business news in context, analysis with attitude

Got the following email about the Tesco-Unilever price dispute - and my reaction to it - from MNB reader Austin F Noll Jr.:

I am in complete disagreement with your POV on the Tesco pricing issue. CPG companies manufacture/produce product for sale to the consumer. They establish a cost of goods "price" based on labor,material costs and the price of the ingredients. They compete in the marketplace based on their quality/price relationship with their consumers. If the quality is good/acceptable and the consumer equates the price paid as good value then a transaction occurs. They also compete in the market place with other companies that make similar products thus you have to be " in-line" with your pricing/value or you will be out of business. The retailer procures product from the CPG companies and places a retail on that product based on the guidelines they establish for the category and the image they want to project to their customers. Manufacturers can suggest what retails that they deem appropriate but in no way can they insist on a retail price. The retailer has the sole discretion to price the product that they stock at the retail price that they determine.

In the end it's the consumer who determines whether he or she will pay the price that a retailer establishes. To allow a retailer to dictate a manufacturer's cost of goods price (base price) is not reasonable or fair in the real world. Large retailers then could demand a better price than their smaller counterparts and then "price" the smaller retailers out of business.

I am not naïve to what happens at different points in time in the industry with regards to trade dealing and discounts but I am a firm believer that every manufacturer should be transparent in their list prices and that these should not be subject to individual "retailer whims" as to whether they are fair or not. The consumer will make that call in the retail store. If Tesco chooses to discontinue lines or brands based on their assumption of what a manufacturer's list price should be then they will have to accept that many of their consumers will follow their preferred brand to other retail locations.

From another reader:

Having worked at CPG’s for 35 years in Customer Management, the hardest part of any role in working with retailers, was managing price increases - particularly double digit ones. They are very challenging to justify unless there are significant cost of goods increases that have occurred due to suppliers passing these on to manufacturers. That being said, it’s very hard to understand why Unilever thinks they can pass on a steep price increase to retailers due to the Brexit impact. Unilever is a multinational and they likely drive a good percentage of their margin from currency exchange (operating much like a bank would globally). I am sure that Dave Lewis is aware of much of this and perhaps that is what drove the reaction from Tesco. It will be interesting if we see more of this from other CPG’s and how this impacts retailer/supplier partnerships long term.

And from another:

I laughed when I saw the article on the dispute between Tesco and Unilever on a price increase.  Dave Lewis, CEO of Tesco, came from Unilever so Mr. Lewis knows Unilever’s practices very well.  Some companies need to take price increases for the right reasons, with real increases in the costs to do business.  Some may take them because they need to reach a promised number to shareholders.  I feel it’s wrong for retailers to bully manufacturers if they need to raise their price.  Some manufacturers do the right thing and spend back on the business with deeper promotions if there are savings down the road.  There are honest reasons for price increases.

And another:

You continue to ignore the possibility that a supplier may have a justified price increase. I have been on the receiving end of demands from Retailers
like Tesco that try to offset their poor strategic decisions by threatening suppliers unless they make price concessions.

I don’t feel you have taken a balanced approach on the issue. You have taken a populist but simplistic position.

KC's View: