Marmitegate

 

 

There has been quite a squabble brewing for the last few weeks between supermarkets and suppliers, which is set to be a continued theme going forwards as inflation is likely to be a big deal over the next 18 – 24 months.

 

The Background Bit……

Unilever has had a hissy fit regarding the price it currently supplies its products to Tesco. Unilever wanted to raise its prices by about 10% to compensate for the steep drop in the value of Sterling. Tesco refused the price increase and halted online sales of top-selling goods produced by Unilever such as Persil, Ben & Jerry's ice cream and Marmite.

 

At the eleventh hour, both sides came to an undisclosed agreement leading to Tesco announcing no price increases and "We always put our customers first and we're pleased this situation has been resolved to our satisfaction." How very noble.

 

The Bigger Issue……

The value of Sterling against the Dollar is now 18% lower than June, on the back of the EU Referendum result. The significant drop in the exchange rate of sterling is reflection of how little confidence the world has in the UK currently due to the uncertainty of Brexit.

 

This 18% reduction now means that anything the UK imports is 18% higher to buy as all commodities / raw materials are purchased in Dollars. The Dollar is the default currency that everything is bought in from overseas. Whether that be tea from India, coffee from Brazil, oil from the Middle East, etc. Clearly an 18% increase in the cost of buying commodities / raw materials has to be absorbed by someone.

 

So who absorbs the increase in cost?

 

Option A

The maker / supplier of the product (in this case Unilever) keeps the sale price to the supermarket the same but accepts the increase in cost and lower profit margins as a consequence.

 

Option B

The supermarket accepts a higher price to buy from the maker / supplier (in this case Tesco) but keeps the sale price to the customer the same and simply makes less profit.

 

Option C

The maker / supplier increases their price to the supermarket and the supermarket increases the price to customers (who in turn pay more).

 

In the short term, Tesco and Unilever came to a deal so that Option C was avoided and we will not see any price increases as customers. But here is the key question……for how long will this last before the customer is hit?

 

The Bank of England is anticipating inflation to hit 3 – 4% over the next 18 months as a direct consequence of a weaker Pound against the Dollar and the increase in cost to make and supply goods. Clearly this is not good for the UK generally as wages will not increase at the same level as inflation. The UK economy will grind to a halt as a consequence.

 

Which leads me back to my point from a few months ago about how politicians failed us prior to the EU Referendum in that clear information on the consequence of ‘remaining’ and ‘leaving’ were never spelt out. All we got was spin, counter-spin and then a bit more spin for good measure.

 

If we knew then what we know now, would we have the same EU Referendum result?

 

Interesting yet avoidable times.