Kraft has secret sauce in UK grocer food fight

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3 minute read

Bottles of Heinz Tomato Ketchup, a brand owned by The Kraft Heinz Company, are seen in a store in Manhattan, New York, U.S., November 11, 2021. REUTERS/Andrew Kelly

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LONDON, July 4 (Reuters Breakingviews) - Baked beans are a potent weapon in a food fight. Supermarkets like Britain’s Tesco (TSCO.L) are yanking Kraft Heinz (KHC.O) favourites like ketchup and canned vegetables over “unjustifiable” price hikes. The $47 billion U.S. company’s meatier margins make it a target for consumers and politicians trying to rein in soaring living costs. But in reducing its choices on offer, Tesco may be yielding ground to Amazon.com (AMZN.O) and cut-price rivals like Lidl and Aldi.

Alongside Tesco, Kraft Heinz is a goliath. Its market value is twice that of the UK’s leading grocer and its operating margin, at 20%, is five times as plump. Presumably Tesco Chief Executive Ken Murphy thinks such numbers make the supplier vulnerable. In a debate over who can stomach more of the pain from inflation, there’s little contest. To make the point, Murphy has stopped selling 16 Heinz products he thinks are too expensive. Ahold Delhaize (AD.AS), the Amsterdam-listed owner of U.S. chain Stop & Shop, pulled a similar move with Nestlé’s (NESN.S) KitKats and Nescafé earlier this year.

The grocers’ tough talk may go down well with customers. UK food inflation has soared to nearly 9%, and the Bank of England is warning of a potential recession. Supermarket chains can also fill the gaps with their own “white label” brands that are cheaper than the equivalents from giants like Kraft, Unilever (ULVR.L), Nestlé and Danone (DANO.PA). If Kraft refuses to back down, Tesco may end up selling more of its in-house produce.

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The consumer giants still have reason to hold out. Around half the goods Tesco and its ilk sell are from big-name brands like Coca-Cola (KO.N) or Nestlé, Shore Capital analysts reckon. The supermarket chain’s 27% UK market share is based on its ability to sell a wide variety cheaply. If Kraft refuses to yield and Tesco enters similar disputes with other food giants, its shelves will quickly fill with little but its own cheap brands. That makes it look suspiciously like discount rivals Aldi and Lidl, whose shelves contain only 10%-15% of pricier international brands from Unilever, Kraft and the like. The German duo have already increased their combined market share by nearly 3 percentage points this year to 16%. That makes Tesco’s price gesture riskier than it looks.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

U.S. food giant Kraft Heinz said on June 29 it had stopped supplying some products to leading UK supermarket group Tesco due to a dispute over price increases.

Tesco, which accounts for a quarter of Britain’s grocery market, apologised for the absence of popular products like Heinz baked beans and tomato ketchup but said it was merely protecting consumers’ interests. “We will not pass on unjustifiable price increases to our customers,” it said.

Kraft Heinz said it was struggling to contain rising commodity and production costs. The company was working with Tesco to resolve the situation as quickly as possible, a spokesperson said.

In a similar row in 2016, Tesco stopped selling dozens of Unilever products, including the popular yeast spread Marmite, after a plunge in the British pound sparked partly by Brexit exacerbated tensions with suppliers.

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Editing by Ed Cropley and Oliver Taslic

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