Grocery industry making progress on code of conduct, but work will stretch into the new year

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Industry players say there has been “remarkable” headway toward a self-regulatory code of conduct for Canada’s grocery sector, but a key aspect is still a work in progress: a mechanism for enforcing the rules and arbitrating disputes.

The steering committee of industry groups developing the code has drafted “provisions” for the behaviour of both retailers and their suppliers – a breakthrough in discussions that had dragged on for months, with warnings about a failure to reach a consensus as recently as this past summer.

However, a recent draft discussion document obtained by The Globe notes that dispute-resolution mechanisms “are still under development.” The document states that these will include a range of options, “from informal discussion through to some type of formal arbitration,” but does not lay out who would act as arbitrator or how such a system would function. The committee is working to clarify that by early next year.

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The fight between grocery retailers – five of whom control approximately 80 per cent of the market in Canada – and suppliers, which include multinational giants as well as smaller food producers, has stewed for years. It boiled over once again in 2020, when grocers including Walmart Canada and Loblaw Cos. Ltd. announced unilateral hikes to supplier fees. That same year, Canada’s federal, provincial and territorial agriculture ministers formed a working group to study the issue and began pushing for the industry to develop its own code of conduct.

This past July, the steering committee wrote in a report to government that it had failed to reach consensus on a number of issues. It warned that if progress was not made by November, government intervention might be needed.

The committee has now submitted a draft of proposals for elements of the code to government officials. Representatives will present their latest draft to agriculture ministers at a meeting in January.

“The legal construct and the adjudication process are critical pillars of the overall code,” said Michael Graydon, co-chair of the steering committee developing the code and chief executive of Food and Consumer Products of Canada, which represents manufacturers. The committee is making progress on plans for a non-profit adjudicator’s office, he said, which would be industry-funded.

Enforcement will be a balancing act, because an adjudicator would need to be given the teeth to ensure compliance, while not being so punitive that companies refuse to participate in what is ultimately a voluntary process.

“This is a $100-billion industry that we’re trying to get under control,” he said. “That we’ve got a set of provisions that we’re all comfortable with is remarkable.”

Among the notable developments is a code provision on allocation of food supply. Major retailers frequently provide order forecasts to their suppliers, but if they ultimately order more than the forecast amount, it can affect the availability of those products for small independent stores. That’s because suppliers try to avoid fines that big retailers charge – in the form of deductions from their payments to suppliers – for orders that are underfilled, so they sometimes reallocate products away from retailers with less market power, Mr. Graydon said. The draft of the code rules says retailers should not impose fines or penalties if a supplier does not accept an order. It also specifies that suppliers take into consideration “orders from all retailers.”

“That element of fair allocation is critically important,” Mr. Graydon said.

Another notable element of the draft is a rule establishing guardrails around those compliance fines. It encourages suppliers and retailers to agree in writing when such fines can be charged; otherwise “reasonable notice” and “substantiation” must be provided, with an opportunity to dispute the fine. Such a rule would work against current circumstances where fines are deducted from payments, and companies haggle after the fact over whether the deductions should be reversed.

The proposed code provisions are now undergoing industry consultation, and could change based on input, Mr. Graydon said.

On Nov. 18, one member of the steering committee walked away from discussions. Food and Beverage Canada wrote in a statement that the proposed code “will be insufficient to address the needs of Canada’s small and mid-sized food manufacturers,” in part because it still relies too heavily on the contracts that suppliers and retailers negotiate with each other, “without actually addressing the underlying imbalance of negotiating power.”

Mr. Graydon noted that other groups representing small- and medium-sized businesses remain part of the process, including the Canadian Federation of Independent Grocers and Food Producers of Canada, and that the committee will continue to consult across the industry on the rules.