The UK press last week was filled with stories stating that Tesco was running out of Marmite, the savoury spread made from malted barley. It seemed that the spread, which you either love or hate, was the victim of a disagreement between its manufacturer, Unilever and the supermarket chain Tesco over the wholesale price. The spat can be summarised as follows:
- Unilever had asked Tesco to accept a 10% rise in the wholesale price of its goods. This price increase affected Marmite as well as other Unilever products including Hellman’s mayonnaise and Persil washing powder.
- The reason given for the price increase was the sharp devaluation in the value of the pound sterling when compared to foreign currencies. This devaluation had made the cost of raw materials, particularly those imported from abroad, more expensive. Some commentators however had noticed that Unilever were asking for a similar price rise in Eire and that Marmite was produced from ingredients which were a by-product of the UK brewing industry.
- Tesco had refused to accept the price rise and therefore was not receiving deliveries of Unilever products. As a result stock was running out and many of the Unilever products were no longer available on the Tesco home shopping website.
In the end, a deal was reached and Marmite returned to the shelves of your local Tesco.
You may ask what a pricing dispute between a major supermarket chain and one of its major suppliers has to do with strategic marketing? The answer is a lot.
First you have to examine the market conditions of the two participants. Let’s start with Tesco.
Tesco is just recovering from pretty terrible results. It has sold off a lot of its side ventures to concentrate on its UK supermarket business. it is operating in a market where prices are still falling despite the devaluation of the pound. It is having to cope with increasing competition from discounters such as Lidl and Aldi. Generally supermarkets look for a 3% margin on the goods they sell. However, often the margin for own brand products is far greater than that of well-known brands. Lidl and Aldi only sell own brand products.
Unilever faces different conditions. Firstly, the devaluation of the pound affects its cost of production, so it is looking to raise wholesale prices. it is also looking at the actions of its main competitors such as Kraft and proctor and Gamble. Unilever will also view many of its brands as premium products. So the price of the goods in the supermarket is partly about recouping costs and making profit; and partly about the brand image.
Price is an element of the marketing mix (product, price, promotion, place). Tesco’s marketing mix appears to be diverging from that of Unilever. Tesco want to be seen as a supermarket offering value. Unilever wants to be seen as a premium brand manufacturer.
The disagreement between Tesco and Unilever also shows the importance of micro-environmental analysis of the two firms market. Porter described this in his five forces:
- The power of suppliers on a business
- The power of customers on a business
- The power of competitors on a business
- The power of new entrants on a business
- The power of substitute products on a business.
It is clear that these forces differ for Tesco and Unilever.
Tesco and other supermarkets have come under increasing scrutiny over their power over their suppliers. However, it is clear that a major conglomerate such as Unilever holds far more power than a small or medium-sized supplier in negotiations with Tesco.
Unilever’s customer group differs from Tesco’s customer group. Tesco’s customers are the general public. Unilever’s customers are the supermarkets and other retailers who buy their products. Unilever will have a smaller and less disparate customer group.
Tesco’s competitors are other supermarket chains and they are in an almost continual price war. Unilever is competing against other large conglomerates and food manufacturing businesses.
New entrants in the grocery market, particularly Lidl and Aldi, have had a major effect on the power Tesco holds in the market. Unilever is a major power broker in its market and in some sectors, particularly washing powder, operates in a duopoly with Proctor and Gamble. Unilever therefore has significant power worldwide.
Tesco is concerned about the power of substitutes particularly own brand retailers such as Aldi, to whom they have been losing market share. As Unilever operate over a wide range of product sectors and clearly sees many of its products as premium brands, it is less concerned with direct substitutes. That said Unilever will be keeping a close eye on the market for products such as peanut butter which are alternatives to Marmite.
Tesco has previous when it comes to an attempt to sell premium products at a discount price in its stores. In the 1990’s it fought a bitter legal battle with Levi Strauss over the sale of jeans in its stores. Tesco had purchased ‘grey import’ Levi 501 jeans from eastern Europe and began selling them in their stores. Levi’s complained that a supermarket did not meet their expectations of their approved retailers and the discount price devalued their premium brand. Levi’s also claimed that the grey import jeans were not of the same quality as those sold in western Europe as they had been produced for an eastern European price point. Tesco lost the case.
Some commentators, of a more cynical bent, have argued that the whole dispute could be a clever promotional ploy. They quote the example of Heinz Salad Cream. Heinz issued a press release stating that it was to cease production of its salad cream. They claimed that UK consumers’ tastes were changing in favour of mayonnaise and European vinaigrette style dressings. Sales of salad cream had dropped so low, it was not worth continuing with the variety. The result of the press release were days of headlines and a huge rise in the sales of salad cream as consumers nostalgic reaction took hold.
It is interesting to note that many newspapers ran offers of free pots of Marmite in the days following the news of the disagreement took hold.
Whether the disagreement between Tesco and Unilever was a true reflection of rising production costs; or whether it was clever marketing; it is a clear reflection of the various factors which a firm must balance and which it must account for in its strategic marketing plan.