Tesco

LONDON — It was a short-lived skirmish.

Unilever, which reported flat third-quarter sales on Thursday, found itself locked in a battle with Tesco after raising the prices of a series of food and beauty goods due to the weak pound. The battle may have been rapidly resolved Thursday evening, but it signals potential trouble ahead for suppliers and retailers looking to protect their margins as the British pound weakens.

As Unilever revealed that third-quarter sales of 13.4 billion euros, or $15 billion, were flat at constant rates in a “soft and volatile” market, impacted by currency fluctuations, news broke that Tesco was refusing to stock certain Unilever products because of wholesale price increases.

Unilever brands affected online and in-store at Tesco include TRESemmé, VO5, Vaseline, St. Ives, Radox, Simple, Impulse, Lynx and Sure deodorant as well as Ben & Jerry’s ice cream and Marmite, the brown yeast spread beloved of many Brits.

According to British media reports, Tesco was chafing at across-the-board wholesale price hikes — even for products made in Britain — which Unilever has implemented to compensate for higher input costs resulting from the weak pound.

The pound has been on a roller coaster ride since the Brexit vote in June, falling against major currencies such as the euro and the dollar. Earlier this week it dropped below $1.21, compared with its pre-referendum level of $1.48. It is currently trading at $1.22.

The weak pound has been causing headaches for a wide variety of brands that source or manufacture outside the U.K. in euros or dollar-denominated currencies. Margins are set to be squeezed, while fashion and clothing retailers up and down the British high street are preparing to raise their prices by an average of 10 percent as of January.

Although Unilever did not issue an official comment, the company’s chief financial officer Graeme Pitkethly said during the third-quarter call with analysts that it is routine for Unilever to make currency-related adjustments in the individual markets.

“We have to offset prices for consumers at the end of the day. We care deeply about our consumers,” he said, adding the company’s decision to raise prices in the U.K. was part of a “normal devaluation-led cycle” that would apply to any of the markets in which it does business.

Although Unilever would not confirm the amount by which it was raising prices, Pitkethly said the increases are “substantially less” than it would need to preserve its margins and that the higher prices have already been passed onto other U.K. stores. “We’re confident the issue [with Tesco] will be resolved soon,” he said.

A Tesco spokesperson said: “We are currently experiencing availability issues on a number of Unilever products. We hope to have this issue resolved soon.”

Indeed it was: After the markets closed on Thursday, the problem was solved, with concessions made by Unilever, according to the BBC. Both companies issued statements late Thursday confirming their ongoing partnership.

“We always put our customers first, and we’re pleased this situation has been resolved to our satisfaction,” said a Tesco spokesman.

Tesco’s chief executive officer Dave Lewis clearly played a role. A former Unilever employee, he was head of the Anglo-Dutch company’s personal care division before joining the supermarket giant in 2014.

In midday trading on Thursday, Tesco shares were down 2.4 percent to 1.96 pounds, or $2.40, while Unilever shares fell 4.22 percent to 35.67 pounds, or $43.66. Both stocks closed down more than 3 percent on Thursday.

Gary Hobbs, senior equity analyst at Investec Wealth and Investment said he sees this type of inflation as inevitable given the drop in the value of the pound.

“Products produced in the euro zone are now nearly 20 percent more expensive, and these two majors (Tesco and Unilever) may well begin negotiations on behalf of the industry to determine an appropriate level of price increase across the board. A modest amount of inflation is good for food retailers, which have been facing price deflation over the last couple of years, depressing like-for-like sales,” he said.

Unilever has certainly been facing its share of currency woes, and not just in the U.K. The group’s third-quarter sales were flat at 13.4 billion euros, or $15 billion, in a “soft and volatile” market, impacted by currency fluctuations. At constant exchange rates, sales were up 3.4 percent in the three months to Sept. 30, while underlying growth was 3.2 percent.

In a trading update on Thursday, chief executive officer Paul Polman said Unilever, which sells goods ranging from ice cream to face cream, is working to make itself more agile and responsive to demand.

“These actions keep us on track for another year of volume growth ahead of our markets, steady improvement in core operating margin and strong cash flow,” he said. Polman added that markets remain “soft and volatile.”

Growth in Unilever’s personal-care category, which includes brands such as Pond’s, Vaseline, Lifebuoy and the newly acquired Dollar Shave Club, slowed to 3.1 percent, reaching 5.2 billion euros, or $5.82 billion, due to “intense competition” in many of the company’s markets. The quarterly results also faced strong comparatives from the corresponding period last year.

The company said deodorants performed well, driven by Rexona Antibacterial with 10 times more odor protection and the continued success of dry sprays in North America. In hair, growth was driven by the successful Sunsilk relaunch and by the TRESemmé Beauty-Full Volume range. In skin care, Simple demonstrated good growth driven by innovations in the naturals segment.

By region, North America was the only market that showed vigorous growth, supported by innovations in deodorants, dressings and ice cream. Unilever said the hair category performed well in a highly competitive environment, while the rate of decline in spreads has slowed.

Latin America also grew ahead of Unilever’s other markets and despite tough comparisons with last year. The company said growth was driven by a price hike to recover higher input costs in local currencies, although volumes declined as consumers reacted to the impact of the “harsh” economic environment.

Sales in China were slightly down, due to intense price competition from local brands in laundry and some destocking related to the continued rapid channel shift to e-commerce.

The company said Europe remained challenging, with “subdued” volume growth and continued price deflation in many countries. Ice cream performed strongly against an “outstanding season” in the prior year, but high promotional intensity adversely impacted the home care and personal care categories.

Unilever said it continued to see good momentum in Central and Eastern Europe, the Netherlands and Spain.

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