Front page news. Lead story on the Ten O’ Clock News. It's a tale which has gripped the nation, as Tesco and Unilever engaged in a Mexican standoff regarding price increases across several brands, driven by sterling devaluation in recent months.
After countless memes, humorous tweets and semi-serious reactions (including this author, with 30+ years of Marmite devotion, man and boy), Tesco and Unilever have finally reached an agreement. Tesco shoppers will once again be met with a continued flow of Pot Noodles and Ben & Jerry’s amongst other brands.
Beyond the jokes, there is a more serious issue, which both retailers and consumers need to face - this may only be the beginning.
Whilst one high-profile, social media-engulfing price increase battle has been fought (and won), there have been others which have quietly been and gone, with countless others possibly to follow.
So, how should retailers brace themselves for the inevitable?
The devil’s in the detail
Sterling has devalued, imports are more expensive and margins are already lean; therefore a price increase is required – a simple story, right? Well, not so much. The primary instinct for a retailer is to resist an increase (after all, who wants to pay more?). This is part-reflex, part-scepticism over the story they are being told, coupled with a desire to conduct a forensic analysis of the economics and factors behind the increase.
Whilst the devaluation of sterling has an adverse impact on goods imported to the UK, the opposite holds true for those being exported; including those under the Unilever brand. Retailers need to consider the wider macroeconomic landscape when entering into (re)negotiations. Likewise, an understanding of the supplier’s supply chain structure (including the domestic vs. imported splits) is crucial in being able to challenge increases effectively.
‘Marmitegate’ is unique in some ways. Dave Lewis, a Unilever lifer, has quite a unique view having transitioned from supplier to the role of Tesco CEO. In addition, consider the buying power of Tesco against the brand power of Unilever. It is far more likely for Tesco to influence and yield concessions over other retailers. Yet, don’t large suppliers need large retailers, just as much as large retailers need large suppliers?
Playing the long game
Whilst there is data, intelligence and leverage certain retailers can take in to supplier negotiations in the short term, longer-term planning is required to proactively manage adverse market conditions, rather than react to them.
The rise of Aldi and Lidl has already provoked retailers to review their ranges and identify opportunities for rationalisation. Buying narrower and deeper means buying cheaper - or so the theory goes. Cost pressures from currency movements should only serve to accelerate the work to structure ranges which deliver for customers in all markets, as well as for the bottom line.
However, perhaps the biggest question retailers should grapple with is ‘how much do my products really cost?’ This would then allow them to determine ‘how much should they really cost?’. Such a question requires thorough analysis. Build up, through investigation and market intelligence, a portrait of the cost elements and dynamics at play; from wage rates, raw materials and distribution to returns and promotions, both within their own and their suppliers’ supply chains. What is the ‘true’ cost? Nothing something most retailers measure or hold anyone to account.
How this knowledge is then used will drive the answer to the second question; being ‘how should a retailer sets itself up to source products?’. Taking a cross-category, material/manufacturing-led approach, as opposed to a single-category, product-based one, will allow retailers to drive efficiencies further through the supply chain. So, for example, a factory making plastic cups could make a wider range of plastic products, where economics allow them to do so. To do this, retailers would need to challenge existing ways of thinking and break down internal silos. Not an easy task.
Squeezing cost out of sourcing is desirable. This only translates into incremental profit if products can be sold and prevent further cost falling in to the supply chain. A simple, yet sometimes, overlooked distinction. Tighter cost control, from increased visibility of all cost components, will be needed to drive this. Additionally, for retailers with an international footprint, a wholesale approach to drive common ranges and lock benefits from the resulting efficiencies may be an option (this would require a significant rethink of the operating model).
Marmite today, not jam tomorrow
With advantageous hedging for both suppliers and retailers reaching the end, if it hasn’t done so already, it appears that that we haven’t seen the last of price increases. How retailers mitigate or even wholly neutralise these is well within their gift; short term tactics will only take retailers so far.
What is really required is for retailers to face into the bigger, longer term questions around what they are buying and how. These questions can lead to answers which involve far-reaching operating model changes, however, they shouldn’t be avoided if retailers want to ensure customer choice and successful supplier relationships endure, whatever the economic weather.