Love it or Hate it: The consequences of Brexit on a supermarket’s supply chain

“Marmite-gate” highlighted the consequences of Brexit to UK supermarkets, and to the British consumer

In October 2016, the United Kingdom held its breath and braced for impact. Supplies of Marmite, a salty yeast-based spread that is adored by the British consumer (and known for its “Love it or Hate it” divisive nature [1]) were dwindling at Tesco, the UK’s largest supermarket chain [2]. The consumer was confused and angry: how could a quintessentially British product be running low at a quintessentially British supermarket? A by-product of beer brewing, Marmite has been manufactured in England since 1902 [3] and, although versions of it exist in other countries, it remains a primarily UK-only brand [4].

Disappointment for Marmite lovers [5]

A dispute on price

However, Marmite (with sales of c.£28M/$37M per annum [6]) belongs to Unilever, the Anglo-Dutch conglomerate. By October 12th 2016, Unilever had stopped delivering about 200 household products to Tesco due to an unresolved dispute on price [7]. Several months after the Brexit referendum on June 23rd 2016, Unilever claimed that the decrease in the pound (from $1.50 on the day of the referendum to $1.22 by October 13th [8]) forced it to increase the price of its products by 10% [9]). Although manufactured in the UK, Marmite’s packaging and raw materials would have been purchased from overseas, and higher prices for these would have raised the cost of producing Marmite [10]. In addition, Unilever reports its sales in euros in its earnings reports, so the sterling proceeds of Marmite sales would have been worth less than before [11]. Ironically for a nation of tea-drinkers, another Unilever product affected was PG Tips, a common tea bag brand.

Although the Unilever standoff was publicly announced, these issues are not unusual in the grocery sector [12]. But this time, not only was the British public made aware of the issue, it was also (perhaps for the first time) made aware of the day-to-day economic and lifestyle consequences of its decision to vote for Brexit. While government officials have repeatedly emphasized that no one voted for Brexit to “trade less” globally [13], Brexit’s victory was supported by an undercurrent of nationalism and isolationism [14].

A short-term solution

In another competitive context, Tesco would have passed on the supplier’s price increase to the end consumer. However, Tesco’s recent market share decrease to discount stores Aldi and Lidl [15] led it to enter a pricing war with Unilever. Tesco would rather lose customers who would choose their local Aldi to shop for Marmite and PG Tips than appear not to be the British people’s champion on low prices [16]. During a few days, Tesco publicly held its ground, but eventually the debate was settled with a likely compromise on the part of both organizations, although the terms of the agreement were never publicized [17].

However, this raises a question for Tesco and other supermarket retailers. As industry experts predict that food prices will rise by c.3% over time due to the impact of the falling value of the pound and the fact that many other conglomerates (such as Nestlé) report in euros [18], how will supermarkets deal with the increase in prices in the future? The conglomerates own a number of power brands which makes it impossible for supermarkets to refuse to stock their products.

Longer-term solutions

One mitigating solution is for retailers to increase their purchasing power. This is what Tesco is attempting to do with the planned acquisition of a UK-wide wholesaler, Booker (given provisional approval by the competition watchdog on November 14, 2017) [19]. The acquisition will not only cut costs by merging distribution and other operations, it will also increase Tesco’s bargaining power with suppliers, as analysts estimate Booker will add £2Bn-£3Bn ($2.6Bn-$4Bn) to Tesco’s current £45Bn ($60Bn) of buying power [20].

Another longer-term solution is for Tesco to consider localizing its fresh produce suppliers to accommodate the higher cost of purchasing items sourced in euros [21], particularly products such as dairy [22]. Aldi and Lidl had been the most proactive in driving provenance and localism with their fresh produce suppliers before the Brexit vote, and as a result are likely to be the least affected in the short to medium-term [23]. Some of the UK’s isolationist tendencies that led it to vote for Brexit might therefore, in the long term, lead it to de-globalize after all.

Additional considerations

The case of Tesco and Unilever brings up additional questions:

  • In what other ways could supermarket chains lessen the effects of currency exchange rates?
  • How will digital and global actors, such as Amazon, benefit from the political and economic consequences of Brexit?

