Tesco v Unilever: what the analysts say

Here’s what experts had to say about the stand off between Tesco and Unilever on prices:

Bruno Monteyne, senior analyst, Bernstein said: ”This is inevitable Brexit induced inflation. While politicians can deny reality, a shampoo produced on the continent is now 17% more expensive.This is retail-supplier negotiation 101. It’s the supplier’s role to pass on increased cost and it is a retailer’s job to challenge price increases. It happens all the time and in the end they settle for what seems a fair cost allocation. However, those discussions rarely spill open in public and rarely lead to de-listings. Clearly the scale of the negotiation is much bigger than usual, but so is the event. Brexit-sized events are rare. This is such a large event that it may simply be that the two gorillas on both sides have decided to go through the motions of the negotiation on behalf of the industry. This isn’t about Tesco or Unilever but about all UK retailers & suppliers.”

Clive Black, ShoreCapital said: ”Unilever products and Unilever needs to distribute through the UK’s largest store and online distribution channel. Hence, we sense an agreement will be thrashed out in due course. What is clear though is that cost recovery is going to be a little more challenging in this present round than it has been in recent years, very much more difficult than the halcyon days of the late ‘noughties’ for suppliers, when they could more often than not implement price rises at will, support volumes through promotions and keep the supermarket happy through ‘commercial income’. The supermarket world has changed… Hmmm. Such dynamics certainly helped manufacturers’ margins, particularly international proprietary brand players. However, such dynamics were a key process in the supermarkets becoming detached from their customers, a detachment that let the limited assortment discounters (LADs) into the UK and so fundamentally adjusted the competitive scene in the domestic supermarket industry. As such, the price of the superstores’ sleeping at the wheel and becoming effectively supplier led has been a collapse in margins, asset write-down and management change.”

Danielle Pinnington, managing director, Shoppercentric said: ”Tesco will be mindful of their pricing vs the competition – particularly the discounters who don’t deal with Unilever. But Unilever’s portfolio is big enough to make this a very difficult decision for Tesco. Meanwhile, in the short term shoppers can go elsewhere if they want specific products – until those alternative retailers take the price hike or run out of stock. If it is all about the fundamentals of who absorbs the cost of Brexit then this is not going to be easy, and it will be interesting to see which business breaks first. If it is Tesco then ultimately shoppers will take the hit.”

Roy Williams, managing director of supply chain firm, Vendigital said: “Anyone that thinks Unilever is just trying it on, are wrong. The cost pressures facing many UK suppliers are very real at the moment. Deep falls in the value of the pound since the EU referendum are cutting deeply. However, Unilever may not have thought its position through carefully enough. Pursuing across-the-board price increases from customers is a blunt attempt to offset rising costs and this kind of approach would not stand up to detailed cost analysis by Tesco. Retailers are of course facing their own cost pressures amid tough competition from low-cost retailers such as Aldi and Lidl. Naturally, they are going to be reluctant to pay suppliers more without understanding more about how exchange rates have impacted the cost of specific goods. Cost pressures within the supply chain need to be addressed in an open and honest way, with all sides explaining the impact of rising costs and working together to address them. With many of its products now de-listed from Tesco’s website, Unilever is now on the back foot and will need to work hard to re-open negotiations in order to achieve satisfactory terms. More disputes over prices are likely in the coming months, as many of the currency hedges that suppliers put in place to protect them from exchange rate changes, start to run out. Ultimately, the effect of these cost increases will be felt by consumers.”

Andrew Wood, senior analyst, European Food & HPC, Bernstein said: ”The UK is about 5% of Unilever’s sales…so, assuming Unilever has a standard weight/share in Tesco (28% UK market share), and that 100% of products are affected, we are talking about less than 1.5% of Unilever’s global sales, which is not immaterial. Of course, tough price negotiations are a constant factor of the relationship between food manufacturers and retailers (and are going to be very tough in the UK following the Brexit vote) but they rarely break out in public or lead to de-stocking of manufacturer products. In the case of Unilever, it has numerous well regarded leading products in the UK market (including Knorr, PG Tips, Magnum. Dove…and Marmite), so it is a very tough stance for Tesco and Unilever to stop buying/supplying while they negotiate. One of the most well-known examples of a de-stocking relating to price negotiations with Unilever was Delhaize in 2009…a spat that lasted only a few weeks, when Unilever’s products were re-listed, after many media reports indicating that Delhaize was losing customers who went elsewhere to buy their favourite Unilever brands (along with the rest of the shopping). If this disagreement with Tesco lasts for only a few days/weeks it will not be individually material…but if it is indicative of a broader backlash of UK retailers against manufacturers, then this could prove to be a drag on performance in Q4 and on into 2017.” 

Pinar Hosafci, senior packaged food analyst, Euromonitor International said: “This is not the first time Tesco is pressuring suppliers to drop prices. Since March 2015, the leading UK grocery retailer has been squeezing the biggest food brands in the world by its price wars, removing Kingsmill and Rachel Organics from its stores. However, this time around the move has been initiated by Unilever and across its entire portfolio of its products. Brexit has been a trigger that started this and it is likely that other companies, which are reporting in Euros including the likes of Nestle and Ferrero will follow suit. This move could be more detrimental to Tesco than Unilever, which owns a number of power brand that are either leading or at best ranking in the second place in their respective categories. According to Eurominitor’s latest data, the company has 37% share in ice cream, 21% share in table sauces and owns the single largest yeast based brand –Marmite- with an impressive 85%. It is a company that Tesco cannot afford to ignore. I also believe that this is likely to be short term phenomenon. In the long run, UK’s leading retailer and one of the leading food manufacturer are likely to negotiate a deal that will bring them together. Otherwise, Tesco might risk of shedding further market share.”

Mark Jones, food and drink solicitor, Gordons law firm said: “The difference with Unilever is that, unlike most suppliers, it usually trades on its own terms, not the retailer’s terms. It is one of the few suppliers who can negotiate with the big retailers on a level - or in most cases higher - playing field. In fact, with so many big name brands, Unilever claims that 98% of households in the UK have at least one of its products in it. “For that reason, a compromise looks inevitable. Tesco will not allow its customers to go elsewhere to find the products they like, and Unilever will not want its products to be off the shelves in such a large retailer. I doubt many Tesco customers will be left reaching for Tesco’s own yeast extract in place of Marmite.”