The disagreement between Tesco and Unilever, which has allegedly led to a shortage of products such as Marmite and PG Tips, is the first of many stand-offs that are inevitable as the implications of Brexit kick in and companies try to navigate a sustainable way forward.
The problem is some companies will use the exchange rate as a vehicle for negotiating price rises that are a) avoidable and b) could leave some of their customers un-competitive, if they agree to pay more when others refuse.
We don't have the details of the conversations between the respective buyers and account managers but a blanket call for price hikes sounds unreasonable without the evidence to back up the implications of cost increases for specific products - for example the impact of a declining pound on the cost of producing coffee will not be the same as the impact on washing powder or shampoo. You can't blame Unilever for testing the water but as all self-respecting fishermen know if you want to avoid a net full of tiddlers or a rig-smashing monster you need to choose your bait and where you cast it very carefully!
A declining pound will hurt UK manufacturers who source lots of ingredients from overseas. But, if they are big players with a significant share of their sales overseas a windfall gain in one market might more than offset a windfall loss in another. Imagine the outcry if Tesco announced it was increasing all of its prices due to the increased cost of energy associated with a declining pound.
Source more locally, make better use of half-empty lorries, reduce the amount of food waste, cut your profit margins would be the response from the 'Tescopolites', on the lookout for any opportunity to bash the beast.
Unilever is no minnow and is big enough to defend itself in a battle with any retailer. The question is whether they are picking the right fight at the right time and whether they have all their guns loaded and pointing in the right direction.
We have seen these stand-offs before and there is always an element of 'bluff' as the retailer tests the loyalty of their shoppers to the offending brands and explore the opportunity to gain market share by encouraging switching to other brands. Retailers make more profit from own-label products than the branded competitors, so when they steal market share their cash revenues might fall, as own label products are generally much cheaper than the branded alternatives, but their profits go up, as they make more on every unit sold.
This is the stuff of every brand manager's dreams come nightmares, as all the boardroom bravado about consumer loyalty and demand elasticity is put to the test - just watch the Tesco shoppers turn tail in search of the nearest competitor when they discover there is no marmite on the shelves! The proof of the pudding is in the wallet of the shopper, whose brand loyalty has been eroding inexorably in recent years.
Tesco are the UK's biggest retailer so their actions always make the news but what we are seeing here is the thin edge of a very long wedge in the world of fast moving consumer goods. The breakout rooms and brown bag lunches of retail buyers and account managers will likely resemble the locker rooms of the Ryder Cup for a day or two - "way to go! In the hole! Bring it on Big Boy!" - the crowd salivates at the prospect of a bloodbath but sooner or later reality kicks in, evidence replaces emotion. But, unlike the Ryder Cup there will be more than one winner/loser as competing brands sniff an opportunity to plunder whilst the giants slug it out.
Suggested For You
SUBSCRIBE AND FOLLOW
Get top stories and blog posts emailed to me each day. Newsletters may offer personalized content or advertisements.Learn more