PepsiCo’s Frito-Lay Looks to Throw Down the Gauntlet in Price Dispute

A long way from Pepsico’s (PEP) Purchase, New York, headquarters, a price dispute is brewing between the company’s Frito-Lay division and Canada’s Loblaw Companies (LBLCF), Canada’s largest grocery store chain with more than 2,400 stores.

While the fight between the two companies might not seem like a big deal, the repercussions for consumers and investors on both sides of the 49th parallel could be far more impactful if this kind of dispute spreads to other businesses and industries.

Here’s what it means for PepsiCo, Loblaw Companies, and other businesses watching to see how it plays out.

PepsiCo Takes Action to Maintain Profits
Before getting into why the food and beverage company appears to have the upper hand, it probably helps to take a step back and explain what the price dispute is all about.

Due to rising costs for virtually everything in Frito-Lay’s supply chain from shipping to ingredients, the company has been forced to raise prices for its products sold in Canada. To ensure it maintains consistent pricing across the entire Canadian marketplace, it requires that retailers pass those price increases to their customers.

“To help offset these pressures on our Canadian operations and to ensure that we maintain the high quality our consumers expect, we have made adjustments to our prices that are consistent across the marketplace,” PepsiCo spokesperson Sheri Morgan wrote in an e-mail to The Globe and Mail. “We are committed to our Canadian manufacturing and operations and our products remain widely available from coast to coast.”

Investors continue to debate how successful companies like PepsiCo will be in passing along cost increases to their end-user customers. In January, grocery prices in Canada were up 6.5% from January 2021. According to an Angus Reid survey of adult Canadians, four out of every five people have changed the way they buy food as a result of rising grocery prices.  

Loblaw Companies are acutely aware of its customer’s ability, or lack thereof, to absorb higher prices. 
“We are laser focused on minimizing retail price increases as much as possible. That’s a challenge when our industry is facing major cost pressures on manufacturing, shipping, ingredients and more,” a spokesperson for Loblaws told Narcity.

So, what we have here, is a good old-fashioned standoff between two powerful companies. Loblaws doesn’t want to alienate its customers, while Frit0-Lay (PepsiCo) wants to maintain its profit structure.

Until Loblaws gets in line with all of Frito-Lay’s other Canadian customers and raises retail prices equal to the price increases it absorbed, Frito-Lay has stopped shipping products to all of the grocery chain’s banners including its Shoppers Drug Mart locations across Canada.

Who will be the first to blink?

The Odds Are Good It Won’t Be PepsiCo

Generally, manufacturers are loath to cut off shipments to a customer. When it’s a customer as large as Loblaws, that’s even more true. However, PepsiCo and Frit0-Lay aren’t going to let their price structure take a beating just to play nice with a large customer.

If PepsiCo backs down, grocery stores everywhere would try the same tactic across every product category. The resulting collapse in gross profits would be untenable for any length of time.

Here’s what Food, Health & Consumer Products of Canada (FHCP) CEO Michael Graydon had to say about the dispute:

“Everybody is in discussion because everybody’s impacted across every category in the store – from plastic bags, to potato chips, to cereal, to shampoo,” Mr. Graydon said. “Because of the magnitude of asks – there’s just so many of them – [retailers] are starting to push back. ... [Suppliers] are just not going to put their businesses in economic jeopardy by not getting the price increases that are necessary to recoup costs.”

Sylvain Charlebois is a Dalhousie University professor of food policy and distribution. He is highly quoted in both the Canadian and American media when it comes to the food business.

The professor believes these kinds of skirmishes between grocers and suppliers will continue to happen for as long as inflation continues to wreak havoc on the economy.

As for PepsiCo, Toronto-based retail analyst Lisa Hutcheson believes it has the upper hand in the dispute.

“They both need each other. But I think Loblaws needs Frito-Lay a little bit more, because of how much shelf space they take up. If I had to guess, I’d say Loblaws blinks first, because they’re the ones who are going to be dealing with disappointed customers,” Hutcheson told the Toronto Star.

She, too, believes we’re going to see more of these battles in the future. That’s something to keep in mind if you’re thinking of buying Kroger (KR) stock or some other large American grocery store chain.

PepsiCo and Frito-Lay might win this battle but the war between consumer packaged goods and grocery store companies looks to be heating up in a big way.

Investors should govern themselves accordingly.