Tesco's pricing dispute with Unilever shows pricing pressures faced by retailers
Friday, 21st October 2016
Last week Tesco removed all Unilever products from its online store, following a decision by Unilever to raise its UK wholesale prices to compensate for the drop in the value of the pound.
Although the dispute has now been resolved, this is the first sign in the retail sector of the pressures faced by the UK economy in a post-Brexit referendum world.
The value of the sterling against the US$ and the Euro has been dropping since the referendum result was announced on 24 June.
Unilever is the UK's biggest food and grocery manufacturer, but many of its product lines are made outside the UK. Therefore, if the value of the pound decreases, it becomes more expensive for goods to be imported into the UK.
As a result of the sudden drop in the value of the pound, Unilever demanded an increase in the wholesale price it charges to Tesco. It is reported that the increase was as much as 10%. While supplier/retailer price negotiations are an every-day occurrence, a 10% increase is certainly unusual and it is even more unusual for a retailer to remove a supplier's product from stock altogether.
Retailers' profit margins are generally much smaller than their suppliers'. Most supermarkets operate on profit margins of 2-3%, while their suppliers' margins are typically between 20-30%. Therefore, Tesco argued that Unilever were in a better position to bear the burden of the change in the pound's value, otherwise Tesco would have been forced to pass the price increase onto its customers. It appears that Tesco chose to fight its customers' corner and take measures to resist the change.
What does this mean for your business?
Retailers who rely on importing goods should expect wholesale prices to increase and that it may become difficult to maintain profit on those products. Businesses may reach a point where there is no choice but to pass the increase on to the customer.
The British Retail Consortium and the CBI have both issued warnings that consumers should expect the increase in import prices to be passed on to them. Food and fuel prices are widely expected to be the first to increase.
It's not all bad news:
The UK has been operating at a trade deficit - where our imports of goods and services have far outweighed our exports. The drop in the value of the pound means that it is cheaper for non-UK businesses to buy goods from the UK and businesses should expect an increase in international orders and the deficit should be significantly reduced, if not reversed.
What should you do now?
Review the price review and currency fluctuation provisions in your supply agreements - when and how do they allow your suppliers to change their prices? If so, is there scope to restrain those changes, in order to maintain your profit and avoid passing price increases on to your customers? Ashfords can assist you with this if you are not sure.
If you don't have a supply agreement in place with your key suppliers you should consider putting one in place now. Again, Ashfords can assist you with this and we can help you negotiate appropriate price control mechanisms, to provide you with predictability on supply prices.
Consider whether an alternative supplier might be cheaper and, if so, whether you can terminate your existing supply agreement in favour of a new supplier on better commercial terms.