Examination of Witnesses (Questions 520
- 539)
MONDAY 9 MARCH 1998
MR STEVE
MURRELLS and MR
DAVID SAWDAY
520. Are you confident they are 24 per cent?
(Mr Murrells) I am confident they are
substantial. The study will actually decide how far and at what
percentage they are actually at.
Chairman
521. Specifically, you must know exactly what
price you are paying your direct supplying farmers?
(Mr Murrells) Yes.
522. Can you give me an indication of what percentage
cut they have taken in their income?
(Mr Murrells) The majority of our abattoirs
and packers work on a two per cent return which I would suggest
is extremely tight so if farmers are obviously losing a lot of
money—which they are—and the people that service the
manufacturers are operating at a 2 per cent level, and we are
saying our margins are declining, I think it is fairly well accepted
that a study is needed because nobody is making the return that
they need to.
523. You said you have farmers who supply you
directly—presumably through the chain. Do you deal directly
with those farmers?
(Mr Murrells) If you refer to the second
graph, which may help you, you will actually see the return that
the producer club farmers actually get by serving Tesco direct.
The line at the bottom is the average market price which will
no doubt be the figures that the Meat and Livestock Commission
have quoted to you. The line at the top is the average producer
club price. That is purely at one stage in the chain. That is
at carcass position. People in our clubs—and there are over
4,000 beef farmers to date—enjoy premiums and bonuses on
top of that which allows a number of them to benefit better than
those not in our clubs.
524. If I am interpreting your graph correctly,
it appears to me that the Tesco club farmers are taking the same
cut but on a higher base figure. Would that be correct?
(Mr Murrells) Sorry. I do not exactly
understand the question.
525. In a sense they are following the average
price but they are getting more. As a mere scientist, it appears
to be that that top graph is following the bottom graph so they
are getting a better price but still taking a percentage cut which
is roughly the same as the average prices drop.
(Mr Murrells) I think you have highlighted
an issue which does concern us which is that, although the bonuses
and the premiums we give our club members are substantial, it
still needs refining and developing to try and reward the people
that actually supply us better than that which the market is actually
doing.
526. But it also appears to me, as somebody
that has read graphs, that there is roughly a 10 per cent drop
there. You have taken a 6 per cent cut and they are taking a 10
per cent cut. Is that being a bit too simplistic?
(Mr Murrells) Being a scientist you would
obviously want to make it simple. I have tried to make the charts
as simple as I possibly can. The position that we have with our
club members is that they enjoy a better return than those that
are not in our club. We have a long way to go in taking the core
part of quality stock into Tesco which rewards those farmers that
do it for us. I accept that actually we have to try and develop
that gap between the market price and serving Tesco.
527. I am pleased to hear that. So, basically
what I am saying is correct—they are taking a worse hit
than you are, albeit by 4 per cent, on the basis that you are
using there?
(Mr Murrells) At that part of the chain
that could be argued. At the end part of the chain, where we end
up paying for the product, we are equally taking the hit.
Chairman: I am not sure I follow that.
Ms Jackie Lawrence
528. My question follows on directly from yours,
Mr Chairman. You say in 5c that basically the suppliers—presumably
they are your club suppliers—that you contracted with directly
get a 5 per cent premium on livestock market price. Is that right?
(Mr Murrells) That premium varies up
and down as the year goes on at different times.
529. We know from other evidence we have received
that the supermarket is actually responsible for retailing 70
per cent of the meat in the UK so you have a dominant part of
that market. What concerns me is all of you say that you are entering
more and more into these direct arrangements between the producer
and yourselves excluding the livestock market, but it seems to
me that the price you are paying is based on livestock market
prices. You are demanding the top quality meats from your suppliers
but the price which you are paying is based on that other 30 per
cent or whatever which is not typical of the best quality meat.
So, in effect, it appears to me—and please tell me if I
am wrong—that this is a case of the tail waging the dog.
Because of your dominant place in the market, you are effectively
governing the price you pay for this meat. Am I right?
(Mr Murrells) I think it is a very relevant
question. It is one of those things which are seriously looking
at. We are, through our clubs, wanting to set in place a programme
through either Scottish Agricultural College or Newcastle University
that looks at production costs on farm. So that, at some point,
if we are in a position to understand the varying production costs
of the farms that serve us, we can then build in a matrix which
is based on true costs rather than a market that goes up and down
on supply and demand.
