Tesco is reportedly locked in a standoff with Unilever after the food manufacturer demanded price rises of 10% on its brands to offset the fall in the value of the sterling.
With Tesco refusing to heed to the demands, supplies of a host Unilever brands such as Marmite, Persil, PG Tips, and Ben & Jerry’s ice cream have started to run low in the supermarket’s stores with a number lines already out of stock online.
Unilever is said to want the price increases to offset the higher cost of imported commodities, which are priced in euros and dollars. However, with it battling to regain market share from the discounters, Tesco has signalled it will fight the rises. Last week, its Chief Executive Dave Lewis accused suppliers of failing to pass on currency benefits to consumers when sterling was on the way up, and that he was “uncomfortable” with efforts to raise prices on the way down. He said that he would try to offset any cost increases brought on from the drop in the value of pound by boosting productivity and negotiating with suppliers.
Tesco said in a statement yesterday: “We are currently experiencing availability issues on a number of Unilever products. We always work to ensure customers get the best possible prices and we hope to have this issue resolved soon.”
After reporting weaker quarterly results today, Unilever’s CFO Graeme Pitkethly told analysts: “The price increases we are passing on are lower than the impact on our own profitability. We care deeply about the customer affordability of our brands, but we do not set the prices charged to consumers.”
While he did not mention Tesco by name, he added: “We are confident that the situation will be resolved pretty quickly.”
Commenting on Tesco’s stance, Bruno Monteyne, an analyst at Bernstein told the Financial Times: “That’s the way you have to negotiate. You have to draw a line in the sand and say, ‘OK, we’re going to delist you.’”
However, while Tesco’s size gives it a strong negotiating position, Monteyne said that the grocer would ultimately be forced to reach a compromise. “Unilever is very big and Tesco can’t get around not working with them,” he said.
Unilever is reported to have approached all the major supermarket multiples with it threatening to cut supplies of its products if agreement on the price rises is not reached. However, some analysts and government ministers have accused the manufacturer of using Brexit as an excuse to raise prices and “exploit” consumers. A person with knowledge of the situation told Reuters that the big four grocers have all protested against Unilever’s demands, highlighting that some of the products they wanted to charge more are actually made in the UK.
“What’s really a problem is when a supplier like Unilever comes and asks for across the board cost increases and there’s no negotiation, there’s no discussion. That’s been the approach that’s upset the grocers,” he said.
However, Bryan Roberts, a retail analyst at TCC Global, said Unilever’s demands were not surprising and reflected attempts by a number of large suppliers to offset rising costs. He suggested there were likely to be more disputes between retailers and suppliers if the value of pound fails to recover.
Some analysts have forecast that food price inflation could hit 5% within the next year with Justin King, the former head of Sainsbury’s, warning this week that supermarkets could not absorb cost increases caused by the falling pound and that price rises were inevitable.
“Retailers’ margins are already squeezed. So there is no room to absorb input price pressures and costs will need to be passed on,” he said.
“But no-one wants to be the first to break cover. No business wants to be the first to blame Brexit for a rise in prices. But once someone does, there will be a flood of companies, because they will all be suffering.”
Meanwhile, Nick Lee, Professor of Marketing at Warwick Business School, commented: “In a lot of ways, this is normal negotiation practice that has all of a sudden had a light thrown on it thanks to Brexit.
“On the one hand, you have a brand owner who considers itself to have the main negotiating power, since they feel consumers buy brands over categories. On the other hand, you have a powerful retailer who judges that consumers will not change behaviour simply because a selection of brands may not be available.
“In a sense, they are both right, and both wrong. Indeed, in many situations, consumers are brand loyal, and Marmite is probably one of those.
“On the other hand, Tesco is right that most consumers are unlikely to change their shopping habits just because a few non-substitutable brands are unavailable. However, the question is how many brands are in play here?
“Further, Tesco needs to realise that supermarket switching is far easier than it used to be in today’s online retail environment. I think they need to be careful about influencing consumers to ‘try’ another provider, because if they do, they may not come back to Tesco. All around, its a somewhat dangerous game being played by both parties.
“But in essence, both realise this is a negotiation, not an ultimatum. They need each other, but are jockeying for best position in a new uncertain environment. I expect we’ll see a lot of this in the coming months as players in this space look to renegotiate deals, and try to play on public sympathy to pressure their negotiation partners.”
- Where at: Apart from oceans of free airtime for Marmite, this is just the start of rounds of currency-induced price rises. It simply needed two of the big guys to kick-start the process.
- Where headed: With the usual suspects jumping aboard to air individual issues (Brexit, bullying, consumer exploitation etc.) the best role for NAMs is observation at this stage. Essentially this will pan out as fact-based selective price increases, and patchy distribution in the medium term.
- Effect on you: Opportunity to push a slightly open but stiff price-increase door. Also some scope to fill some distribution gaps in the meantime.
- Action: Vital to make a defensible case for appropriate price increases. Check the actual cost affected by imports of ingredients/finished goods, building in some give-in points where possible. Still a difficult task, but keep in mind that both sides want price increases…