draft grocery code of practice this March to the Federal, Provincial and Territorial (“FPT”) Working Group addressing systemic and rising unfairness in the grocery industry.

Relationships between large, vertically integrated wholesale grocery retailers and small, independent suppliers in the Canadian grocery industry have been deteriorating over the past several decades as already narrow supplier profit margins thinned due in large part to the uploading of costs from grocery retailers to suppliers.

Vertically integrated grocers like Sobeys, Loblaws, Metro, and Walmart make up the vast majority of market share in Canada. They have their own distribution centers and own or control the retail locations, giving them enormous power over small suppliers. These grocers have consistently used their market supremacy to squeeze fees out of smaller suppliers for advertising, shelf-space, and development of their own infrastructure.

Many on the supplier side have been calling for regulation for years while large grocers have consistently denied the existence of an issue in need of government interference. This coming together of Empire and FHCP marks a rare collaboration between both sides of the industry to not only acknowledge the issues being faced by Canadian suppliers but to also propose a solution.

The Proposed Code

The Proposed Code aims to stabilize relations between grocers (called “Retailers” in the Proposed Code) and suppliers by promoting fair dealing, mutually beneficial relationships, transparency, and equitable dispute resolution. The code enshrines a set of good-faith industry business principles, such as ensuring changes to business terms are not imposed arbitrarily by requiring agreements between large Retailers and suppliers to be in writing.

It’s clear from the drafting of the Proposed Code that the intent was to place the majority of legal and administrative burdens on grocers and provide suppliers with more room to breathe. The first words of almost every provision of the code start with “a Retailer shall” and goes on to define a duty, obligation, or limitation of power on grocery retailers. However, the Proposed Code is not necessarily binding and a majority of these requirements may be contracted out of in the mandatory written Supply Agreement.

From an administrative perspective, the Proposed Code also places the burdens of implementation squarely on Retailers’ shoulders. For example, under the Proposed Code grocers are required to appoint a Code Compliance Officer and a Senior Buyer to ensure they are obeying the code and to give suppliers a contact to make complaints to at the Retailer level. No such personnel requirements are placed on suppliers.

Room for Improvement

The Proposed Code is still a long way from the kind of intervention needed in the industry. Most pressing in its deficiencies is the lack of any protections explicitly addressing small, independent suppliers, and the lack of detail in regard to the role of an adjudicator to enforce the code.

One of the Competition Bureau’s four distinct mandates is to “ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy”. As discussed in our previous post on the need for a Canadian grocery code of conduct and what should be included within, the Competition Bureau has consistently failed to recognize its responsibility to smaller Canadian enterprises, instead prioritizing impact on consumers.

The Proposed Code makes no specific mention of small, independent players from both the Retailer and supplier side of the industry, but their unique position and sensitivities need to be addressed. Exemptions from many of the administrative burdens imposed on larger grocers should be given to independent or single-store grocers who likely cannot support hiring an additional employee for the role of Code Compliance Officer or Senior Buyer. Small scale suppliers should also be independently considered.

Such exemptions should be considered with reference to the UK. The UK Groceries Supply Code of Practice (the “UK Code”) specifically limits its application to “Designated Retailers” and defines Designated Retailers to exclude small, independent operations.

The Proposed Code also needs to expand beyond stating principles to be promoted and putting obligations on grocers. To be effective, the code will need to incorporate an independent enforcement mechanism like the one implemented in the UK. Initially, the UK’s Code had little effect on the industry before it created the Grocery Code Adjudicator to enforce compliance with the code. The UK adjudicator is funded by a levy on designated retailers and has received almost exclusively positive reviews since being implemented in the early 2010s.

The Proposed Code for Canada does contemplate the eventual addition of an independent adjudicator to be appointed to oversee compliance with the Code, but detail on its ability and discretion to impose penalties, damages, or costs will need to be expanded.

Over the next year as the FPT Working Group considers the needs of the Canadian grocery industry and contemplates changes to Empire’s and FHCP’s Proposed Code, it would be wise to consider the lessons learned in the UK and how they can be applied to our unique Canadian context.

John Sotos, Sotos LLP

John Sotos is the founding partner of Sotos LLP and a dean of the franchising, licensing and distribution bar. John has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.9806 or jsotos@sotosllp.com.

Lauren Huxtable, Sotos LLP

Lauren Huxtable is an articling student at Sotos LLP.  Lauren joined Sotos after graduating from the Queen’s University Faculty of Law in 2020.