Brexit Hits Pricing as Tesco Deals With Shortage of Unilever Products

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The true cost of Brexit hit home for U.K. shoppers as Unilever's iconic Marmite spread and a host of other products remained absent from Tesco's online store Thursday because of a standoff over price increases triggered by the Brexit vote.

Marmite spread
Marmite spread Credit: Unilever via Facebook

Britain's biggest supermarket chain said Wednesday that it's "currently experiencing availability issues on a number of Unilever products," and aims to have the issue resolved soon. Unilever, which reported a decline in third-quarter sales volumes Thursday, told analysts that it was "confident" the issue would be resolved quickly, noting that the U.K. accounts for just 5% of its business.

The dispute lays bare the close ties between Tesco and its third-largest supplier, which produces household brands like Hellmann's mayonnaise, Dove, and Ben & Jerry's ice cream and was Tesco Chief Executive Officer Dave Lewis's longtime employer. Unilever, along with other consumer-product makers like Nestle SA, is facing heightened sourcing costs from a plunge in the pound since the June vote to leave the European Union, yet passing those expenses along to retailers will be difficult with U.K. grocers already locked in fierce competition.

"Tough price negotiations are a constant factor of the relationship between food manufacturers and retailers, and are going to be very tough in the U.K. following the Brexit vote," Andrew Wood, an analyst at Sanford C. Bernstein, said in a note. "But they rarely break out in public or lead to de-stocking of manufacturer products."

Mr. Wood's note today also said Tesco likely accounts for around 1.5% of Unilever's global sales. He likened the dispute to a similar Unilever confrontation with Delhaize in Europe years ago that was resolved in a few weeks, and said it could signal more pricing skirmishes as global marketers look to compensate for the declining pound.

Tesco is Unilever's third-biggest customer after Wal-Mart Stores Inc. and Kroger Co., accounting for 2.3% of its revenue, according to Bloomberg data.

The Guardian newspaper has reported that Unilever wants to raise prices by about 10% because of the fall in sterling. Among Unilever's brands to exit the Tesco web store were Persil detergent, Flora margarine and more than 100 products in the Dove range of body care. A check of Tesco.com Thursday morning showed the products were still unavailable.

"Retailers' margins are already squeezed," Justin King, former CEO of U.K. supermarket chain J Sainsbury, said at an event hosted by Bloomberg in London on Wednesday. "So there is no room to absorb input price pressures and costs will need to be passed on."

The Brexit vote has already affected pricing of products ranging from floor coverings to toilet paper. Unilever was among companies that lobbied voters to remain in the European Union, while supermarkets including Tesco took a more neutral stance ahead of the vote in a bid not to alienate either faction of consumers. Sainsbury and Wm. Morrison Supermarkets declined to comment on their relationships with Unilever. Wal-Mart's Asda unit did not immediately respond to a request for comment.

"The question is whether Sainsbury, Asda, Waitrose and others are taking it on the chin or if they will play hardball too," Alan Clarke, an economist at Scotiabank in London, said in a note. "What about other suppliers -- Unilever is probably not a one-off trying to pass on higher input costs."

Food companies such as KitKat maker Nestle and Swiss dairy concern Emmi AG have both said they will look to raise prices in the U.K. to respond to the plunge in sterling. Nestle is due to report third-quarter sales Oct. 20.

"The margin in the U.K. will be lower next year than this year or last year, that's for sure," Emmi Chief Executive Officer Urs Riedener said on Oct. 6. "We're obliged to push price increases in most of the segments."

Any dispute between Tesco and Unilever would be particularly touchy for Mr. Lewis, the Unilever veteran. Tesco has sought to improve relations with its vendors in the wake of an accounting scandal and criticism from a grocery industry regulator. The tussle also risks damaging Unilever's reputation as a good corporate citizen, an image that Chief Executive Officer Paul Polman has sought to enhance in recent years.

"This sort of standoff benefits no one," said Bryan Roberts, an analyst at researcher TCC Global. "Unilever will lose market share by not being in Tesco, and shoppers will feel a huge degree of frustration. A speedy resolution would be in everyone's best interests."

--Bloomberg News--

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