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-February 11, 2009


Supply Chain News: Grocery Pricing Battles Reach New Level, as European Chain Pulls Unilever Products off its Shelves


CPG Companies Seek to Fatten Margins as Costs Drop, While Grocery Chains Gird for Price Wars


By SCDigest Editorial Staff


Over the past few years, rising commodity and energy prices caused consistent price escalation in many consumer packaged goods and other products sold to consumers through grocery, mass merchants and other retail channels. The manufacturers, used to little leverage over the past many years due to the growing clout of large retail chains, blamed the rising price of oil (transportation, plastics), corn, wheat, and anything else they could cite as increasing underlying cost drivers.

Since about the start of the economic crisis, however, most of these underlying commodity costs have dropped, in many cases significantly or even spectacularly. The fall of oil from $147 a barrel to about $40 is the most prominent, but most other areas are also impacted – the price of corn is down by half, for example, to about $4.00 per bushel from $8.00 last summer.

But consumer packaged goods manufacturers have in general chosen to make a price retreat in the face of these lower costs, looking to fatten profit margins and goose bottom lines in the face of flat or lower demand resulting from the recession.

This price stance, however, has not gone over well with retailers, which argue that materials cost changes should lead to downward price changes now just as they caused increases in 2005-2008.

Those tensions boiled over in Europe this week, as Brussels-based Delhaize SA, which also owns the Food Lion chain in the US, pulled some 300 products of CPG giant Unilever that it believes are priced too high off of the shelves of its 775 stores in Belgium this week.

The stores stock some 500 Unilever products in total, but about 40% were not pulled because the prices were not deemed excessive.

According to a Wall Street Journal story, this pricing dispute involves more than just straight product pricing.

Delhaize says Unilever has been trying to force its full product assortment into its stores, including some that the grocer says it would prefer not to stock. If the supermarket doesn't buy the whole range of products, Delhaize says, Unilever has threatened to raise prices by an average of 30% for the remaining items, according to the WSJ.

The stand-off comes as there is data showing more consumers are switching to cheaper, private-label brands in many cases.

Meanwhile, some stock industry analysts have warned grocery chains may be under pressure as the economy causes a “price war” that will eat into revenues and profits, making the price negotiations with CPG vendors even more critical.

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