Brand power protects drinks companies from echoing Unilever spat in UK - analyst
Beverage brands, such as Johnnie Walker, are stronger than those in other FMCG categories, such as home care
A brand's strength is likely to protect beverage companies from a Unilever-style stand-off with UK off-premise retailers, an analyst has told just-drinks.
Late yesterday, reports said the Unilever had locked horns with Tesco after the retailer resisted a demand from the FMCG group to introduce price increases, caused by the falling pound. Some Unilever products are now unavailable in Tesco's e-commerce channel, due to short supply.
However, Morningstar analyst Philip Gorham said today that a similar crisis is less likely to affect the big drinks suppliers in the UK, because the power of their brands gives them more leverage with retailers.
"The key difference between companies such as Diageo or Pernod Ricard and Unilever is pricing power, the power of the brands," Gorham said. "In personal care and food, we've seen a significant erosion in pricing power... Beverages tend to be more protected from this."
He also said that drinks brands have greater social status and are more likely to be given as gifts. "You're not going to give Tesco own-brand whisky out as a present," he said.
The analyst, however, said conversations between beverage companies and retailers on prices are likely to be happening in the wake of the Sterling fall, with supermarkets unwilling to compromise because of their "everyday low price" pledges.
"Negotiations are always tough," Gorham said. "There is a perpetual cycle of both sides trying to extract margins, so this sort of stuff [the Unilever argument] happens all the time. It's just rare that it goes public in this way."
Speaking about brewers, Bernstein's Trevor Stirling said price conversations with big retailers are likely. However, because companies hedge input costs a year in advance, talks would happen later and not immediately, as with Unilever.
"Sooner or later," Stirling added, "most companies will have to have those sorts of discussions with UK retailers."
Meanwhile, Miles Beale, chief executive of the Wine and Spirits Trade Association, said: "We should be under no illusions that wine prices are likely to increase. The fall in Sterling as a result of the Brexit vote is of grave concern to the wine industry. Ninety-nine percent of all wine consumed in the UK is imported, meaning that the currency fluctuation has already been felt."
While empty shelves caused by arguments between suppliers and retailers are rare, it has happened in the beverage industry before. In 2009, US retailer Costco withdrew The Coca-Cola Co's drinks from sale after a pricing dispute. Costco also took the unusual step of erecting signs in stores to explain its reasons to consumers. Coca-Cola products returned to Costco shelves a month later.
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