Kraft has a secret sauce in the UK grocery fight

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

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LONDON, July 4 (Reuters) – Cooked beans are a powerful weapon in the food fight. Supermarkets such as Britain’s Tesco (TSCO.L) are snapping up Kraft Heinz (KHC.O) favorites like ketchup and canned vegetables due to “unexplained” price hikes. The company’s $47 billion US profit margins make it a target for consumers and politicians trying to rein in the rising cost of living. But in reducing its options on offer, Tesco may ditch Amazon.com (AMZN.O) and discount competitors like Lidl and Aldi.

Along with Tesco, Kraft Heinz is a Goliath. Its market value is twice the market value of the leading UK grocer and its 20% operating margin is five times greater. Ken Murphy, CEO of Tesco, believes that such numbers leave the resource vulnerable. In the debate over who can bear more of the pain of inflation, there is little disagreement. To illustrate the point, Murphy stopped selling 16 Heinz products he thought were too expensive. Ahold Delhaize (AD.AS), the Amsterdam-listed owner of US chain Stop & Shop, made a similar move with Nestlé (NESN.S) KitKats and Nescafé earlier this year.

A grocer’s tough talk with customers can be fine. UK food inflation has risen to nearly 9%, and the Bank of England is warning of a possible recession. Supermarket chains can also fill in the gaps with their own “white” brands that are cheaper than giant peers like Kraft and Unilever (ULVR.L), Nestlé and Danone (DANO.PA). If Kraft refuses to back down, Tesco could end up selling more of its in-house products.

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The consumer giants still have reason to hold out. Nearly half of the merchandise sold by Tesco and its ilk is from big-name brands like Coca-Cola (KO.N) or Nestlé, Shore Capital analysts believe. The 27% UK market share for the supermarket chain is based on its ability to sell a variety at a cheap rate. If Kraft refuses to succumb and Tesco gets into similar disputes with other food giants, its shelves will quickly fill up with a few of its own cheap brands. This makes it look suspiciously like discount competitors Aldi and Lidl, whose shelves contain only 10%-15% of the more expensive global brands of Unilever, Kraft and the like. The German duo has already increased their combined market share by about 3 percentage points this year to 16%. This makes the Tesco price gesture more risky than it appears.

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

Tesco, which accounts for a quarter of Britain’s grocery market, has apologized for the lack of popular products such as Heinz baked beans and tomato ketchup, but said it was only protecting the interests of consumers. “We will not pass on unjustified price increases to our customers,” she said.

Kraft Heinz said it was struggling to contain rising costs for goods and production. A company spokesperson said it was working with Tesco to resolve the situation as quickly as possible.

In a similar row in 2016, Tesco stopped selling dozens of Unilever products, including its popular Marmite spread, after a drop in sterling in part to Brexit exacerbated tensions with suppliers.

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Editing by Ed Cropley and Oliver Taslik

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The opinions expressed are those of the author. They do not reflect the views of Reuters News Agency, which is committed under the principles of trust to impartiality, independence and freedom from bias.

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