Outside the big box

David Blackwell has been awake since 4 a.m. By the time he makes the call, he has already milked his 80 Holsteins, four at a time, in the sturdy red barn his grandfather purchased near Kamloops in 1913. The milk heats in pasteurization tanks while Blackwell dials the 11-digit number of Wal-Mart Canada Corp.'s head office in Mississauga, Ontario.

He expects to hear confirmation that his family farm and processing plant will continue to supply the Kamloops Wal-Mart. Blackwell Dairy Farm products have been sold at the Wal-Mart for more than six years and have been a fixture in the North Okanagan community for almost a century. Instead, Blackwell, a shy, soft-spoken man, can hardly believe what he is told. "Frankly, we're not interested in dealing with you," is the message he says he was given. "Price-wise, you're a little higher-and we've signed a national contract."

Wal-Mart, in the throes of a major Canadian expansion, had forged a deal with Saputo Inc., Canada's largest dairy-processing company. The 2001 agreement granted Saputo exclusive rights to supply Wal-Mart Canada's 255 stores with milk, cheese, yogurt, and other dairy fare. Milk sold at the Kamloops Wal-Mart used to make a 16-kilometre journey along the TransCanada Highway from the processing plant Blackwell owns with his wife, brother, mother, and father. Now dairy products in the Kamloops Wal-Mart are trucked 350-kilometres up the Coquihalla Highway from any one of Saputo's three Lower Mainland processing plants. Some milk could even make the journey twice: raw milk from the Kamloops area often is shipped to Lower Mainland processing plants, including to Saputo, confirms Jim Byrne, general manager of the B.C. Milk Marketing Board.

Wal-Mart Canada spokesperson Kevin Groh says national contracts give customers the merchandise they want while saving on costs. "With the Saputo example”¦we are working with dairy suppliers right across the country. It's not as though Ontario milk is being shipped to Vancouver," Groh says in a phone interview from Mississauga, Ontario. Today, the Kamloops Wal-Mart sells a four-litre jug of two-percent Saputo milk for $3.45. Four litres of Blackwell Dairy's two-percent milk retails at North Okanagan supermarkets and smaller stores for $4 to $5.20.

Low prices, after all, are the foundation upon which Wal-Mart has constructed an empire. The company's legendary founder, Sam Walton, hit upon a retailing formula so ingenious that in just 43 years, one little store in an obscure town in the American south has become a business spanning nine countries on four continents. (Make it 10 countries if you include Wal-Mart's 38-percent interest in leading Japanese retailer Seiyu Ltd.)

In the past 11 years, since Wal-Mart gained a toehold in Canada through the purchase of the ailing Woolco chain, the company has become Canada's largest retailer. Easily surpassing the Hudson Bay Co. and its Zellers discount stores, Wal-Mart's estimated annual sales in Canada now top US$7.1 billion.

In B.C., Wal-Mart operates 27 stores, five of which opened last November and January.

Seven additional B.C. Wal-Marts are in various stages of planning or waiting for rezoning approval, Groh says. (A controversial eighth outlet, slated to be the first Wal-Mart in Vancouver, on Southeast Marine Drive, had its rezoning application refused by city council on June 28.) They include a store in Merritt (where U.S. mall developer Stanley Kroenke, husband of Wal-Mart heir Ann Walton, owns the half-million-acre Douglas Lake Ranch), and a store in Campbell River, where Wal-Mart has negotiated a deal with the Campbell River First Nation to build on former reserve land adjacent to the famous salmon river that gave the town its name.

Most Canadians still associate Wal-Mart with discount clothes and small appliances, not with cereal and sausages. Think again. Wal-Mart is the "fastest-growing and most dangerous" alternative player on the Canadian grocery scene, according to CIBC world markets analyst Perry Caicco. (Caicco declined to be interviewed by the Georgia Straight, referring a reporter to his reports.) By 2006, Caicco writes, Wal-Mart will likely be a $5 billion-a-year player in the Canadian grocery industry. Each year, Wal-Mart Canada's cash registers take in an additional $1 billion in grocery sales. "Wal-Mart's growth in the food industry in Canada has been quiet, but it's nothing short of phenomenal," Caicco noted in an April 14, 2004, CIBC world markets report, "Alternative Grocery Channels in Canada".

