Supermarket bosses have vowed to fight supplier demands for a wave of Brexit-related price hikes, warning the clash between Tesco and Unilever is just the start of a wider battle with “profound implications” for food and drink for years to come.
As The Grocer revealed earlier this week, fmcg giant Unilever stopped deliveries to Tesco because the retailer snubbed its demand for price hikes, believed to be 10% across the board, leading to a raft of household names including Hellmann’s, Marmite, Ben & Jerry’s, Knorr and Pot Noodle being unavailable on its website in many regions.
The dispute has now been settled, following intense media scrutiny, with The Guardian claiming that former Unilever boss turned Tesco CEO Dave Lewis “played a blinder”, though the final terms agreed were not disclosed. A Tesco spokesman said: “We always put our customers first and we are pleased it has been resolved to our satisfaction.”
Unilever added: “For all those that missed us, thanks for all the love.”
However, The Grocer can also reveal Unilever has approached other major supermarkets with a similar demand for 10% price rises on the back of the tumbling value of sterling since the EU referendum, with industry leaders gearing up for a “bloody battle”.
Other supermarket execs have told The Grocer they were determined not to cave in to ‘unjustified demands’.
“We are agents of our customers and therefore any supplier price needs to be challenged,” said one supermarket CEO.
“Unilever, who are very profitable, are effectively transferring the currency risk to us. They have resisted putting prices down when the market was going the other way, but they can’t have it both ways.
“We would not choose to have quite such a public spat but inevitably the biggest lever we and [Tesco] have is to refuse the increase and by default stop selling their products.”
He added: “There are more long-term profound implications but that can be saved for another day. Welcome to Brexit Britain.”
Another supermarket boss said its negotiations with Unilever are still ongoing and did not rule out delistings: “Unilever demanded a 10% price increase across all their products, citing Brexit and currency.
“We held meetings with them to try and understand how it could be exactly 10% across every item, products as diverse as Marmite and soap powder. We source similar products and have good visibility on costs, often down to individual ingredient level. It’s became rapidly clear Unilever couldn’t justify the 10% and quickly moved to a position of ‘it’s 10% and we will stop supplying in October if you don’t accept the 10%’ so Unilever is essentially delisting itself.”
The source added: “We were talking to Unilever’s competitors, category by category, to see if they take the same position or if they see this as an opportunity.”
Last week Lewis was asked by The Grocer at Tesco’s H1 results, at which he vowed to increase Tesco’s profit margins in the next three years, how he planned to cope with demands for price hikes from suppliers hit by the weakness of the pound following the EU Referendum.
“We start from a place which is as a champion for customers, we are not looking to pass on cost increases,” said Lewis.
“Let me be candid, where those suppliers when the exchange rate moved in the other direction a number of years ago put that benefit into price so customers benefitted then we will be much more sympathetic about the need to accommodate that change.
“Where that didn’t happen when the exchange rate moved in the other direction then we will be a little more challenging about why when it moves in one direction the customer pays for it and when it moves in the other direction the customer doesn’t get the benefit; we are not so comfortable with that way of thinking and we would be challenging in that space.
“And we would be very challenging with anybody who was thinking of taking an exchange rate move to justify a price increase just on the back of that alone. But that is just part of us positioning ourselves in a way to do the best thing for customers.”
However, the need for retailers to keep prices down is flying in the face of a looming crisis facing suppliers. This week more than 75% of respondents in an FDF survey said their cost of goods had increased since the referendum, with one company’s raw materials costs up by 20%, and 63% of respondents reported a fall in profit margins.
“The Unilever clash with Tesco is a harbinger of things to come,” said FDF director general Ian Wright.
“Suppliers are facing a long-term shift in costs and it ain’t coming back. This is a massive issue and it’s having a huge effect across all sectors. Unilever is just one example. This is having an impact on companies large and small.”
Wright said commentators were wrong to criticise Unilever for demanding price increases across the board, even though many were manufactured in the UK.
“It doesn’t matter where products come from, it’s where the ingredients come from that counts. There is no doubt we are now seeing the first consequences of the Brexit vote.”
Bruno Monteyne, senior analyst at Bernstein, said: “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 and suppliers.”
Speaking to analysts on Thursday, Unilever’s CFO Graeme Pitkethly confirmed it was increasing prices in the UK. However, he said the company “cares deeply” about its brands being affordable for customers, so increases were “substantially less than we would need to cover the cost on our own profitability”.
BRC CEO Helen Dickinson said: “Retailers are firmly on the side of consumers in negotiating with suppliers and improving efficiencies in the supply chain to control the inflationary pressure that is building through the devaluation of the pound. However, years of falling shop prices and higher costs have left limited scope for retailers to continue absorbing this pressure, and everyone in the supply chain will need to play their part in maintaining low prices for consumers.”
No comments yet