Wage rises hold key to Brexit price pressure

The spat between Tesco (Frankfurt: 852647 - news) and Unilever (NYSE: UL - news) over the stocking of popular brands like Marmite was not just about those two goliaths of the grocery sector.

It was a very rare glimpse for the public into the kind of arguments and negotiations that usually only go on behind the scenes between retailers like Tesco and suppliers like Unilever.

However, given these febrile times, it is possible we may see more such rows in the future.

Sterling has fallen by 17% against the US dollar since Britain voted to leave the EU and by 15% against the euro.

Since the beginning of the year, the falls are even sharper against the euro, amounting almost 19%. That directly feeds into higher production costs for companies like Unilever (Amsterdam: UZ8.AS - news) - both in ingredients for its food and in packaging for both its food and its household products.

In fact, the increases in price since the beginning of the year are probably greater, given the increase in the price of oil. Brent crude was trading at $37.28 a barrel as we rang in 2016, but now stands at $52.37, a rise of 40%.

Given the high proportion of packaging that comes from oil derivatives, particularly plastic, the increases the manufacturers are having to absorb are significant.

And even for a company like Unilever, with industry-leading profit margins of 14.1% in the latest reporting period, that is a big hit. Hence its demand to Tesco (Swiss: TSCO.SW - news) - and, it is believed, other supermarkets - for an across-the-board 10% increase in the prices at which it wholesales its goods to them.

Graeme Pitkethly, Unilever's chief financial officer, conceded as much when he pointed out this week that the increases Unilever had demanded from Tesco and other supermarkets were "substantially less" than the increased costs it has incurred.

Unilever, whose other brands include Persil washing powder, Magnum (BSE: MAGNUML.BO - news) ice cream and PG Tips tea, will not be the only one making such demands. It is thought that its closest rival, the US company Procter & Gamble (Swiss: PG-USD.SW - news) , whose brands include Pampers nappies, Gillette razors and Ariel washing powder, has been making similar demands to the likes of Sainsbury (Amsterdam: SJ6.AS - news) 's.

The grocers are in no mood to stomach these kind of price increases. Competition in their industry is ferocious with, for example, Tesco's profit margin during the first six months of the financial year coming in at just 1.9%.

Having spent two years trying to re-establish its credentials on price, Dave Lewis, Tesco's chief executive, was unlikely to accept such a hit on prices, particularly not when - in his view - the big food and drink manufacturers were slow to cut their prices when sterling was strong.

As someone who spent the first 27 years of his working life at Unilever, Mr Lewis was well-placed to know how much of a hit to its own margins the Anglo-Dutch consumer giant was likely to be able to accept, making him the worst possible opponent for Unilever in this particular poker game.

To take on Unilever so publicly, though, was a high-stakes move from Mr Lewis. He will have recalled better than most how, in 2009, Unilever had a similar row with Delhaize, a Belgian supermarket, during which it was quite prepared to see its products 'de-listed', in the jargon.

The row went on for several weeks and it became clear on this occasion that Unilever had the upper hand. Delhaize backed down when it became clear its customers were going elsewhere. But Mr Lewis will have calculated that, with Tesco accounting for 20% of Unilever's UK sales - and, as the UK accounts for 5% of Unilever's global sales, 1% of its total global sales - and Unilever accounting for less than 5% of Tesco's sales, Unilever needed Tesco more than Tesco needed Unilever .

However, just as the annual pay round at Ford set a template in years gone by for the rest of UK manufacturing, this dust-up between the UK's largest supermarket and one of its biggest suppliers of branded food and household goods is likely to be followed elsewhere.

And prices are going to start rising everywhere as a result of the fall in the pound: Mountain Warehouse, the outdoor retailer, said today it would see prices rise next year once its current hedges against shocks in the currency market fall away next February.

Sports Direct, which, as a value retailer, is likely to try and absorb any hit to margins caused by the falling pound, rather than pass them on to customers, has already issued a sterling-related profits warning.

Motorists organisations have noted that prices at the pump are starting to rise - something that would have happened anyway due to the recent rise in the oil price above $50 a barrel, but exacerbated for British customers by sterling's fall against the dollar, in which oil is priced.

It all means that, before long, inflation is going to be edging up closer to the Bank of England's central target of 2% and possibly beyond it.

The question is whether wages will rise with it. With (Other OTC: WWTH - news) employment in the UK currently standing at record levels, the labour market is tight, so in theory that should point to higher wages as well.

But, as we saw in the years following the financial crisis, workers may continue to value job security over pay increases.

If that happens, expect to see inflation outstripping wages before very long, leading to increased grumpiness among the general population - the kind of grumpiness, ironically, that fuelled the 'Leave' vote in the first place.

And that may be only the start of it. As the British Retail Consortium pointed out this week, if the UK ends up with the wrong sort of Brexit, the price of all kinds of imported goods, from womens clothes made in Bangladesh to wine from Chile (Stuttgart: 704599.SG - news) , could all rise sharply as tariffs are imposed on them. It's not a cheery prospect.