As Wal-Mart wades deeper into the Canadian grocery industry-with "pantry" sections in almost every store and six new members-only "Sam's Clubs" in Southern Ontario offering, among other products, a plethora of food, including fresh meats, frozen foods, and produce-B.C. food suppliers are watching with interest and concern. "The feeling is that you have to be there," says Brian Rogers of Silver Hills Bakery, makers of sprouted organic breads carried by B.C. Wal-Marts. "They're becoming an increasingly important customer, not just for Silver Hills but for other B.C. food suppliers as well." Are small companies like Blackwell's simply out of luck, or will Wal-Mart Canada's pledge to "include local products in the merchandise mix" extend to the grocery industry as well?

The eggs at Wal-Mart's new Terrace store come from Daybreak Farms, just north of the city. Daybreak is a family business that mixes its own antibiotic-free feed. Daybreak eggs look like any other supermarket eggs-white, uniform, cleaned of stray feathers-but the story of how these pink, blue, and white styrofoam egg cartons ended up in the Terrace store shows how B.C. food suppliers are already jostling for spots in the Brave New Wal-Mart World of Groceries.

Daybreak is owned by Ian Christison and his wife, Jeannie. The couple also operate a potato farm in Vancouver Island's Cobble Hill area. Daybreak's 30,000 laying hens sounds like a lot of chickens in one place, but the farm is minuscule compared with 1.5 million hens at each of two U.S. top egg-producing farms.

When Christison heard that Wal-Mart Canada was building a store in Terrace, he phoned the company's head office in Mississauga to ask if Daybreak could supply its eggs. Wal-Mart quickly agreed, Christison says. The company, despite its reputation for haggling down supplier prices, didn't even try to talk Christison down from his set price.

Then, just days before the store opened early in 2004, Christison says, he received an unexpected call from Golden Valley Foods Ltd, an Abbotsford food manufacturer that handles about 80 percent of B.C.'s egg production. Golden Valley, along with several other Canadian egg companies, had formed a brand new association called National Egg Inc. National Egg, says president Bert Harman, is "a strategic alliance" that enables regional players in the egg industry to supply Wal-Marts across the country. At the present time, the association's six regional members sell only to Wal-Mart, but Harman says they hope to supply other retailers, given the growing trend to adopt national accounts. "Wal-Mart has been very good to deal with," says Harman, who declined to discuss pricing.

Christison says he was told he would have to deal with Golden Valley if he wanted to supply Wal-Mart. Today, he sells to Wal-Mart's Terrace store through National Egg. "They [Wal-Mart] get one invoice," says Christison. "They write one cheque. End of story. Let someone else worry about all the administrative costs."

A slight increase in egg prices paid by Wal-Mart means that Christison is not out of pocket for administrative costs he pays to National Egg. Yet he feels his company has been left in a very tenuous position. Daybreak is not part of National Egg. As such, it must submit to a long chain of command: Daybreak submits an invoice to Golden Valley, which submits an invoice to National Egg, which deals directly with Wal-Mart. "We aren't connected directly with the Wal-Mart store or head office," Christison explains. "They don't know who the hell we are”¦We don't like it, but at this point in time we're going with it because we have to."

Citing confidentiality, Wal-Mart's Groh will not discuss details of the Saputo or National Egg agreements. But in the U.S., where Wal-Mart is the nation's largest grocer, national contracts have helped reduce Wal-Mart's costs by tying suppliers' hands when it comes to pricing. Suppliers sign contracts even before they know how crop harvests will turn out, or if rising oil prices will send shipping costs sky-high. When poor weather in Florida damaged Fresh Del Monte's tomato crops in 2003, causing prices to rise, the cost of Wal-Mart's Fresh Del Monte tomatoes held firm, Fresh Del Monte chairman and CEO Mohammad Abughazaleh told Reuters.

In other sectors, too, Wal-Mart has signed supply contracts with large corporations in order to bring down costs for consumers. Kodak Canada, for instance, has a deal to supply Wal-Marts with photo-finishing products. Yet Groh says that national contracts "have not been a trend with Wal-Mart". The company does business with more than 6,000 Canadian suppliers and manufacturers and bought more than $8 billion worth of goods from them in 2004, Groh says. (Canadian suppliers do not necessarily source their products in Canada.) "Our customers are telling us that they want more food, so where we can expand on the variety that we're offering, we have been and will be. And that obviously means that the number of Canadian food suppliers that we're dealing with will grow."

