Grocery Margin Squeeze: Surging Fuel Surcharges Force Pricing Dilemma
For over 30 years, Essence of Life Organics, a grocery store in the heart of Kensington Market, has strived to provide affordable, healthy food to its community.
But since the COVID-19 pandemic, keeping that mission alive has become an uphill battle, with food prices rising across the board. Yet in recent weeks, Wan Lu, the store’s second-generation owner, has been confronted with another round of supplier price hikes as the U.S.-Israeli conflict with Iran has sent diesel prices surging.
“Everything is kind of going up by about three to five per cent,” said Wu, whose parents emigrated from Taiwan and opened the store in 1994. “We try our best to really absorb most of the costs, but at some point, it gets to be inevitable, and we do have to start increasing prices in line with what we’re being charged by suppliers.”
Fuel use is woven into nearly every step of the food supply system, from the harvesting of crops to transportation. Across the country, many suppliers are sending grocery stores notices of price increases they attribute to rising fuel costs or fuel “surcharges,” said Gary Sands, senior vice-president of the Canadian Federation of Independent Grocers.
The Star has obtained a number of fuel surcharge and price increase requests sent to retailers by food suppliers, including some of the largest, such as Maple Leaf Foods, Sofina Foods and Tree of Life, as well as local farms and health product distributors.
For instance, Sofina is implementing a temporary fuel surcharge of $0.07 per kilogram, effective as of April 24, citing the sustained increases in transportation and fuel costs.
“While we have absorbed these increases for as long as possible through internal efficiencies, current conditions require us to take this measured step to ensure continued service levels and on‑time deliveries,” Sofina said in its email to retailers. Sofina did not respond to the Star’s request for comment.
Paul Sawtell, the CEO of 100km Foods Inc., an Ontario food distributor, says his March diesel bill was up 50 per cent year over year to just over $10,000. And if high prices persist, he says, he could face an additional $75,000 in expenses by the end of the year.
“It will erase any hope for profitability,” he said. Sawtell has absorbed the additional costs so far but is looking at ways to recoup the expenses or make transport routes more efficient.
According to Metro and Empire, the higher costs of goods have not been reflected in shelf prices.
Metro’s executives said on an April 22 analyst call that the company has received only a few requests for price increases and is negotiating with vendors to delay the impact. However, the company said it is feeling the strain of rising transportation costs across its distribution network to stores and pharmacies, and expects a “$5 million per quarter impact” if diesel prices remain high.
“Over time, we expect that higher costs like that will be reflected (in food prices), but it hasn’t started to happen yet,” Metro’s CEO Eric La Flèche told analysts.
Caitlin Gray, spokesperson for Empire, the owner of Sobeys and Farm Boy, said the company has received a few supplier requests to date and has declined them.
“We believe the fuel market is too unpredictable to make any decisions that could adversely impact the value we provide to our customers,” said Gray.
The Star asked Loblaw and Walmart about whether they have received price increase requests or fuel surcharges, but did not hear back.
Sands, of the Canadian Federation of Independent Grocers, said he believes that notifications of cost-increase requests sent to independent grocers are, in some cases, not being sent to the large grocery chains.
Independent grocery stores don’t have the leverage that big grocers do to refuse those requests, given the risk of being cut off, he added.
Fuel charges are squeezing already thin margins — typically around two per cent — at independent grocery stores, particularly in rural and remote areas, Sands said. Some are delaying increases, while others are passing costs on to stay afloat.
“If you don’t, you’re not going to be an independent grocer. You’ll be an out-of-business grocer,” he said.
Wu, who runs Essence of Life Organics, said costs are still manageable for now, though she has adjusted prices for some non-perishables like chips and toilet paper. The impact is expected to become more pronounced in the coming months, she said.
“If you can stock up on groceries, do so now,” said Wu. “It’s probably going to go up in the next month or so. It’s definitely not going down.”
Brad McMullen, the CEO of Summerhill Market, which has six grocery stores in the Greater Toronto Area, said his company has received a handful of notices tied to rising fuel and logistics costs, but is largely absorbing them for now.
“If sustained, this will put pressure on margins. We’re responding by tightening purchasing, improving planning, and leveraging bulk buying where it makes sense,” he said.
Absorbing costs is not an option for Angela Donnelly, who has run Raise the Root, an organic market in Leslieville, for 15 years and has started receiving fuel surcharge requests from Ontario suppliers in recent weeks.
Donnelly said local grocers cannot sustain the repeated waves of price increases since the pandemic. With food prices more volatile than ever, running a local food business has become “overwhelming.”
“We’re on a shoestring here. When we have a price increase, we pass it on to our customers. We don’t have any extra room to absorb any extra charges,” she said. “It’s just a very low margin business.”
This article was first reported by The Star
