Tesco Is Fighting Its Suppliers Over Price Increases

Pet food producer Mars has removed pet products from Tesco's shelves as the British supermarket chain declined to accept a proposed price hike. Talking to Reuters, a spokesperson for Tesco explained, "With household budgets under increasing pressure, now more than ever we have a responsibility to ensure customers get the best possible value, and we will not pass on unjustifiable price increases to our customers."

This follows another battle Tesco fought last month which caused beans on toast to become just toast for British households as Tesco refused to budge on prices for Kraft Heinz. Kraft Heinz, which produces the key ingredient Heinz baked beans, wanted to raise sales prices to match the increased costs of production and shipping. Tesco, however, decided it would be easier to stop stocking the items, according to The Grocer

These spats have occurred during a time when companies have used issues created by the pandemic to increasingly hike prices, but, as Time reports, companies have also been enjoying record profits, which indicates that they are raising prices higher than they strictly need to. In other words, costs are being passed on to the consumer and then some. A balanced view would note that Kraft Heinz reported a -6.8% difference in U.S. sales between the Q4 of 2020 and Q4 of 2021 (per Food Manufacturing), but that low quarter still equated to $6.7 billion in sales.

Tesco and Kraft Heinz are playing a game of chicken

Tesco is obviously trying to play the part of the people's champion. After all, it is good publicity to be seen as the sole company standing up for consumers against greedy megacorporations. However, The Grocer's editor-in-chief Adam Leyland told the BBC that a separate battle is being waged, "I think [Tesco wants] suppliers to know that they're not going to roll over and accept everything that's pushed through."

Leyland also noted that this argument occurs within a shift in how negotiations between suppliers and retailers work. Historically, it has been retailers who push suppliers for changes. Now, though, suppliers across the board are threatening retailers with the possibility of stopping their shipments if retailers don't accept raised prices. As food price hikes have become a regular occurrence since the pandemic began, Piper Jaffray analyst Michael Lavery suggested to Barron's that Tesco's refusal to follow along could also be an indication of a tipping point of what stores will accept. 

There are two possible outcomes for Mars and Kraft Heinz: Either the companies lose business with the largest supermarket in the United Kingdom or they come to an agreement that doesn't meet their price plan but also indicates to other stores that the price hikes are negotiable. On the other hand, Tesco runs the risk of losing customers who want ketchup and pet food. A deal will probably be reached. It's just a question of who blinks first.