Tesco’s push back against Unilever’s proposed price hikes suggests major manufacturers don’t have the pricing power they thought they had in a market that’s only going to get more challenging as the details of Brexit unfold.
This week saw the first battle in what industry commentators believe will be a prolonged war between the world’s largest FMCG players and supermarkets as the impact of Brexit becomes a very real prospect on balance sheets.
‘Marmitegate’, as it was dubbed, saw Unilever hold some of the nation’s best loved brands hostage from the shelves at Tesco as it tried to convince bosses at the retailer to take approve a 10% price hike.
Within 24 hours of the news emerging, a social media backlash against Unilever ensued amid a media furore that painted Unilever as a corporate shark out to make a few extra pounds on Brexit. If it was worried about the fallout then the FMCG company didn’t let on, with the company’s chief financial officer making it clear that he expected the dispute to be resolved “really quickly”.
However, what the affair has shone a light on is the fact that Unilever – and fellow giants Procter & Gamble, Johnson & Johnson, Kellogg’s etc who will no doubt be facing a similar commercial conundrum (The Drum understands from those in the industry it was a case of waiting to see who would broach the subject with Tesco first) – simply don’t have the pricing power they thought they might once have had.
The critical question for Unilever et al now is to work out how loyal shoppers are to big brands and how much of a premium they are prepared to pay for them.
Unfortunately for those companies, there has been a renewed focus on own-label lines across the market. According to Kantar Worldpanel’s latest grocery share figures, own brand goods are growing at both ends of the price spectrum: premium retailer brands are up by nine per cent and value lines up by two per cent.
Unilever also found itself dealing with a reinvigorated Tesco, which has spent the past two years toiling to prove that it will put the customer first – asking them to be the ultimate losers of this fight was never an option.
Chief executive Dave Lewis – a former Unilever exec himself – has in many eyes played a blinder, positioning Tesco has as stout defender of UK consumers interests (leading some commentators to speculate that the spat maybe have been deliberately leaked). And according to Entsight – a company which can analyse the sentiment of conversations on social channels – Lewis undeniably succeeded.
On an average day, Tesco normally sees high levels of negative sentiment from UK audiences. But this week, Entsight noted that their handling of Unilever generated higher than average positive sentiment for the brand.
Unilever, on the other hand, suffered as 65% of online conversations about the brand were negative (a “much higher than average” stat according to Entsight). ‘Boycott Unilever’ was among one of the most popular phrases used on Twitter.
So if Unilever is wondering how loyal its shoppers really are then these insights will prove unwelcome reading. Granted, its brands, specifically Marmite, have had some free publicity this week that could well turn into a sales boost and so it's not a been a complete disaster.
But the price problem is not one that’s going to go away. Manufacturers have repeatedly warned that food prices will go up post-Brexit and with the pound hovering around a 31-year low there's no getting away from the fact it will have an impact on what people pay for goods.
On its quarterly earnings call this week, Unilever’s finance chief Graeme Pitkethly hinted at the fact that even a 10% increase in prices would still mean it’s taking a hit on profitability.
“We care deeply about customer affordability of our brands. And as a consequence the increases we are taking are substantially less than we would need to cover the impact on our profitability,” he said.
So, the question now is simply how long until round two?