530. So effectively, there do appear to be two
separate and distinctive supply chains in this process?
(Mr Murrells) As far as Tesco is concerned,
we are trying to develop partnerships, trying to react to customer
confidence in beef and we formed the producer clubs to do that.
It is our belief that those 4,500 beef farmers have a direct voice
into Tesco—in other words can influence what we do through
their own committees—and will enjoy better returns than
the rest of the market place. There is the argument which you
have quite rightly put which we have recognised which is why we
are now looking at forming production contract pricing to resolve
the issue. It is not about "them and us" because the
meat to Tesco is a key store reason why people shop so there is
no reason for us to ruin the beef industry. We have to promote
and progress the beef industry and we believe we are taking a
responsible place in doing that.
531. One final point on that: you do say in
5c that last year you sold 30 per cent more fresh beef in volume
terms than the previous year. If that is the case and demand has
increased to the extent you have sold 30 per cent more, why do
you feel that farmers have in some instances seen a 60 per cent
drop in beef prices in the livestock markets from say £1.40
a kilo down to 80 pence odd per kilo? The two things seem to be
incompatible.
(Mr Murrells) We have enjoyed a growth
in volume terms in our business because one of the questions asked
by the Meat and Livestock Commission at the point of the BSE announcement
was that they asked customers whether they were prepared to pay
for their traceability. Customers responded and said "We
actually thought we were already paying for it", so the producer
club network was born. It is our way of meeting customer needs
in terms of health and safety, animal welfare and delivering traceability.
We believe it is those issues and the value for money factor—when
customers come to our stores we believe they get a superb offer
on meat—that have allowed us to grow our share of the market.
We are in a difficult position because, on the one hand, we have
customers who want great value for money and lower meat prices
and, on the other hand, we have a great responsibility to the
agricultural industry with farmers who want more money and that
is a difficult balance for us and one we are continually trying
to work to.
Mr Caton
532. I was interested in your comment just now
that you as Tesco's were equally taking the hit. I have to say
that creates a picture in my mind of a ladder leaning against
the wall; the foot of that ladder in the water. You are as the
retailer, in this case Tesco's, saying "We all need to take
a step down" and the abattoirs in the middle prepared to
take a step down and then the farmer at the bottom, probably taking
two steps down, with his or her head actually disappearing under
the water. If you are serious about a long term partnership with
the farming community, do you not think you should be doing more
to make sure those heads do not disappear under the water?
(Mr Murrells) Thank you for the question.
I think it is accepted that as a retailer that stocks the range
of products that we stock we are not totally dependent on the
profit we make out of our meat business so the rest of the business
allows us to continue to develop at the expense of the drop in
income that we see through our meat side. We believe we are working
harder than anybody to try and reward people that are working
closely with Tesco. The other important thing is that the producer
club concept is not about "Give us everything you have".
It is about "You decide, Mr Farmer, how much stock you want
to put into the club." If Tesco's scheme does not work for
you, then you will choose not to serve our club. If Tesco's are
rewarding in that return, then people will want to put more stock
into us and to have 4,500 farmers directly sourcing us in eighteen
months I think is a good example of how we are actually working
very hard with progressive beef farmers in this country.
Mr Livsey
533. Could you tell us the annual turnover of
the Tesco operation in the UK?
(Mr Murrells) As a company or as a meat
business?
534. As a company.
(Mr Murrells) The company figures I think
were about £15 billion.
535. Pounds?
(Mr Murrells) Yes, as a group.
536. What percentage of the UK meat market do
you actually have in your sales?
(Mr Murrells) I believe AGB currently
holds us at about 20 per cent of the red meat market.
537. This may be an unfair question but you
may be able to answer it off the top of your head: could you give
us some information as to what proportion of the turnover that
you mentioned that is, ie, what is the turnover and value of the
meat in pounds?
(Mr Murrells) When I quote the figures
that is obviously the retail market. I would suggest between £500-700
million is the turnover of our red meat business.
538. Thank you. Could you tell us who London
Economics are?
(Mr Sawday) They are an independent research
organisation that carries out commissioned research in the field
of economics.
539. They are not allied to any university or
possibly the London School of Economics?
(Mr Sawday) No. They are a separate organisation.
Often confused but different.
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