Porters, Tesco and Unilever

A photo of a trolley speeding through a supermarket
By Lecturer, Graham Foster

31 October 2016

The stand-off between Tesco and Unilever is generally seen as having been something of a PR coup for the troubled supermarket chain, but the underlying negotiating position of each firm is worth looking at in more detail.

The ‘Porter’s 5 Forces’ model, presented within TC Business Management, is a good analytical tool for this purpose. Developed by Harvard Business School’s Michael Porter, this model aims to analyse the competitive pressures that exist within a particular market.

If we want to analyse the relationship between Tesco and Unilever then we should concentrate on the ‘Power of Buyers’ and ‘Power of Suppliers’.

In this case, Tesco is a buyer and Unilever a supplier, although Tesco also has buyers (its retail customers) and Unilever has its own suppliers (providers of the resources required to make their products).

As a general strategic rule, competitive firms want to be in a situation where both their suppliers and their buyers have low power and, as a consequence, a weak negotiating position.

The story broke earlier this month that the falling value of the pound had, in Unilver’s view, caused a negative impact on the cost of its imported supplies and that Unilever wished to pass these cost increases on as higher wholesale prices to Tesco.

A bird of another feather

One of the main drivers of bargaining power is the size and concentration of buying / selling volume. This is why supermarkets, with huge, consolidated buying power, are generally seen as having the advantage over Britain’s highly fragmented dairy sector.

But Unilever is a different beast – a global firm for whom the UK, never mind one supermarket chain, makes up less than 5% of its total business.  

Another driver of supplier power can be differentiation: creating a product that stands out from the competition. This is another problem for the dairy industry, which is already under pressure.  

To many consumers, milk is simply a homogenised, white commodity with almost no discernible difference between the product of different suppliers. The same would be true if Unilever sold Generic Yeast-Extract Spread. Instead, they sell Marmite.

Consumers typically have low switching costs, lots of information and plenty of choice.

Love it or loathe it, Marmite has instant brand recognition and its biggest fans might have drifted away from shopping at Tesco if they ceased to stock it. That gives Unilever bargaining power that dairy farmers can only dream of.

And yet Unilever seems to have blinked first. Perhaps the reasons lie in the end customers; the British shopping public. Although seemingly ‘weak’ and very highly-fragmented, individual consumers typically have low switching costs, lots of information and plenty of choice.

They can turn against a supermarket quickly, as Tesco knows only too well. But they can also turn against big brands like Persil and Flora if they start thinking, fairly or perhaps unfairly, that their loyalty is being taken advantage of by a powerful global corporation.

In the final analysis, perhaps the customer is always right?

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