Examination of Witnesses (Questions 433
- 459)
MONDAY 9 MARCH 1998
MR TONY
SULLIVAN AND
MR MIKE
WILDMAN
Chairman
433. Good morning, Mr Wildman and Mr Sullivan.
I know you are aware of what we are looking into today. The form
is that I will start off with the questions and my colleagues
will then catch my eye and chip in. I have said to other people
in your circumstances as retailers that, if there is any confidential
information of a commercial nature that you wish to divulge to
the Committee, then we can take it in private and not divulge
it; for the purposes of our deliberations it may be useful. Your
memorandum tells us 8 of your 390 supermarkets are in Wales. Are
any of your other retail businesses in Wales?
(Mr Sullivan) Eight stores.
434. Do you have any other retail outlets in
Wales, apart from those stores?
(Mr Sullivan) Just the supermarkets and
a few Homebases but in terms of food retailing it is the eight
supermarkets.
435. Roughly what is your turnover in Wales
and how much of it is meat?
(Mr Sullivan) Within the Welsh stores,
£240 million comes from those eight stores and, within meat,
approximately £4 million comes from beef and lamb. In addition,
a further £9 million comes from the lamb we sell in our serve-over
counters throughout the group which is 192 stores, so £13
million in total.
436. How many people do you employ, roughly,
in Wales?
(Mr Sullivan) In Wales, within the eight
stores, approximately 3,000 people and then indirectly through
our suppliers, the main one being Oriel Jones—he employs
just over 300 people.
437. In your evidence to us you acknowledge
the concern amongst Welsh farmers about the disparity between
carcass prices for beef and the ultimate price charged by retailers.
It is clear that retail and farm gate price spreads have increased
since 1995 and we have had evidence to that effect from the MLC.
Perhaps you could give us your definition of what a price spread
is, and could you give us some indication of how your profit margin
for beef has changed within that period?
(Mr Sullivan) What we have done to try
and help illustrate this for everyone's benefit is the simple
drawing that we have provided you with to try and show the aspect
of live weight versus dead versus boned weight in terms of the
amount of product that is left to sell after animal has been bought[1].
It is true to say clearly that farmer prices have fallen. Our
own cost prices from our suppliers, from our meat packers, have
risen mainly due to higher inspection costs that have been put
into place in order to protect food safety and through the loss
of fifth quarter revenues that have previously been there, plus
other aspects such as improving traceability and farm assurance.
Those aspect have all added to a cost price increase to Sainsbury.
Our retail prices on beef have fallen marginally by approximately
5 per cent over that period of time, and we have, in the mean
time, supported beef with a much heavier promotional programme
than we might otherwise have done in order to try and keep customer
confidence in the retailing and consumption of beef. The most
recent example of that was the British beef promotion that Sainsbury's
did in January to try and help the farming industry and also to
get the message across to customers about the quality and safety
of British beef.
438. So, putting it simply, a price spread is
the difference between what you pay at the cattle market, shall
we say, or the price that is paid at the market, and the price
on the shelf? If a price spread increases, most people out there
would say, or could say, that is an increase in profit to yourself.
Can you explain to them why that is not the case?
(Mr Sullivan) The spread, yes, from the
revenue that the livestock animal will create versus the spread
that we would sell a particular cut on retail for has increased
but the cost price which we pay the packer in the first place
has also increased because the operator costs of creating a product
ready for sale to the end consumer have gone up. As I say, those
issues are to do with regulating the abattoir for food safety
purposes, to do with traceability and to do with higher animal
welfare costs, and it is that angle there which needs to be considered
in order to show the difference between the two spreads.
439. So you are saying that the evidence we
had from the MLC suggesting that the supermarkets were keeping
up their margins and that, in fact, it was the processors that
were taking the brunt of the costs and the farmers also taking
their share of the costs but the supermarkets were not, is not
correct?
(Mr Sullivan) No. The farmers are taking
a very severe hit, as we all know. The on-costs from the processors
have increased and our retails have fallen marginally, so our
margins year-on-year are down. The cost of production is higher
than it was.
440. So you are effectively saying that your
margins have fallen as well. You are taking your share of the
pain, shall I say?
(Mr Sullivan) Our gross margins have
fallen and what we have done to increase confidence in beef and
to get the volumes of beef back is to do more and more in-store
promotion activity to try and get customers back into regular
weekly buying of beef. The British beef promotion certainly showed
that to be true.
441. So you are spending money on promotion
but you cannot drop your prices to increase sale of beef, to increase
the possibility of people buying beef?
(Mr Sullivan) Well, the promotions do
that. They drop the price but—
442. On a one-off basis?
(Mr Sullivan)—not on a very regular
basis.
443. Asking you some specific questions, you
say your suppliers' costs have risen by a £100 per animal
and the price at which they sell beef to you has risen by 12 per
cent. Can you tell us how much of the suppliers' additional costs
are passed on to you—ie what proportion of the £100
is met by the 12 per cent price increase?
(Mr Wildman) Do you want details on where
the extra costs have come from? Would that make it easier?
444. Partly that and how much is passed on to
you? As you said, you are actually paying more for your meat.
Can you give us a figure?
(Mr Sullivan) Yes, certainly.
(Mr Wildman) We introduced nine years
ago a farm assurance scheme, the Sainsbury's Partnership in Livestock
Scheme, across our supply base. There is a cost associated with
that and we have built that up over the last nine years and we
have over 9,000 farm members in that scheme now. There is a cost
for that. There is an added cost at the abattoirs now through
the new regulations which have been brought in in terms of the
specified risk material which has to be removed. The abattoir
owners were able to recoup some of that money in the past but
they are not able to do that now so there is an added cost there.
