Tesco boss in 'parallel universe' over price rises, UK farmers' chief says

LONDON (Reuters) - Britain's farming union has accused the boss of Tesco, the country's biggest supermarket, of living in a "parallel universe" after he said food companies may be using inflation as an excuse to hike prices more than necessary.

While supermarket chains look to hold down prices to preserve market share, food companies and farmers are facing surging costs they need to pass on through higher prices.

Official inflation data for December published last week showed food prices 16.8% higher than a year earlier, the sharpest increase since September 1977, led by eggs, milk and cheese.

Asked by BBC television on Sunday if food producers were taking advantage of the poorest in society, Tesco Chairman John Allan said it was "entirely possible".

He said the retailer, which has a 27.5% share of Britain's grocery market, was trying "very hard" to challenge price hikes it thinks are illegitimate and had "fallen out" with "a number of suppliers".

Minette Batters, president of Britain's National Farmers' Union, said she was "slightly baffled" by Allan's comments.

"It was almost like he was living in a parallel universe," she told BBC radio on Monday, noting farmers and growers were facing unprecedented hikes in production costs.

"We're seeing a wholesale gas price that's 650% higher than it was back in 2019 and the cost inflation on the back of that has been unprecedented and it has dwarfed any price increases to date," she said.

Allan said there had been "very robust discussions" between Tesco and a number of suppliers, and referenced last year's spat with U.S. food giant Kraft Heinz.

"We didn't have Heinz soup and Heinz tomato ketchup for a spell last summer when they tried to put through a large price increase at that stage. That was eventually settled," he said.

"We've fallen out with other suppliers. So we do try very hard I think to challenge cost increases."

Tesco also had a pricing dispute with Mars last year.

Karen Betts, chief executive of the Food and Drink Federation, said producers' prices were inevitably impacted by rises in the cost of energy, ingredients, transport, packaging and labour.

"If they can't pass some of these cost increases on, they'll go out of business," Betts told BBC Radio, noting that most supermarkets are asking suppliers to open their books to justify "line by line" where the cost increases are coming in.

TENSION

While inflation has added tension to negotiations, Tesco's supplier relationships have been transformed since a 2014 accounting scandal, with the independently run supplier Advantage Report often ranking it as the best supermarket group to deal with.

This month, when Tesco reported better-than-expected Christmas trading, CEO Ken Murphy said the group had raised prices less than the overall market.

"We are battling (with suppliers) to keep prices down for customers and it's an ongoing struggle but we're doing our best," he told reporters.

"It is a constant to and fro but there's a fair bit of partnership involved as well," he said, pointing to its "price lock" scheme that will maintain prices on over 1,000 branded and own-brand products until Easter.

"Our suppliers recognise that they also need to protect volume...they want to protect their market share, they want to work with us to do so," he said.

Murphy said Tesco was in a constant dialogue with suppliers.

"We're just trying to make sure that only the justifiable price increases come through and that everything else is mitigated or held back."

Shares in Tesco were up 0.2% in early afternoon trading, paring losses over the last year to 14%.

(Reporting by James Davey; editing by Kirsten Donovan and Jason Neely)