The UK’s decision on Brexit was a huge event, so the recent dispute between Tesco and Unilever, where the supplier attempted to impose a 10% price increase on the retailer, is not being viewed as a surprise by anyone in the know within the nation’s food supply chain. As a country we import around 40% of what we eat, so the widely forecast 20% reduction in sterling’s value since the referendum was always going to lead to some serious arm-wrestling about who carries the burden created by this change.
The economics behind the proposed increases were fairly straightforward, but with a supply chain that is already under a serious margin squeeze, and consumer expectations built up by over two years of food prices going down, the retailers are now feeling a very strong pressure to drive the burden created by foreign exchange movements back up the chain.
In the foodservice sector we’ve seen similar approaches by suppliers wishing to pass on the full effect of exchange rate movements, some as early as the week after the June 23rd vote. The difference in our market is that buyers are much more dissipated than in retail. Tesco and the other major retailers have enormous power, which we all observed first hand by them unilaterally delisting Unilever products from their website last week. A similar approach in our own sector would just not be possible.
What we are seeing here is the leading edge of negotiations that everyone selling food to consumers will be forced to have in the months ahead. Buyers will be well advised to understand fully the geographical source of the products they are buying, evaluate alternative sourcing options, and where importing a product still makes sense ensure that they fully familiarise themselves with their supplier’s hedging arrangements.
This is just the beginning. There is little doubt that there will be serious inflationary pressure in the year ahead, and not just in food and drink.
David Read is chief executive of Prestige Purchasing