As Wal-Mart drives down prices across the country, other Canadian retailers are scrambling to trim costs, according to Caicco. Loblaw Companies Ltd., Wal-Mart's main Canadian competitor in the grocery industry, has already announced that it will lower food prices, and it has cut wages for some unionized employees. (The only North American Wal-Mart to unionize, in Jonquií¨re, Quebec, was shut down by the company in April.) Loblaw, which operates Real Canadian Superstores in 21 B.C. cities, says it will also pursue cost-saving efficiencies by using fewer brokers, among other strategies.

Other companies, too, are dealing with the Wal-Mart juggernaut by turning to national suppliers instead of using many different local suppliers. Blackwell, for instance, used to stock chain gas stations and doughnut shops. Over the past six years, five or six of those businesses have cut his family dairy company adrift in favour of national dairy companies that can supply outlets right across the county with cheaper fare, he says. All told, Blackwell estimates that 15 percent of his business has been whittled away by the trend to sign national supply contracts. "There's nothing the small person can do about it," he says in a telephone interview. As a result of losing business to national contracts, including to Saputo, Blackwell says he had to lay off four of his 20 full-time staff and reduce starting wages by $2 an hour. Today, thanks to flourishing ice-cream sales, three of the four positions have been reinstated as part-time jobs.

The problem with national contracts, according to Bill Rees, a UBC planning professor, is that they increase the distance that products travel. Global transportation is the third-largest component of harmful carbon-dioxide emissions, and the fastest-growing one, Rees says. "Nobody wants to pay more for anything. But the question we have to ask as a society is whether it really is cheaper food?"

Rees is the architect of the "ecological footprint" concept, which calculates the natural resources required to support our lifestyles. Your tinned tomatoes from Ontario might seem relatively cheap, but consider the Sasquatch-sized environmental footprint created by trucking them 4,500 kilometres across the country. Seventeen percent of North America's total energy budget is now dedicated to food production, processing, and transportation, Rees says in a telephone interview. "The more we go into the mass sale of processed, prepackaged food coming from central locations in North America, or central locations like the Lower Mainland for milk going to somewhere like Kamloops, the more we're intensifying the energy and material demands associated with food production." One century ago, 100 percent of the energy used to produce food was solar energy, Rees says. Today, 90 percent is fossil energy.

Rees advocates "full cost accounting", or pricing that includes social and environmental costs. In the case of Southern Ontario, where smog has recently been blamed for a spike in deaths, full cost accounting would mean that "17 percent of the cost of excess deaths associated with air pollution can be ascribed to the energy costs of food production." Rees urges shoppers to consider the environmental impact of their purchases, especially if they buy products that have travelled a great distance.

Wal-Mart is striving for higher environmental standards, Groh says, with a unique, although doomed, "green" design plan for the defeated Vancouver store. The design included windmills to provide power for store heating and cooling systems, rooftop water collection for use in store toilets, climate-controlled skylights, and dozens of trees to offset the visual impact of a 717-vehicle parking lot.

Vancouver's planning department had seized upon Wal-Mart's green design as an opportunity to encourage the company to do even more for the environment. Although the department pooh-poohed Wal-Mart's windmill proposal, noting that Vancouver has insufficient wind speeds for such turbines-and suggesting the money would be better spent on other sustainable building objectives such as green roofs and natural ventilation-it came up with numerous other environmental recommendations. In one eyebrow-raising suggestion, planners recommended that Wal-Mart work with the city to "identify opportunities" for pursuing urban agriculture on the five-hectare store site.

Although the idea of growing food at a Wal-Mart development might seem outlandish, City of Vancouver food-policy coordinator Devorah Kahn says the first thing that sprang to mind when she saw the Wal-Mart design proposal was the large number of dogwood trees the company planned for the site. "There should be a variety of horticultural products, some of which include fruit-bearing trees," Kahn says in a telephone interview. "It may not be feasible to have fruit trees where cars are parked, but there could be a walkway lined with fruit trees." The idea, Kahn says, is that nonprofit groups would harvest the fruit and use it in a way that benefits the community. That might seem a delicious irony to some, but as Rees pointed out before the June 28 city council vote ended years of community controversy: "If you're going to have a Wal-Mart store, it's better to have a green Wal-Mart store than a brown one."

For a company that didn't even start selling food until 1988, Wal-Mart has done extremely well in the grocery business. It is now the largest grocery retailer in the U.S., and the second-largest in the United Kingdom, where it operates under the name Asda. U.S. households buy 21 percent of their groceries at Wal-Mart, according to an October 2004 survey by Retail Forward Inc., a Columbus, Ohio-based market-research firm.