(Words: 771)

 

[1] Hollis, Nigel, “Miracle Whip, Marmite, and the Love-It-or-Hate-It Brand,“ Harvard Business Review, March 01, 2011 [https://hbr.org/2011/03/miracle-whip-marmite-and-the-l]

[2] Mckevitt, Fraser, “Lidl becomes the UK’s seventh largest supermarket,” Kantar Worldpanel, August 21, 2017 [https://www.kantarworldpanel.com/en/PR/Lidl-becomes-the-UKs-seventh-largest-supermarket]

[3] Hayden, Danielle, “Marmite: A potted history of the British-born spread,” BBC News, October 14 2016 [http://www.bbc.com/news/uk-england-37646193]

[4] Bacon, Jonathan, “Marmite – the marketing story even the haters love”, Marketing Week, October 22, 2014 [https://www.marketingweek.com/2014/10/22/marmite-the-marketing-story-even-the-haters-love/]

[5] Wearden, Graeme, “Unilever and Tesco resolve Brexit price rise row – as it happened,” The Guardian, October 13 2016 [https://www.theguardian.com/business/live/2016/oct/13/pound-sterling-brexit-price-row-tesco-unilever-live]

[6]  IRI Press Releases, “£335k Marmite sales boost answers the question of Love It or Hate It,” October 24, 2016 [https://www.iriworldwide.com/en-GB/insights/news/%C2%A3335k-Marmite-sales-boost-answers-the-question-of-Love-It-or-Hate-It]

[7] Butler, Sarah and Kollewe, Julia, “Tesco and Unilever settle Marmite dispute,” The Guardian, October 13 2016 [https://www.theguardian.com/business/2016/oct/13/tesco-unilever-resolve-marmite-dispute-price-supermarket]

[8] Buttonwood, “Brexit means… higher prices,” The Economist, October 13, 2016 [https://www.economist.com/blogs/buttonwood/2016/10/economic-impact-devaluations]

[9] Reuters. “Tesco pulls Unilever goods from website over price row,” October 12, 2016 [https://www.reuters.com/article/us-tesco-unilever-prices/tesco-pulls-unilever-goods-from-website-over-price-row-idUSKCN12C2KN?il=0]

[10] Daneshkhu, Scheherazade and Vandevelde, Mark, “Why has the pound made Marmite cost more?,” October 13, 2016 [https://www.ft.com/content/cabfa280-9129-11e6-a72e-b428cb934b78]

[11] Buttonwood, “Brexit means… higher prices,” The Economist, October 13, 2016 [https://www.economist.com/blogs/buttonwood/2016/10/economic-impact-devaluations]

[12] Butler, Sarah, “Tesco runs short on Marmite and household brands in price row with Unilever,” The Guardian, October 13, 2016 [https://www.theguardian.com/business/2016/oct/12/tesco-running-low-key-unilever-brands-price-row-supplier-supermarket-falling-pound]

[13] Parker, George and Campbell, Peter, “UK business secretary rules out post-Brexit protectionism,” Financial Times, July 25, 2017 [https://www.ft.com/content/e181f518-7152-11e7-aca6-c6bd07df1a3c]

[14] Chan, Szu Ping, “From Brexit to the rise of protectionism: is the world facing an era of permanent low-growth?,” The Telegraph, October 10, 2016 [http://www.telegraph.co.uk/business/2016/10/09/brexit-gloom-has-lifted-but-the-big-issue-still-looms-large-is-t/]

[15] BBC News. “Aldi and Lidl double market share in three years,” November 15, 2017 [http://www.bbc.com/news/business-34842198]

[16] Butler, Sarah and Kollewe, Julia, “Tesco and Unilever settle Marmite dispute,” The Guardian, October 13 2016 [https://www.theguardian.com/business/2016/oct/13/tesco-unilever-resolve-marmite-dispute-price-supermarket]

[17] Ibid.

[18] Ibid.

