Last week, we discussed being prepared for higher food prices. It looks like that advice was right on time. Tesco, the major supermarket chain, and Unilever, the largest food manufacturer in the UK, just reached a deal on food prices. The battle focused on proposed rate changes to compensate for the falling value of the pound. Initially, Unilever wanted to raise prices by 10 percent. But Tesco was fighting back.
Wholesale and Retail Pricing
Unilever was trying to raise the wholesale price of their products. Those are the prices supermarkets pay to purchase the products placed on store shelves. Often, as wholesale costs rise, retail prices also move up. This allows the supermarket to maintain a profit-base even though the wholesale cost has changed.
Rising retail prices mean more out of the pockets of consumers. With food prices rising during the month of September, increased wholesale prices would have hurt UK consumers even more.
Reaching a Compromise
Renegotiations are common amongst retailers and manufacturers. However, most of these changes are managed behind the scenes and receive little attention from the media. But, with such a notable change being in the works, this time was different.
Tesco was able to talk Unilever down, preventing wholesale prices from rising as dramatically as initially proposed. This move helped Tesco keep prices lower for their customers, though some shifts are still likely to occur.
Asda, the supermarket chain, was also able to reach an acceptable deal with Unilever.
While the story focused on Tesco and Unilever, there is much more at stake behind the scenes. Retailers can expect similar renegotiations on their wholesale prices, shifting prices for buyers across multiple markets.
The costs of importing goods into the UK is rising as the pound falls. While manufacturers in the UK may be able to remain fairly stable, many products are produced elsewhere and brought in from other countries. Since the pound is losing value against other currencies, it makes the costs of doing business with UK retailers more expensive.
In some cases, there is little that can be done to fight against the changing costs. Certain products, like the grocery items supplied by Unilever, are often considered necessities in retail stores. This gives Unilever a lot of power to set wholesale prices as they see fit. Manufacturers are not going to sell their products at a loss just to keep the products in the UK, so retailers have to work to find a happy medium.
Brexit Fears Partially Responsible
Concerns about Brexit has spurred much of the pound’s loss of value against other world currencies. The pound has repeatedly hit new lows against the U.S. dollar; some of the lowest trading points in 31 years.
While most people consider trading values to be set by specific facts, changes in emotional sentiment have a significant impact. If investors become concerned and start selling off certain investments, this causes the sale price for the asset to drop. Seeing the price drop may cause other investors to sell, dropping the price even further. It becomes a self-perpetuating system until a new equilibrium is found.
What’s an Average Person to Do?
Since the full impact of Brexit isn’t known, and retail prices in many sectors are likely to rise, it is important to pay attention to your household budget. Make sure you have funds saved to handle any unexpected changes and work to keep your debt burden low. As the effect of Brexit becomes clearer, markets may stabilize. But it is hard to say exactly when that will happen and what the final settling point will be.