Examination of Witnesses (Questions 503
- 519)
MONDAY 9 MARCH 1998
MR STEVE
MURRELLS and MR
DAVID SAWDAY
Chairman
503. Thank you for coming, Mr Sawday and Mr
Murrells, representing Tesco. In your information to us you say
you have 35 stores and employ 11,000 people in Wales. Roughly
what is your turnover in Wales and how much of that relates to
meat?
(Mr Murrells) Good afternoon, Mr Chairman,
ladies and gentlemen. Can I first start by saying thank you very
much for inviting us here today. It might help to explain my responsibilities
in that I am responsible for the whole of fresh meat within Tesco
and David Sawday is head of our PR department responsible for
agricultural affairs. To answer your first question, Mr Chairman,
the fact that Sainsbury's have obviously divulged their figures
to you today will mean we will also do that. We do not have those
with us but we do not have a problem giving you that information
afterwards. With regards to Wales, we have 35 stores in the region;
we employ 11,000 people—850 actually alone at our Magor
distribution depot; 2,000 beef and lamb farmers serve us each
week; and the relationship we have with one of our suppliers has
enabled them to invest £25 million in a new abattoir and
packing facility which is due to be opened at Merthyr Tydfil at
the end of this year.
504. On the question of price spread, as I said
to Sainsbury's, "price spread" to the average person
means, basically, what is being paid for the cattle on the hoof
and what is being asked for in the stores in terms of little plastic
packets full of meat. That spread has increased and we had figures
from the MLC and the Co-op which suggested that the growth for
lamb has been from 37.8 per cent to 55 per cent and for beef the
growth was from 44 per cent to 54 per cent between December 1995
and December 1997. As I said before, to the average person that
might appear as though there was some profiteering taking place.
Perhaps you would like to take the opportunity of denying that
and explaining it.
(Mr Murrells) We do not normally refer
to "price spread" so indulge me if I try and explain
our position to you. The price the farmers gets at the market
place bears no resemblance to the price we actually pay. I think
it has already been alluded to this morning that there are substantial
costs coming into the middle part of the chain—costs such
as the rendering industry support going; removal of SBO and SRM;
the reduction in the fifth quarter. The price that Tesco pays
is the price negotiated at the end where overheads, costs, packaging
has been taken out. You should have a graph in front of you[4]
which may better illustrate what I am trying to go through with
you which is the one that is entitled "Relative changes of
Tesco average annual beef cost in retail prices". We have
done it on an indices basis obviously to protect the confidentiality
of the price we pay but I hope you can see that it illustrates
that, over the last three years with regards to beef, our retail
price has come down greater than the cost price that Tesco pays.
I cannot stress enough that the price that Tesco pays is not the
average market price.
505. Do you want to explain the other graph?
(Mr Murrells) If I could refer to that
later on with regards to producer clubs that would be useful.
506. You have commissioned a study by London
Economics, I understand—
(Mr Murrells) Yes.
507.—analysing your margins in relation
to the rest of the meat supply chain. Do you have any interim
results in that study?
(Mr Murrells) No. The trouble when you
make these announcements is that everybody wants the information
very quickly. London Economics are doing the study; they are making
sure they take the appropriate steps to get the information right
and, as our chief executive mentioned at the Oxford Farming Conference,
we will be sharing that with the National Farmers' Union in terms
of explaining where the profit line is going.
508. And in your memorandum you assure us that
you have not operated super normal profits from the livestock
industry and your chief executive went further in January I think
at the farming conference by claiming that you make little or
nothing on selling meat. Can you substantiate all this and does
it hold for lamb as well as beef?
(Mr Murrells) It referred to both beef
and lamb. London Economics will substantiate that and we await
the results of the study, as I say.
509. But do you hold by that statement, bearing
in mind you have not had the study results yet? Do you suspect
it is right?
(Mr Murrells) We do suspect that it is
right. We know our margins have been declining and we believe
that the study will justify that.
510. Do you think the study might show a difference
between beef and lamb?
(Mr Murrells) The trends are very similar.
Beef is in a unique position in that obviously the price is at
a low level because of customer confidence which is getting better
but the ability to see inflation coming through is restrictive.
The lamb industry, on the other hand, has different problems.
It can export but the strength of sterling is causing the lamb
producer immense problems.
