The pricing row between Tesco and Unilever made headlines around the country this week. It was caused after Unilever reportedly raised the price of its products by 10% in a bid, it said, to offset the higher cost of importing caused by the weak pound following the Brexit vote.
These sorts of pricing rows are not uncommon. Back in 2009, Costco, removed Coca-Cola products from its shelves because the retailer said “it could not provide the value its customers deserved”. It took the two companies a month to settle their differences.
In the case of Tesco and Unilever the dispute seems to have been sorted less than 24 hours after it became public knowledge. Unilever said in a statement this afternoon (14 October) that the “supply situation has now been successfully resolved”.
“We have been working closely together to reach this resolution and ensure our much-loved brands are once again fully available. For all those that missed us, thanks for all the love,” the company added.
So what happened?
While suppliers and retailers are almost constantly negotiating on pricing and distribution, for things to escalate so far that distribution was affected and Tesco was forced to remove Unilever products from its website shows there was a dramatic breakdown in the relationship.
In this case, Tesco refused to accept the price hike, with boss David Lewis (who used to work at Unilever) pointing out that Unilever had been all too happy to take the benefits when the pound was strong and not pass the savings onto the customer but was now trying to recoup costs as soon as the situation shifted.
“It’s important to point out that we don’t set prices for consumers. At the end of the day, we are in a devaluation-led cycle. We care deeply about customer affordability of our brands. As a consequence, price increases have landed with most of our customers,” Unilever’s CFO Graeme Pitkethly said on a call this morning.
Unilever flexing some muscle
Both companies clearly thought this was a fight they could win. But it is unclear who actually did. Both said the matter had been resolved, but not where the compromise had come.
For some, Unilever had the advantage because it owns strong household name brands, to which many customers are undoubtedly loyal. YouGov BrandIndex figures show Unilever brands PG Tips, Colman’s and Marmite are some of Britain’s most highly ranked brands in the dried ambient food category, placing eight, ninth and 11th on a list of 29 brands. The Index measure is a reflection of the public’s perception of brands on a daily basis across a range of measures, including value, quality and satisfaction.
According to Euromonitor’s latest data, the company also has a 37% share in ice cream, 21% share in table sauces and owns the single largest yeast based brand –Marmite – with a notable 85%.
“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. It is a company that Tesco cannot afford to ignore,” says Pinar Hosafci, senior packaged food analyst at Euromonitor International.
Maria Vardy, managing director at marketing agency Jaywing, adds: “Unilever will come out on top. Consumer’s loyalty lies more in the brands they purchase, such as Marmite, Hellmann’s, Dove and Ben & Jerrys, than in the retailer they shop with.”
However, there is also a risk for Unilever. It has built its image on being a company that cares – shouting about sustainability and purpose. Price rises are never popular and its biggest brands have plastered across the media in relation to negative articles about the devaluation of the pound, brexit and High Street price hikes.
Tesco risking its market share
There has been a lack of supermarket loyalty in recent times. Shoppers are increasingly promiscuous, visiting a number of stores to get the best deals and doing smaller shops more frequently. The rise of Aldi and Lidl is also testament to the declining power of Tesco and the other ‘big four’ grocers.
Tesco pulling dozens of loved products from its shelves could put the grocer at risk of shedding further market share and lead consumers straight into the arms of the discounters. Even though its most recent results recorded the retailer’s slowest fall in sales in more than six months, its market share fell one percentage point to 28.1%, according to Kantar Worldpanel.
“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,” says Nick Lee, professor of marketing and researches sales management at Warwick Business School.
However, there are benefits for Tesco. It has been able to give the impression to the public that it cares about price and that it won’t stand to see the price of their favourite brands increase at the whim of a corporate owner. That is positive given consumers’ increasing focus on price amid the rise of the discounters.
That the issue was resolved in 24 hours is testament to both parties’ desire to avoid any reputational damage while at the same time seeing to be helping the consumer – Tesco by keeping prices low and Unilever by giving them access to their favourite brands. We will never know which company caved or if indeed a mutually beneficial compromise was reached.
What we do know is that this is unlikely to be the last we see of the pricing issue especially due to the economic uncertainty that surrounds Brexit.
“Today, the pound is around 17% below its referendum day value against the dollar. Who knows how the markets will rate the UK economy over the next few years but I don’t know anyone who expects the pound to regain that ground. Given that we import more than 60% of what we consume via retail (food and non-food combined), it is clear that we will be importing a material slice of inflation,” concludes retail consultant Richard Hyman.