Frito-Lay stops shipping chips to Loblaws stores in pricing dispute

One of Canada's biggest food manufacturers has halted shipments to the country's largest grocer in an extreme example of how inflation is impacting the food industry and driving a wedge between some retailers and suppliers.

At issue is a dispute over pricing between Frito-Lay Canada and Loblaw Companies Ltd.Frito-Lay, the maker of brands like Cheetos, Doritos, Lays, Ruffles and Sunchips, says it's tryingto recoup higher costs.

The situation has left the chip and snack food aisle of many Loblaw stores less full than usual, or stocked with house brands, such as President's Choice or No Name.

Frito-Lay spokespersonSheri Morgan confirmed there is a "temporary disruption" with one customer.

"Our business has faced unprecedented pressures from rising costs of items including ingredients, packaging and transportation," she said in an email.

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"To help offset these pressures on our Canadian operations we have made adjustments to our prices that are consistent across the marketplace."

Loblaw spokespersonCatherine Thomas said the grocer is "laser focused" on minimizing retail price increases.

"When suppliers request higher costs, we do a detailed review to ensure they are appropriate," she said in an email. "This can lead to difficult conversations and, in extreme cases, suppliers don't ship us products."

The rift between Frito-Lay and Loblaw exposes deepening tensions in Canada's food industry that many experts say could worsen as supply chain challenges and inflation continue.

Some argue that grocery retailers are simply trying to keep sticker prices low for consumers and stop suppliers from using inflation to justify unreasonable price hikes.

Others suggest grocers are using their market strength to bully suppliers and pad their bottom lines.

"It's challenging that it has devolved into such a confrontational relationship," said Michael Graydon, CEO of Food, Health & Consumer Products of Canada, which represents Frito-Lay.

"The level of frustration is growing."

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Retailers,manufacturers at odds over pricing

The increase in wholesale prices some suppliers are seeking from retailers will help mitigate ongoing inflation but won't completely offset higher costs, Graydonsaid.

The final price consumers pay in stores is set by grocery retailers not food manufacturers, he said.

However, retail industry advocates say food manufacturers are, in some cases, seeking price hikes that outpace inflation.

Retail Council of Canada spokespersonMichelle Wasylyshen said theindustry group, which represents Loblaw, has been contacted by bothbig and small grocery retailers about a flood of new price increasesin January from vendors.

"This follows an already alarming number of increases in thepreceding quarter," she said. "In many cases the increases areunprecedented and far exceed typical food inflation levels."

Statistics Canada said last week that food prices increased 6.5per cent in January, the biggest year-over-year jump in grocerybills in more than a decade and higher than the overall annualinflation rate of 5.1 per cent.

It's unclear how the loss of sales at Loblaw, which includesconventional chains such as Zehrs, Atlantic Superstore and Provigoand discount stores No Frills and Maxi, could impact Frito-Lay.

The company's products are made in Canada, largely using Canadianpotatoes grown by local farmers. Experts say a long-term drop insales could ultimately hurt local producers.

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Brand loyalty a factor

But experts say brand loyalty will work in the chipmaker'sfavour.

"Frito-Lay is betting that the loyalty consumers have for theirbrands gives them leverage to make this move," said JoelGregoire,associate director of Canada Food and Drink with market researchcompany Mintel.

Yet pulling supply from Loblaw which holds the largest share ofgrocery sales in Canada is also risky for the food manufacturer,he said.

"Not filling orders to Canada's largest grocer will no doubthave a substantial impact on Frito-Lay's near-term sales,"Gregoiresaid.More broadly, he said the dispute appears emblematic of a broader battle for pricing leverage betweengrocers and manufacturers.

"This tension is not new, but this move by Frito-Lay has highstakes," he said. "This is a battle to maintain margins as costsrise."

Indeed, food expert Sylvain Charlebois said the friction betweenFrito-Lay and Loblaw is the "tip of the iceberg."

The hostility between retailers and manufacturers could worsen inthe coming months, he said.

"This is not just about chips," said Charlebois, DalhousieUniversity professor of food distribution and policy.

"We're goingto be seeing this in other food categories like bakery and dairy aswell."