Pressure rising between suppliers and buyers

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It’s rare for supply chain disputes to make the front pages of national newspapers, but that is exactly what happened in early October when an altercation between Unilever and UK supermarket chain Tesco was aired in public.


The retailer said it had stopped selling many of Unilever’s popular branded goods on its online shop because of a dispute arising from the consumer goods giant demanding a 10% price increase. Unilever is said to have blamed this increase on the falling value of sterling, which was affecting the UK-Dutch multinational’s profitability. Following the UK’s vote to leave the European Union, sterling dropped by around 16% against the euro and 19% against the dollar, which has significantly increased costs for the likes of Unilever.


With some commentators espousing their views on the company’s motives for increasing prices – besides the reasons given by the consumer goods giant – and more xenophobic sections of the UK press jumping on the decision as another attack on the country’s businesses, it was a battle played out in a public forum.


In a typically British style, it was also a storm in a teacup, with the two companies settling their disagreement within 24 hours of news of the dispute being made public.


Complicated relationships


In some ways, that apparent settlement demonstrated both Tesco’s clout and Unilever’s desire to protect its reputation. The resolution also demonstrated that, for procurement organisations on both sides of the argument, life could be about to get a lot more problematic, especially in terms of functions’ relationships with suppliers.


“While politicians can deny reality, a shampoo produced on the continent is around 17% more expensive,” said Bruno Monteyne, a former Tesco executive who is now an analyst at Sanford C Bernstein.


“This isn’t about Tesco or Unilever but about all UK retailers and suppliers.”


The value of shares in each company fell in the immediate aftermath of the dispute – a fact that will not have gone unnoticed by any suppliers contemplating asking their customers to shoulder the burden of a pound that shows little sign of increasing in value.


A report by Barclays, published in August 2016, bore out the concerns of companies most likely to be impacted by the devaluation of sterling, which recently hit a six-year low against the euro.


As well as highlighting the fact that companies were, by and large, hopelessly ill-prepared for Brexit, the study painted a grim picture of the impact that fluctuating foreign exchange rates could have.


Just 2.9% viewed the currency fallout in a positive light, while around 80% looked on it negatively. The Unilever and Tesco spat has brought the issue sharply into focus, but Barclays’ study suggests procurement could really feel the hit in 2017.


“While depreciation of sterling has been one of the more immediate effects of the referendum result, this could also have a longer-term impact,” the report states.


“Many retailers are likely to be reasonably well-hedged going into next year, meaning that the real consequences could be seen from mid-2017 onwards. Currency volatility will have a very different impact on each retailer, depending on their circumstances. Those that are heavily reliant on imports will no doubt be looking to exploit opportunities to market their products more widely in new markets, while major exporters with a largely domestic supply chain could benefit from currency movements in the shorter-term.”


Hedging, unsurprisingly, has assumed a greater priority within procurement and supply chain operations following the referendum, with 71% of those questioned in Barclays’ report highlighting it as an action for immediate review.


Squeezing suppliers


That focus will doubtless continue into the New Year, but Tesco’s battle with one of its largest suppliers is far from an isolated incident, particularly in the fast-moving consumer goods sector. Another retailer, Asda, asked suppliers for discounts and cash contributions in February 2016, as the Walmart-owned company looked to launch a fightback against low-cost rivals such as Aldi and Lidl.


Books and stationery retailer WH Smith, meanwhile, stated in October that it was looking to consolidate factories and negotiate better deals with suppliers to cope with currency pressures.“


There are price pressures everywhere – if anyone thinks that Tesco and Unilever is an isolated example of a supplier demanding something and a retailer putting their foot down, then they’re kidding themselves,” one senior procurement figure said.


“A lot of similar demands and negotiations will be going on elsewhere without anyone finding out about them, particularly the media.”


The fact that this dispute has been played out in the full glare of the public – both in the UK and further afield in Europe – ensured both companies moved swiftly to bring it to a conclusion, and demonstrated the power of using both social media and the press to hammer home an advantage.


The head of Tesco, Dave Lewis – once a senior executive at Unilever – has been hailed a champion of the consumer for his handling of the recent situation.


“This makes Dave Lewis look like a hero defending consumers,” one senior retail figure told Reuters.


Another source familiar with the situation said Unilever had made similar demands to the UK’s other biggest supermarkets, namely Sainsbury’s, Asda and Morrisons.


Traditionally, of course, the relationship between suppliers and buyers has been one where the latter had the advantage. In the automotive industry, for example, Toyota have routinely asked their suppliers to cut their costs in both good times and bad. Even last summer, after reporting a quarterly profit of $5.2bn in the quarter between April and June 2015, the company asked their suppliers to consider price cuts of between 0.5% and 1%. In 2011 and 2012, as the company suffered a hit as a result of the strong yen, it asked suppliers to decrease prices by as much as 3%.


Not all suppliers boast the clout of Unilever, clearly, but the company’s demands, regardless of the outcome of its settlement with Tesco, signal a distinctive shift in power. More relationships will doubtless be tested in the coming months – it may prove more than a storm in a teacup.


This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.