In the aftermath of the Brexit vote, in which citizens of the United Kingdom decided to leave the European Union, British currency lost nearly 15 percent of its value in the currency exchange market. As a result, products imported into the United Kingdom immediately grew more expensive for distributors and retailers to attain, though in some cases, these price increases have yet to affect local consumers.
The impacts are expanding though. In one notable example, the international consumer goods firm Unilever demanded that retailers pay higher prices—with increases of as much as 10 percent—to gain access to its brands, from Ben & Jerry’s ice cream to Dove soap to Marmite spread. But the U.K. grocery market features razor-thin margins already, leading several large retail chains to protest the demands. Tesco even began the process of removing Unilever products from its shelves before the parties came to an (undisclosed) agreement that averted the crisis. Sainsbury, another large grocer, has indicated that it is in talks with Unilever about the demanded price increases; the outcomes remain to be seen.
However, the request and its aftermath signal a clear consequence of Brexit. Prices on many discretionary imports, such as cars and electronic devices, already are higher. Unilever asserts that it cannot profitably supply its brands to retailers without charging them higher prices. In this sense, “Brexit-induced price inflation” appears inevitable. Yet price-sensitive consumers are unlikely to accept such moves quietly, such that the threats to retailers come from both upstream and downstream in the supply chain.
Discussion Question:
- How does the rise in the value of the U.S. dollar relative to the U.K. pound affect prices in the United Kingdom?
- How should retailers in the United Kingdom react to this situation?
Source: Saabira Chaudhuri, The Wall Street Journal, October 13, 2016.