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Tesco vs Unilever – the thin end of the wedge

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  • A public dispute has erupted between Tesco and one of its key suppliers, Unilever, thanks to the pressure on pricing arising from a weaker pound.
  • Less than two weeks ago, in its interim results, Tesco told us it has witnessed a ‘very strong improvement in UK supplier satisfaction measure at 78 percent’, meaning almost 4 in 5 suppliers said they were satisfied with the experience of working with Tesco.
  • This public spat with Unilever highlights the pressure these relationships are likely to come under, as a weaker pound leads suppliers to try to push through price increases, while UK retailers try to keep consumer prices low, in what is an extremely competitive market.

Indeed only a few days ago the British Retail Consortium warned that Brexit could lead to higher prices on the high street. Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘This pricing spat is likely to be the thin end of the wedge when it comes to relationships between UK retailers and their suppliers, in light of the pressures now applied by weaker sterling. This kind of friction is an inevitable result of the unstoppable force of higher import costs hitting the immovable object of UK retail pricing. 

A lower pound helps exporters and has certainly given the UK stock market a leg up to record levels, but the dark side of a weaker currency is that it leads to more expensive imports, and hence rising inflation. That makes things look pretty ugly for retailers, who face an extremely competitive pricing environment, along with the challenge of adapting to changes in consumer behaviour driven by the digital revolution. 

It also doesn’t bode too well for consumers, who may soon face higher prices if retailers can’t entirely defray the higher costs of imports. If we do get rising inflation, that will also have a negative impact on cash savers, who will find the measly crumbs of interest they are currently picking up aren’t sufficient to protect them from price rises, and the buying power of their savings will actually start going backwards.’ Heart disease, cancers and respiratory diseases continue to drive up company healthcare costs. Average 2016 increase of 9.8 percent projected for medical costs in 40 countries; Cost of UK company medical plans set for 6.4 percent increases; Cancer claims prevalent across regions, respiratory diseases a problem in Asia; Future costs increases driven by stress, diet and metabolic risk, such as obesity. 

The cost for companies to provide medical care to staff continues to vastly outpace inflation in most major economies, according to new research by Mercer Marsh Benefits, a partnership between global professional services firms, Mercer and Marsh. In the UK, medical costs are set to increase 6.4 percent against an inflation rate of 0.8 percent. The research into company-provided employee healthcare plans also found that the costs were largely driven by claims related to employee lifestyle choices, such as smoking, a lack of exercise and a poor diet. 

The research Medical Trends Around the World, is based on a survey of 171 insurers across 49 countries (outside of the United States) and shows that, across 40 countries, the average per person increase in healthcare costs (Table 1) is, globally, almost triple the rate of inflation. Globally, 2015 saw an average 9.9 percent increase in medical costs, with 2016 forecast at 9.8 percent. Cost increases are being driven by non-communicable diseases; those that cannot be caught from other people but are frequently caused by the lifestyle choices of individuals. Average overall price inflation reduced from 3.9 percent to 3.5 percent over the same period. 

For Jacques Goulet, Mercer’s President of Retirement, Health and Benefits, the results yielded by this year’s survey underscore the importance of the role employers can play globally in controlling healthcare costs. “Stakeholders need to embrace disruption in health care. The window of opportunity is now for employer-led healthcare transformation – in the United States but also in other geographies where employers have not played a direct traditional role but where having a cost effective and high quality health care system is an enabler for business success.” 

According to Graham Pearce, Partner at Mercer, “We believe that, quite frankly, a medical cost inflation rate close to three times that of overall inflation is just not sustainable. It is therefore of the utmost importance that employers become much more serious about ‘bending the trend’ with a long-term healthcare strategy. This approach, however, will require some initial investment, strong executive support and rigorous analysis of what is, and is not, working for specific workforce populations. One core and fundamental strategy available to employers is to help employees live a healthier life, improve their productivity, reduce absences and increase engagement. Wellness programs, education of the impact of lifestyle choices and the redesign of medical insurance plans have all had an important role to play in better controlling long-term medical plan cost trends.”

The report asked insurers for information on the rising cost of medical care compared to inflation in each market as well as the types, costs and frequency of medical conditions that were claimed for by company employees in 2015. 

Europe
Europe was the region with the lowest levels of forecast medical inflation running at 7.8 percent in 2016 against a regional average rate of inflation of 2.5 percent. Russia, Lithuania and Ukraine are forecasting the highest expected increases in medical costs of 17.8 percent, 17.3 percent and 15 percent respectively. Lowest levels of forecast medical inflation are France (1.8 percent), Netherlands (2.5 percent) and Italy (2.9 percent). The UK is forecasting cost increases of 6.4 percent. In Europe, the top claims (based on total cost) in 2015 (Table 1) were cancer (53 percent), osteomuscular diseases (43 percent), and diseases of the circulatory system (41 percent). In addition to these claims, gastro-intestinal diseases were among some of the most frequent claims reported, and the report shows that stress-related health concerns are also growing in Europe. 

Asia
Across the region in 2016, medical costs are expected to increase by 11.5 percent against an average regional inflation rate of 2.1 percent. The highest cost increases are expected in Vietnam (19.3 percent), Malaysia (17.3 percent) and Indonesia (11.8 percent). Diseases of the circulatory system (59 percent), Cancer (52 percent) and respiratory conditions (46 percent) and gastro-intestinal diseases (46 percent) were the main cause of claims cost in 2015. It should be noted that in Asia, the role of governments in specific markets has greatly impacted on the costs. For example, recent legislation in Vietnam is anticipated to increase the cost of some public hospital services and products by up to 30 percent. 

The Americas (excl USA1)
Costs in Canada are expected to increase by 6 percent in 2016 against a background inflation rate of 1.3 percent. Across Latin America, medical inflation averages 12.8 percent compared to an average inflation rate of 8 percent. Cost increases are expected to be highest in Argentina (33.3 percent), followed by Brazil (18.6 percent) and Mexico (11 percent).  As with Europe, cancer was the most common cause of claims cost (82 percent) followed by diseases of the circulatory system (68 percent) and respiratory conditions (27 percent) and obstetrics and pregnancy (27 percent). In Latin America, employers and insurers are seeking to address health risk issues and changes in demographics that are impacted by continued general inflation and more recently by large exchange rate fluctuations. 

Insurers were also asked what greatest risks facing medical costs in the future. Globally insurers said that the two greatest risks were metabolic factors (high blood pressure, cholesterol) and dietary risk (obesity, physical inactivity). The third most cited risk varied by region. In Asia, environmental risk was a factor while smoking was most prevalent in Latin America and the Middle East and Africa. In Europe, emotional and mental health issues as cited as the third most serious risk facing medical plans. 

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