The Tesco/Unilever spat over cost inflation is just the beginning. Today, the pound is around 17% below its referendum day value against the dollar. Who knows how the markets will rate the UK economy over the next few years but I don’t know anyone who expects the pound to regain that ground. Given that we import more than 60% of what we consume via retail (food and non-food combined), it is clear that we will be importing a material slice of inflation. So who will take the hit? Tesco have chosen to kick off this huge question in public but it not only impacts every player in grocery but across virtually every sector of the industry.
Politicians and economists have been warning of rising retail prices and that suggests that ultimately the public will have to pay. However, they are unlikely to appreciate the structure of the retail industry and the massive changes that were already taking place pre the Brexit vote. We have now had more than 24 consecutive months of retail price deflation in every sector. During this period, retailers’ cost growth has outpaced demand growth. The vast majority of retailers have been unable to pass these cost increases onto their customers because of competitive pressures. Very few will be able to make price increases stick here either.
Tesco and Unilever will come to an arrangement and share the hit. Tesco is too big for Unilever to ignore. Tesco needs branded product to differentiate itself from the private label discounters, and to underpin choice. And the customer? The most intensely competitive retail market we have ever seen will ensure that the lid on retail prices remains very firmly shut. Price promotions will continue to characterise trading and the industry will have to learn to live with lower margins for the foreseeable future.
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