When Wal-Mart first came to Canada in 1994, the company said it did not plan to sell groceries. "We don't have any plans of getting into the food business," Wal-Mart Canada former CEO Dave Ferguson told Canadian Retailer magazine in July 2000. Asked by Canadian Retailer about the stacks of cereals, soft drinks, and frozen foods that were already displayed in some Canadian Wal-Marts, Ferguson commented that he "wouldn't even go so far as to say they're grocery-it's not unlike expanding our sporting goods department."

However, Caicco projects that 306 of the 322 Wal-Mart stores in Canada anticipated to be open by 2006 will have food "pantries". Rather than containing a small amount of food as an adjunct to the larger store, as the choice of name suggests, Wal-Mart's pantries can be as copious as everything else about the world's largest retailer. Like Wal-Mart itself, the company's pantries are quickly expanding, with Caicco pointing out that some now occupy as much as 13,000 square feet.

Fearing Wal-Mart's potential impact on neighbourhood grocery stores, Vancouver planning staff had recommended a restriction on the amount of floor space the Southeast Marine Drive Wal-Mart could devote to food sales, limiting it to 8,000 square feet. (If the store had gone ahead, that restriction could have been overturned by a future council decision, senior Vancouver planner Lynda Challis confirms, as could the city's current policy not to allow any new grocery stores in the Marine Drive industrial area.)

In the U.S., Wal-Mart offers a variety of grocery formats that could eventually find their way to Canada. They range from 24-hour "neighbourhood markets" catering to local demographics (organic cornflakes in upscale neighbourhoods; ethnic "grab it and go" convenience food in inner cities) to 24-hour "Supercenters" that, as their name suggests, are the super-sized approach to retailing and draw a huge number of customers.

Canada is the only country in which Wal-Mart operates that does not have Supercenters. If Wal-Mart does bring its Supercenter concept to Canada, Caicco notes that the "middle of the road" Canadian grocer will be "road kill". John Scott, president of the Canadian Federation of Independent Grocers, says there is no doubt Wal-Mart will have a significant long-term impact on Canada's grocery business. "They're very big and they're very strong and if they expand into grocery obviously they're going to take more and more market share, to the point where some people will be reevaluating if there is a role for them in the marketplace in the future," Scott says in a telephone interview.

Loblaw has tried to stay abreast of Wal-Mart by experimenting in Southern Ontario with Real Canadian Superstore discount outlets. The outlets, 20 of which are expected to be open by the end of 2005, are similar to Wal-Mart's U.S. Supercenters but usually smaller-about 150,000 square feet each compared to as much as 245,000 square feet for Wal-Mart's Supercenters.

Groh says Wal-Mart won't rule out bringing Supercenters to Canada, just as it won't rule out introducing any of its 10 global store formats to Canada given sufficient consumer demand. The company, Groh says, will find a "made in Canada" solution to selling more food. "As we get the feedback for more food, we'd be foolish not to at least consider how we can address that customer need."

Wal-Mart's foray into the Canadian grocery industry, and subsequent adjustments by food retailers, has spurred some B.C. food suppliers to seek new ways to stay competitive. Island Farms Dairy, which former CEO Greg Martin says was "pushed out" of an agreement to supply the Duncan Wal-Mart when Saputo stepped in, wants to increase national exposure for its 60 farmer members. The farmer-owned cooperative voted in January to join forces with Agropur, Canada's largest dairy cooperative. Quebec-based Agropur will own Island Farms, but members will keep their production quotas and continue to sell milk to Island Farms. "As we compete and grow and try to acquire national accounts, our shortfall has been that we're not a national supplier," Martin explains in a telephone interview. "It's just a part of economic reality."

Blackwell Dairy now distributes more products for other companies, including Breyer's ice-cream and Miller's Spring Water. Daybreak, for its part, will launch a $25,000 media campaign this fall, urging Terrace consumers to buy local eggs and other local products. "It just doesn't make sense to be trucking the stuff all over the country when we can produce it here," Christison says. The "buy local" message is also being sowed by Vancouver's food-policy council-whose mandate is to help build an ecologically sustainable food system-as well as by local nonprofit organizations such as FarmFolk/CityFolk and people like Rees. If oil prices double, Rees says, it may become more economical to buy local products from small producers instead of from distant corporations large enough to have lower production costs.

For Blackwell, that thought must be richer than cream.