Higher prices are inevitable in the grocery market

Tesco’s dispute with Unilever, while interesting in its own right, also raises broader questions about the outlook for supermarket pricing.

It is worth pointing out that this is the time of year when brands and supermarkets are deep in price negotiations. Unilever will certainly not be the only brand owner that is having challenging discussions with leading supermarkets, and we expect other grocery manufacturers will be seeking to increase their wholesale prices too. What is unusual about this case is that it is being played out on the front pages.

 

From Tesco’s perspective, it is understandable why it is taking a firm position. First, it has invested heavily in price over the past 18 months or so. Shopper perceptions of Tesco’s prices have improved and the retailer will be determined not to undo that work. Second, Tesco is likely to hold the view that the grocery retail market is highly competitive, with margins already thin. It is having to contend with discounters’ expansion and the high likelihood that Asda will become increasingly aggressive on price. Tesco will have a fair idea of what impact that will have on its own margin, and few are better qualified than Dave Lewis to know what the effect might be on Unilever’s.

 

In this particular case we suggest that Brexit plays only part of the story, since many of Unilever’s products are made in the UK and, as a truly multinational business, what it loses on one currency transaction it is well placed to recover in another.

 

But that is not to say that Brexit will not shape the pricing outlook over the next couple of years. The UK imports considerably more food and drink than it exports. Given the recent falls in the value of Sterling with further declines anticipated, there is no hiding the fact that shop prices will start to rise. Savvy’s research finds that 72% of shoppers expect grocery prices will increase as a result of Brexit and many expect they’ll change their behaviour as result. 56% of shoppers say they will buy more British products and 55% anticipate they will cut back how much they spend on their groceries.

 

The critical question for Unilever is how loyal shoppers are to big brands and how much of a premium they are prepared to pay for them. The market is only going to become more competitive and challenging as the details of Brexit unfold. As such both parties will be keen to settle this dispute as soon as possible, before market conditions become even more difficult.