In terms of our own meat specification we have a blueprint, as
we call it, which enables us to ensure that we can create the
quality of meat our customers are looking for by holding the meat
for much longer on the bone and maturing it. So there is an added
cost included there which obviously is borne, in the first instance,
by the processor and then when we produce our meat for retail
packs, because of the very strict specification we employ to provide
our customers with the quality of meat they are looking for, there
is added cost there so we are continually striving to improve
the quality of the meat and the safety of the meat we sell our
customers so therefore the cost will increase also, on an on-going
basis.
445. What I am trying to establish is just what
proportion of their extra costs are passed on to you and therefore,
presumably, passed on to the consumer? Do you have any idea of
that?
(Mr Wildman) I do not think we can give
you the actual percentage other than to say that that added cost
is put into the wholesale cost that we pay to the supplier.
446. Can you explain Annex 2 to us? What are
Periods 10 and 11?
(Mr Sullivan) They are simply Sainsbury's
four weekly accounting periods and that was just a reflection
to show you what the current comparisons year-on-year of cost
prices were doing for beef on a per kilo basis.
447. Would they be quarters or what?
(Mr Sullivan) Four weekly periods.
448. So what part of the year?
(Mr Sullivan) October/November.
Mr Paterson
449. You say "the price at which we sell
beef has fallen by 5 per cent year on year" (paragraph 4.6).
Can you expand on this?
(Mr Sullivan) If you take retails across
all the prime cuts and the forequarter cuts and compare them,
and take the mix between the trade with the prime cuts going up
in volume and the forequarter going down, when you average that
all out, they have fallen by approximately 5 per cent over that
year.
450. What is the breakdown between prime cuts
and forequarter?
(Mr Sullivan) I do not have that specific
figure but between the likes of topside joints and steaks and
forequarter, that split has changed away from the forequarter
and moved more into prime meats which carry a higher price per
kilo than the forequarter used to. What we have been trying to
do, as everyone has, I think is give confidence back in all aspects
of the meat because there is no point in just allowing the prime
meats to sell; you have to also find and develop markets for the
forequarter.
451. Have you been running promotions on forequarter
meat?
(Mr Sullivan) Yes. All of it has been
having promotions on a regular basis, and forequarter meat has
been promoted to try and get customers back in. Added value is
a very good way—putting more mince in for the same money
to try and push volume and thereby reduce the overall cost matrix
for the cattle.
452. What sells forequarter meat? Price or quality?
(Mr Sullivan) Well, they are both a function
of each other, I think. Our quality we strive hard to make sure
is of a very good standard. All our mince is British and we have
a competitive price in the market place. There are choices for
customers; we sell under the Sainsbury economy brand—a lower
specification or a higher fat content basically of mince at the
low retail per kilo, and then we have the high, extra lean and
super lean minces with very low fat contents so you offer the
customer the choice, which they respond well to.
453. Can I put the following to you: if cattle
prices have dropped 30 per cent, you say in Annex 2 that your
cost has gone up by 12 per cent; you also had to take a 5 per
cent drop in price. That would indicate to me that you are still
well in pocket on beef sales.
(Mr Sullivan) All I can do is repeat
to you that our gross margins are lower year-on-year. Our cost
prices are higher; I believe our supplier cost prices are higher;
everybody is having to pay more money and receiving less revenue
for the cost of production for beef. We have a shrinking market
which has now been stabilised and we are all gradually trying
to increase that. We have a lower cattle kill going through the
abattoirs which, again, is a further cost in terms of a lower
contribution to fixed costs at the abattoirs, and it is in everyone's
interest through the partnership scheme, where we work with processors
and farmers, to pass best practice, pass what the customer is
looking for in terms of best cuts and leanness, to ensure that
we get as efficient a process as possible for the marketing of
beef. We believe we are doing that quite successfully but we have
still a long way to go to get ourselves back to the levels that
we all used to be at.
454. But on the figures you have given us, there
is still a difference. We acknowledge there are increased costs
and you have had to drop the price of some cuts, but there has
still been a massive drop in price to the farmer of 30 per cent
and someone is making a margin. Is it you or is it not?
(Mr Sullivan) It is not us, as I have
said before. Our gross margin has declined; we still obviously
make a gross margin but I do not think the suppliers are seeing
increases to their margin either. So it is complicated—otherwise
we would not be talking about it now—set of parameters where
we have a lower farm gate price, higher cost prices from the supplier,
and our retails to the customer. Really that trend of a lower
margin for us and a higher cost price from the supplier is all
I can repeat to you.
455. So who is making the money? It is not the
farmer, it is not you—
(Mr Sullivan) I do not believe anybody
is making extra money.
Mr Livsey
456. Mr Chairman, it will be very hard for people
here to understand that—in fact, very difficult indeed.
Could I have a succinct short answer to this, please? Are you
on the top end of the market or are you dealing only with quality
product? In other words, only high notes for beef?
(Mr Sullivan) No, we sell forequarter
as well. As I was saying earlier, we buy in carcass form. We have
a very large market for forequarter in the form of mince and burgers
but all of the product we buy has a high quality specification
attached to it which we achieve best through our partnership and
livestock scheme with our suppliers and farmers. We have many
a successful meeting with those farmers as to the best way to
run our joint businesses.
457. Thank you for that answer. I do not regard
it as a succinct one but I wonder whether you are in a situation
where, in fact, we are talking about butchers type meat, or are
we talking about manufactured meat as well, that goes into packs
mixed in with other foods?
(Mr Sullivan) My responsibility is for
fresh meat.
458. The actual fresh meat itself?
(Mr Sullivan) We buy it from an abattoir,
sell in pre-packed form and serve-over counters.
459. And it is only fresh meat we are discussing
here?
(Mr Sullivan) Yes.
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