[19] Monaghan, Angela and Wood, Zoe, “Tesco’s £3.7bn takeover of Booker given green light,” The Guardian, November 14, 2017 [https://www.theguardian.com/business/2017/nov/14/tescos-37bn-takeover-of-booker-given-green-light]

[20] Butler, Sarah, “Why is Tesco buying Budgens’ owner – and will it affect shoppers?,” The Guardian, January 27, 2017 [https://www.theguardian.com/business/2017/jan/27/tesco-booker-shoppers-takeover-londis-budgens]

[21] Kantar Retail’s UK and European Analyst Team, “Brexit’s impact on the British FMCG retail landscape,” Kanter Retail Company News [http://www.kantarretail.com/brexits-impact-on-the-british-fmcg-retail-landscape/]

[22] Churchill, Francis, “Localise supply chains post-Brexit, supermarkets told” Supply Management, Chartered Institute of Procurement & Supply [https://www.cips.org/supply-management/news/2016/june/localise-supply-chains-post-brexit-supermarkets-told/]

[23] Ibid.

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7 thoughts on “Love it or Hate it: The consequences of Brexit on a supermarket’s supply chain

  1. Helen,

    Killer topic. Unfortunately I think Tesco and other UK businesses will start and continue to feel the hurt of the Brexit decision for a good while to come. This is a great example of the difficulties that occur when international suppliers of goods work with national retailers, housed in countries with varying degrees of political stability and economic regulation. I think your suggestion that retailers might move towards localizing their suppliers in order to ease price fluctuations is an agreeable one. In addition, I wonder if there exists a world where wholesalers band together in order to form a sort of monopsony for certain products in high demand such as marmite. I suppose I don’t know enough about economics to be able to stand behind such a wild idea as that.

    Finally, I read an interesting article that claimed that Brexit could be a blessing in disguise for food retailers after all. The article stated that retailers like Tesco have battled for years against rampant growth of German discount brands such as Morrisons, Asda, and Sainsbury’s, causing them to significantly cut prices, like you mentioned. This price war has squeezed the food retail industry, inhibiting growth and causing persistent deflation. The article claims that, as a result of the falling value of the pound, inflation might be a good thing for retailers like Tesco’s bottom lines (as long as they can pass on some portion of the price increases to the shoppers, which is a challenging assumption). [1]

    [1] Ashley Armstrong, “How Retailers Can Fashion Their Way Through Brexit,” The Telegraph: Business, http://www.telegraph.co.uk/business/2016/06/27/how-retailers-can-fashion-their-way-through-brexit/, Nov 28, 2017.

  2. Dear Helen,

    Thank you for a wonderfully appetizing article (in my opinion, far more enjoyable than the Marmite product itself).

    Interestingly, in the week after this pricing dispute was settled Marmite, sales grew nearly 61% from the prior year. Undoubtedly due to the heavy amount of media coverage around the issue serving as a sort of blitz-advertising campaign (1). So, it would appear that this particular story has a happy ending for now. However, I think your article sheds light on the breadth of complexities that the growing trend of isolationism could have on a country’s economy, and some of the ways in which citizens could be effected by the consequences on an everyday basis.

    (1) https://www.express.co.uk/news/uk/724672/Marmite-sales-rise-high-profile-price-war-unilever-tesco-brexit-Marmitegate

  3. I remember the first time I tried Marmite…let’s just say it’s the last time I tried it. Regardless of my personal taste buds, you raise a lot of very interesting issues that I didn’t consider when thinking about some of the consequences of Brexit. As isolationist ideas and policies have recently gained momentum, I think we need to find a way to better educate the public on the widespread affects of these actions because they can and do touch our daily lives. It’s interesting that it took Tesco taking a public stance for people to really understand how Brexit could change the prices and options of foods they can buy. I am conflicted about the idea of localizing suppliers in order to better deal with the rising cost of buying items sourced in euros. While it seems like an effective long-term solution, it’s quite frightening to see how these isolationist practices really do affect economies across the globe as foreign suppliers are completely cut out. If the public had known how Brexit would affect their economy and day-to-day lives, do you think they would have voted the way they did?

  4. I am very intrigued by the idea of a food made from the by-product of beer brewing. Your post really highlights the impact of Brexit on smaller day-to-day things that I think many would not have realized.

