When I read the news today that Tesco (LSE: TSCO) has removed a whole raft of Unilever (LSE: ULVR) products from its online shelves to protect against increased wholesale prices, my first reaction was one of incredulity — I couldn’t quite understand what it was trying to achieve.
With the pound having slumped against the rest of the world’s currencies since the Brexit vote, imported goods (including products that use imported ingredients) simply have to rise in price in pounds — or does Tesco really expect Unilever to pay the difference for us and subsidise our shopping?
I do wonder if this is mainly a publicity stunt, but if it is, I think it’s one that could backfire badly if it’s not resolved pretty quickly. I mean, if a store stops stocking your favourite items, what are you going to do? I’ll tell you what I’d do — I’d go get them somewhere else, and I think most other people would too.
Fickle shoppers
I do a lot of online grocery shopping, and I use both Tesco and Asda — and what I tend to do is just reuse the one that served me well the previous time. So if Tesco has no Marmite or Hellmann’s, I’ll just get my shopping from Asda — and probably start there next time.
As the UK’s biggest seller of groceries by far, Tesco perhaps has some clout with Unilever here — and Unilever has said it’s working towards a quick solution. But Unilever is an international company and only around a quarter of 2015’s turnover came from the whole of Europe. On that scale, Tesco’s large share of what is actually a relatively small market looks a bit less impressive.
The timing of Tesco’s move is surely not accidental either, coinciding as it does with a Q3 update from Unilever that revealed a market-beating 4.2% rise in underlying sales during the first nine months of the year, with prices up 2.8%. And while we might have expected that upbeat news to nudge Unilever shares up a bit, the fight with Tesco has instead helped push then down by 3.6% at the time of writing, to 3,591p.
But there’s another edge to the sword, and it’s sliced 2.1% off Tesco shares too, sending them down to 197p — although they’re still riding relatively high after last Wednesday’s interim results showed an actual increase in like-for-like sales.
Which is better?
Which of these two would I buy? Well, Tesco looks like its recovery effort is finally starting to bear fruit, but I don’t think the market has yet fully adjusted to the razor-thin margins that go with today’s revolutionised groceries market. And I see a P/E of more than 20 based on forecasts as far out as 2018 as being just too much, especially with only tiny dividends expected.
But then at Unilever, whose shares have been boosted by a flight to safety triggered by the Brexit vote, I don’t see a December 2017 P/E of 22 as really any more exciting.
If I had to choose, I think I’d plump for the long-term quality and global reach of Unilever, and I’d shun the massive uncertainty that still clouds Tesco’s mid-term future. Meanwhile Tesco, stop being so silly.