Mr Livsey
511. Just a comment, Mr Murrells, on your graph
which, on the surface, looks extremely impressive but only shows,
in fact, a drop of 3 per cent in the cost per kg and even when
you take the retail price per kg it is a further 2 per cent so
it is only 6 per cent over 3 years you are showing.
(Mr Murrells) What the graph illustrates
is our position with regards to profiteering—ie, the gap
between what we are paying and what we are actually selling the
product for to customers. The drop, as the graph illustrates,
clearly shows that we are not profiteering. It is not there to
show what our gross margins are and the reference that our chief
executive made at the Oxford Farming Conference was at net margin
level, not gross, so obviously the costs that come into our business
are being taken into account.
Chairman
512. Does that graph not actually show you are
not taking the same kind of hit that the farmers are taking, in
that you have dropped 6 per cent and they have dropped 35/40 per
cent?
(Mr Murrells) As I have mentioned already,
the price that you see on there is the price our suppliers are
charging us for the product. I am sure we will get the opportunity
to talk to you about producer clubs later on which clearly illustrate
that the farmers belonging to the Tesco producer club are rewarded
financially better than going to the market place, where the average
prices are those you are quoting.
Mr Caton
513. It sounds and appears very laudable, this
study analysis you have commissioned London Economics to do, but
one has to suspect it is basically to get the farmers off your
back at this time. You have said we are not going to get the findings
in the very near future. Can I also quote from your chief executive
the actual whole sentence: "We make little or nothing on
selling meat. I looked at some recent figures and, after deducting
our costs from the small gross margin, we are lucky to break even".
Why can you not let us and the farming community see those figures
and make our own assessments now rather than wait several months?
(Mr Sawday) I think one of the problems
(and maybe this Committee demonstrates that) is the amount of
suspicion that has crept into the industry at present. The offer
of the study was exactly aimed at trying to diffuse that suspicion
and we want to make sure that is done properly by an independent
body so those figures can be judged as independent figures. They
will take some time to assemble because we want to get an all
industry figure and some of the figures we are not privy to because
they are locked up in our suppliers and, indeed, are on farms
and whatever. So, if we could ask you to be patient, they will
be available and open fairly soon in the early summer we hope,
and I think they will be fairly conclusive when they are available.
514. But the chief executive was confident enough
of those figures to state "we make little or nothing on selling
meat". I can see the independent study will be very helpful
to sustain your argument but why not let us have the figures now?
We will wait till August and see if what he says is actually right
but—
(Mr Sawday) I think it was a brave step
for us to offer to do the study to start with and I think we should
get some credit for that. I do not know that anybody else has
been so bold. We want to make sure that is right and independent.
The path we have chosen is to do it that way and I would just
ask you to have some patience.
515. You are not confident about your chief
executive's statement?
(Mr Sawday) No, we are very confident.
Mr Jones
516. Why can you not produce your figures?
(Mr Sawday) We are going to.
517. Are you prepared to produce them to the
Committee?
(Mr Sawday) The issue is that we have
to gather these figures together. Our chief executive made a statement
that, on his assessment, those are the figures. We now want to
do those absolutely accurately and independently—
Mr Jones: We understand you need to give evidence
to the independent inquiry but are you prepared to give us the
figures upon which your executive chief made that statement at
Oxford to this Committee? Yes or no?
Chairman
518. Bearing in mind you can, of course, give
them in confidence.
(Mr Sawday) We are happy to co-operate
with the Committee in any way and, if those are the figures you
would like us to submit in confidence, then we would be pleased
to do that.
Chairman: It would help to allay any suspicion
which we may or may not have.
Mr Paterson
519. Our suspicion is based on the fact that
cattle prices are down a minimum of 30 per cent. You are saying
your costs have only dropped by 6 per cent. Are you sure you are
not being ripped off by your suppliers in the middle?
(Mr Murrells) That is one of the things
the study will look at. It will look at the complete supply chain.
It is well accepted, though, that there are massive costs that
have come into the middle of the supply chain. Not to get into
too much detail of specifications, we are producing a quality
product for customers so there are obviously yield implications
and usage of raw material. We have already mentioned legislation
coming in; HAS (Hazard Analysis Scores) are a good examples. Abattoirs
are having to invest millions of pounds to get their factories
to the standards that customers would expect, and as you would
expect of the largest retailer in the country, we expect the people
serving Tesco to have the highest standards. Those are all compounding
costs coming into the centre part of the chain.
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