    To answer your first question, in addition to the solutions you mentioned, large super markets can begin to develop their own branded products or stock more off-branded products to provide a lower priced alternative to the more expensive branded products. That way they can still keep their shelves stocked with branded products and pass on the increased prices to the consumers, while also offering low price options. They can also continue to be aggressive in their negotiations with suppliers, similar to what Tesco did with Unilever. While the results of the agreement were not publicized, one can assume that the results were at least better for Tesco than where they started. If the large supermarkets can play hard ball and, while not ideal, refuse to stock the suppliers’ products until better terms are met, then they can potentially improve prices.

    Amazon and other digital and global actors will benefit from the economic consequences of Brexit by enticing customers with lower prices. Amazon’s scale provides them with the purchasing power to negotiate cheaper prices with suppliers and, therefore, pass on the savings to customers. To compete with these players, retailers will need to merge to strengthen their own purchasing power. I worry that soon mom-and-pop shops will struggle to compete and survive in a world dominated by retail powerhouses.

  5. This is such an interesting ripple effect of Brexit that I hadn’t previously considered. I’m glad to hear from JJ that the British consumers managed to get their hands on their beloved Marmite after all!

    This example highlights the massive impact the work of political actors can have on not only the global business context, but on their country’s citizens as well. I am reminded of two in-class discussions that apply to this topic. The first is our discussion in Li&Fung regarding a “borderless supply chain”. With growing isolationist movements in countries with large economies, does the concept of a borderless supply chain still hold as a maximizer of efficiency? Or will companies be forced to forgo cost savings internationally and turn to localization, ultimately increasing prices for the very consumers who voted for Brexit-like policies in order to improve their own economic situations? My belief is that isolationism will have long-term damaging effects on the domestic economy, but only time will tell.

    I am also reminded of our discussion in FIN 1 today regarding the role of government in shareholder capitalism. If, as Professor Malloy says, the evidence strongly supports shareholder capitalism as the best system for rewarding society, what is the role of government in that society? Do moves like Brexit hinder shareholder based capitalism in a global context or provide necessary intervention?
    Who knew Marmite could be such an illustrative topic to help me develop more curiosity about the role of government in business! I’m looking forward to connecting the dots between TOM and FIN, and discussing Brexit in more detail, in BGIE next semester.

  6. Fantastic article, Helen! Though, unfortunately, I can’t say I feel the same way about marmite. I do think that Brexit ‘yay’ voters have likely underestimated just how severe, extensive and pervasive the rise in food costs from currency depreciation and isolationist policies will be. The rise in food costs will also cause a shift in customer supermarket preferences amongst the more price sensitive. It will be interesting to see which supermarket brand ‘wins’ the market. Will there now be an Aldi every few metres down the high street as opposed to a Tesco’s? I’m eagerly watching this space!

  7. Helen – I wonder if Marmite, and other “unique” products without close substitutes, will be disproportionately affected by protectionist policies. Products that are easily replaced by other items would not have endured a “price war” with Tesco and the distinctive nature of Marmite and the ubiquitous Tesco serve as symbolic and iconic brands for the UK in particular. Both Unilever and Tesco may feel extreme pressure to protect the standing of their respective brands given the global attention.

    To address your question about supermarkets facing grim exchange rates, I believe it will rely on cost savings in other business areas. There may be a shakeout of inefficient grocery chains and sophisticated and efficient supermarkets may remain in future years. Last month, the Tesco CEO postulated that Brexit will not cause mass disruption for his supermarket chain because of his superior supply chain and focus on cost cutting to offset currency impact [1] Of course, it is in his best interest to claim that Tesco will not accept inferior quality at its stores on account of Brexit, and only time will show the impact of negotiations regarding Brexit terms on grocery stores.

    [1] Williams-Grut, Oscar. Tesco CEO: Ex-Sainsbury boss is wrong on Brexit — but ‘no deal’ could push up food prices. Business Insider. http://www.businessinsider.com/tesco-ceo-dave-lewis-brexit-supermarkets-food-prices-2017-10

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