Stand-off in the Aisles

What do Ben & Jerry's ice cream, Pot Noodles, Persil, Dove soap and Marmite have in common?  They are all made by Unilever.  What does Unilever and Tesco have in common?  Dave Lewis, Tesco’s current boss, spent most of his career at Unilever before being poached by Tesco.  What does all of this have to do with negotiating?  Well, having been in a stand-off that threatened to damage both parties, heads were banged together on Thursday 13 October and a deal was done.  We at Scotwork have constantly maintained that external factors are the most common cause of the kinds of conflicts that need negotiated solutions and what happened between Tesco and Unilever is a classic example.  External factors do not come much bigger than Brexit!

The UK’s decision to leave the European Union has had many consequences, chief amongst which is uncertainty.  Hard Brexit or soft?  Free movement of EU citizens or not?  The triggering of Article 50 sooner or later?  All of these as yet unanswered questions have led to uncertainty; business hates uncertainty; markets hate uncertainty and one of the results is a significant fall in the value of sterling against the currencies of the country’s major trading partners, Europe and the USA.  Interestingly and on the face of it paradoxically, the FTSE 100 index has never been higher; this is mainly due to UK-produced goods being cheaper to sell abroad than they used to be.  The downside of all of this though is that overseas-produced goods have become much more expensive in the UK.

Unilever is Tesco’s biggest supplier; I venture that Tesco is probably Unilever’s biggest route to the UK market.  You might argue that the one needs the other as much as the other needs the one and that therefore both would tippy-toe lightly around each other when they come together to discuss their business arrangements.  Occasionally, of course, things can go wrong!

Unilever has factories all over the world; in addition, it sources raw materials for production worldwide.  The pound has crashed and so these ex-UK products and materials have become comparatively more expensive in the UK.  Not unreasonably perhaps, the company sought to recoup some, if not all of these costs in an unscheduled price increase averaging around 10%.  Tesco, as is often its wont, refused to countenance such an increase and further suggested that they would only pay the previously-agreed prices for Unilever’s products; Unilever refused to supply on those terms and we suddenly found ourselves observing an impasse. 

A review of the balance of power between the two parties is interesting. 

• Tesco has a dominant share of the UK market, but Unilever would have seen that as an important opportunity to “level the playing field” and bring Tesco down a notch or two 
• Unilever will also have noted that Tesco is no longer as dominant as once it was and has suffered from bad publicity as a result of some reports of corporate bullying
• Unilever has a massive range of branded products, but Tesco would have seen this as an opportunity to promote other brands as well as its “own-label” offering
• Tesco will have argued that more shoppers shop in their stores than in any others, but Unilever could counter that the consumer would begin to shop elsewhere were they not able to find the brands that they wanted at Tesco
• Unilever (and Dave Lewis, I venture) will remember the last time a major retailer took them on. Delhaize Belgium and Unilever fell out in similar circumstances in 2009. Eventually Delhaize was forced to climb down because it discovered that without Unilever brands on its shelves, shoppers voted with their feet and went to other supermarkets. They lost about 30% of footfall as a result, because Delhaize shoppers reckoned that if they had to go to another supermarket to get their Unilever brand favourites they might as well do their whole weekly shop there.

Tesco is a bigger business in a bigger market than Delhaize but the example is there.  Critically, Lewis was on the other side of the fence in the battle with Delhaize; perhaps he remembered what had happened and decided to go for an early settlement.

Which brings us to negotiation.  Obviously, both parties decided to sit around the table and come up with a negotiated solution.  We are not privy to the deal yet but I venture that it might look something like this.  In return for improved payment terms and brand listings as well as a 10% increase on some, if not all of its products, Unilever agrees to a figure of less than a 10% increase on some products and a waiving of any increase on a select chosen few other products until the next scheduled price review – whenever that may be.  One imagines that both sides have given the other an opportunity to put a positive spin on the deal to their constituents – their customers, employees and  shareholders. 

Now let’s talk about Brexit.  No.  Let’s not.

Robin Copland