Tesco gets PR and share price boost from battle with Unilever

Last Updated: Fri, Oct 14, 2016 21:05 hrs
File photo of clouds over a Tesco Extra store in London

By James Davey

LONDON (Reuters) - Tesco appeared to emerge victorious from a pricing row with Unilever on Friday, with its shares rising 5 percent and analysts saying Britain's biggest retailer had scored a public relations coup by casting itself as the consumer's champion.

Though details of the agreement between the supermarket group and one of its main suppliers were not disclosed, analysts said Unilever had probably at least partially backed down in its bid to raise prices to compensate for a plunge in sterling following Britain's vote to leave the European Union.

"For the first time in many years, Tesco is coming across as the consumer champion and in the popular press is being reported as the company fighting to keep prices low for shoppers. This is good news for Tesco," said HSBC analyst David McCarthy, who has a "hold" rating on the stock.

On Wednesday, Tesco halted online sales of goods produced by Unilever, taking the unusual step of making a dispute with a major supplier public after the Anglo-Dutch group pushed for a 10 percent increase in prices on top-selling products such as Marmite and Pot Noodle.

On Thursday, after the standoff had dominated the news agenda, both companies said the spat had been resolved.

Friday's British newspapers laid the blame for the row firmly at Unilever's door. A front page headline on The Sun, Britain's biggest selling newspaper, was "Greedy Marmite bosses back off", while The Daily Mail went with "The Great Marmite Scam," blaming Unilever for exploiting the Brexit vote to hike prices and highlighting that some of the products it was demanding price rises for were actually made in Britain.

Some analysts said "Marmitegate" benefited Unilever as much as it did Tesco, giving it a possible sales boost from all the publicity, which even included a voucher in Friday's Daily Mail for a free large jar at rival supermarket Iceland.

"Unilever gets free publicity for its brands and will probably still get the same price increases it would've negotiated had it all been conducted in private," said Duncan Swift, a partner at advisory firm Moore Stephens.

"It hasn't hurt anybody. What it has done is put into the public consciousness that the sterling devaluation has an effect on staple food prices."

Most analysts and economists believe sterling's recent slump - it is down about 19 percent against the dollar and about 16 percent against the euro since the June vote - will lead to higher prices, despite fierce competition between supermarkets.

"(Tesco) highlighting the fact that the suppliers are driving the inflation is a good way forward to prepare the consumer for the inflation – it blames Brexit rather than Tesco," said David Sables, CEO of Sentinel Management Consultants, a firm that coaches major suppliers on how to negotiate with big UK grocers.

Analysts also said the progress CEO Dave Lewis has made in turning Tesco round since joining two years ago - from Unilever - meant the company had leverage to resist supplier demands. Tesco has a 28 percent share of the UK grocery market.

Tesco is "delivering the best volume growth to most of its suppliers," said McCarthy. "It is harder for Tesco's mainstream competitors (Sainsbury's, Asda and Morrisons) who are not delivering anywhere near the volume growth and therefore will have much less to negotiate with."

At 1445 GMT, Tesco shares were up 4.7 percent at 204.20 pence, the biggest rise on Britain's blue-chip FTSE-100 index. Unilever shares were down 1 percent.

(Additional reporting by Martinne Geller; Editing by Mark Potter)

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