‘Tremendous pressure on grocers right now to put on deals’

It is alleged that in supplier-retailer meetings Loblaw, Walmart, Sobeys, Metro and Giant Tiger accepted price increases from the suppliers on the condition that their retail competitors would also accept them.

In 2016, Canada Bread was the largest supplier of fresh commercial bread in Canada with 40 per cent market share with Weston close behind with 38 per cent, the court documents said.

Loblaw and George Weston were granted immunity from prosecution after reporting the alleged collusion to federal authorities. Sobeys, Metro and Giant Tiger, have all denied participating in the alleged scheme and Walmart Canada has declined comment, citing the ongoing Competition Bureau investigation.

Bread prices rose at an average annual rate of 5.25 per cent between 2002 and 2014, compared to an annual inflation rate of 2.57 per cent for all other food purchased from stores, according to an analysis of Statistics Canada data by Kevin Grier, a food industry analyst.

Those increases could not be linked to underlying factors such as the cost of ingredients, Grier noted. By 2015, a loaf of bread cost nearly a dollar more than it would have if prices had followed the same rate of inflation as all other food bought in stores, Grier found.

While Walmart’s decision to cut ties with Weston now after a long-term supply relationship might raise questions amid the price fixing probe, Walmart’s moves are ultimately dictated by a drive to offer lower prices to consumers, and the company will negotiate accordingly with its suppliers to that end, said Sylvain Charlebois, dean of management at Dalhousie University.

“The scandal may have triggered different conversations that led to this decision,” he said. “Walmart might have said after that, ‘What do we gain from dealing with Weston going forward?’ That might have been a motivator when it came to its procurement strategy in bakery. Knowing how Walmart operates, I suspect that the decision was financially motivated. There is tremendous pressure on grocers right now to put on deals.”

Still, losing Walmart as a national customer might not bode well for Weston Foods in a tepid market for fresh commercial bread.

In the first quarter, George Weston reported profit of $1.40 per share, up from 84 cents a year ago.

But several factors dragged down the performance of its bakery business, management told investors during a conference call earlier this month, including sales declines in fresh baked goods, costs associated with its restructuring plan, higher input and transportation costs and lower volumes due to a reduced number of products.

Sales in the Weston Foods segment fell 1.5 per cent in the quarter, excluding currency factors, primarily due to declining volumes. Adjusted operating earnings fell 28 per cent. “While we were anticipating a deterioration in (the bakery’s operating earnings in the quarter) we were not anticipating this significant of a decline,” analyst Peter Sklar of BMO Capital Markets wrote in a recent note to clients.

At George Weston’s annual meeting this month, CEO Galen Weston addressed the price-fixing scandal, saying there is “no excuse” for what occurred.

“I believe, that when something like this happens, you must take accountability,” he told shareholders. “We discovered the scheme, we reported it immediately to the authorities and have taken steps to make sure that it never happens again.”

I SUSPECT THE DECISION WAS FINANCIALLY MOTIVATED. — SYLVAIN CHARLEBOIS, DALHOUSIE UNIVERSITY

JOE RAEDLE / GETTY IMAGES FILES Walmart’s moves are ultimately dictated by a drive to offer lower prices to consumers, says Sylvain Charlebois, dean of management at Dalhousie University.