Are Tesco right to dig their heels in and say no to the Unilever price increase?

Question

Are Tesco right to dig their heels in and say no to the Unilever price increase?

Answer

Unilever have recently requested that many of the retailers they supply accept a price increase (believed to be 10%) to compensate for the lower value of the Pound against the Euro and Dollar (Vandevelde, Daneshkhu and McClean, 2016). Unilever’s rationale is that the goods are often imported and so are originally produced and sold based on Euro or Dollar pricing, effectively allowing the UK retailers to buy more for less money. Tesco have refused to comply and are now no longer having their inventories resupplied by Unilever. This has drawn great public attention, and is a risk to Tesco as it can no longer sell brands such as Pot Noodle, Ben and Jerry’s and Marmite. Notably, many of the products that would be affected by the price rise are actually produced in the UK, such as Marmite, and thus this negates the effect of the Pounds decreased value. Increased prices for retailers would most likely lead to higher prices for consumers as the retailers opt to pass on the cost rather than shrink margins. In this way Tesco is seen as protecting its customers. The action taken by Tesco may well be mirrored by other retailers seeking to gain a strong negotiating position. In this case Unilever may well be forced to relent, as alternative brands could take advantage to grow market share. As such the action taken by Tesco may well prove to be a good negotiating strategy. At the time of writing (before market closing times) both Unilever and Tesco share prices have fallen, but at 3.2% versus 2.2%, respectively, Unilever are faring worse (Google, 2016). Whether the Pounds fall will be short term or sustained will affect the impact and severity of this issue. At present the pound is widely considered to be undervalued, as the UK’s GDP has not fallen and it still offers good investment opportunities (Adinolfi, 2016). Accurate as at 13/10/16.

References

Adinolfi, J. 2016, The pound is already undervalued — so how much weaker can it get? (online), Market Watch, available: [http://www.marketwatch.com/story/the-pound-is-already-undervalued-so-how-much-weaker-can-it-get-2016-10-03], accessed: 13/10/16 Google, 2016, Google Finance, available: [https://www.google.co.uk/finance?q=AMS:UNA]; [https://www.google.co.uk/finance?q=LON:TSCO], accessed: 13/10/16 Vandevelde, M. Daneshkhu, S. and McClean, P. 2016, Tesco pulls products over plunging pound (online), Financial Times, available: [https://www.ft.com/content/58560c1e-909a-11e6-8df8-d3778b55a923], accessed: 13/10/16