Examination of Witnesses (Questions 740
- 765)
TUESDAY 7 APRIL 1998
MR GEOFFREY
MOLLOY, DR
TONY HEANEY,
MR ANDREW
PRESTON, MR
EDDIE HONEYWELL
and MR PETER
KIRBY
740. Does it come from abattoirs specifically
or does it come from meat wholesalers or both?
(Mr Preston) It comes from abattoirs.
We have an approval list of six producing plants, three of which
have their own abattoir and the other three are cutting houses.
Those cutting houses then have an approval list of slaughterhouses
that they can buy from.
741. Could you possibly tell the Welsh Affairs
Committee where these plants are or not?
(Mr Preston) We buy from Jarratts in
Bristol, from Kerry Foods in Chard, from Chitty's in Guildford,
from Midland Meat Packers in Rugby, from Great Harwood Foods in
Blackburn and from International Livestock which is part of Mather's
in Aberdeen.
Mr Livsey: Thank you very much indeed.
Mr Edwards
742. Can I move on to the issue of margins that
you were talking about a minute ago. You state that the profit
margins on burgers has suffered badly since BSE. Can you give
us some quantification of this?
(Mr Molloy) I do not know how commercially
sensitive the information is on behalf of our members, but I can
speak in fairly clear general terms and tell you that there have
been no price increases for a number of years. There have been
very specific reductions in prices. One major product from our
biggest member has been priced down at list price by ten per cent
over the last two years. There have been further price promotions
which have been on a consistent basis and again I am told that
the effect of that was the equivalent of a further five per cent
reduction. So we had a net reduction in price terms of 15 per
cent of a major product at a time when, whilst the beef price
has been coming down by perhaps 24 per cent, I am told there are
other ingredients in most meat products and they are all inflating,
so there will be no recovery of that part of the cost. The most
important factor affecting margins is the loss of volume whereby
we have, as has just been said, plants working at well below full
capacity, idle for substantial periods of times, with costs to
absorb, so that the net effect on trading margins has been very
substantially negative. I do not know whether I could specify
any further on that.
743. Does this affect other meat products?
(Mr Molloy) Yes. The same is true for
a cross-section of people whom I have talked to in the last week
or two. I do not think anybody has had a price increase in a meat
product for a number of years, not just the last two years but
in some cases five years. There are a lot of things that go into
the cost of a frozen product apart from the ingredients, there
is the freezing process itself, there is the packaging, there
is the transportation and storage costs and all of those things
have two years inflation of about seven or eight per cent. So
the loss of margin will depend to a degree on the relative advantage
of the meat content. In terms of the price reduction of meat,
you are looking at a 24/25 per cent reduction in meat prices but
inflation of seven or eight per cent in all other costs affecting
those products. It is not only in burgers where we have had increases
in product specification, I think beef MRM has gone and most other
MRM has probably gone. A lot of the edible offal from beef and
other animal carcasses will have gone out of the specification
in favour of more muscle meat. The volume reductions will be most
severe in the burgers and grills, but there has been some volume
reduction in other meat products as well with more overheads to
be absorbed. I think we can say with a fair degree of confidence
that nobody is making a great deal of money out of selling frozen
meat products at the moment, certainly less than we used to do.
744. Could I ask you to estimate what proportion
of the price of frozen meat products is value added by the frozen
food manufacturing sector?
(Mr Molloy) It will vary enormously depending
on the product itself. There will be more value added in terms
of labour cost and depreciation, the actual manufacturing processes
by which our members add value. There will be far more of that
in a very complex ready meal and especially more so at the top
end of the range of ready meals, the premium products, with a
very high degree of value added compared with, say, an economy
burger which will have a much lower degree of value added to the
basic raw material.
(Dr Heaney) One figure I do have in my
mind is that the raw material element of a burger amounts to less
than half the actual cost of selling that product on to the retail
trade. So it is quite a substantial additional input of value
or cost.
(Mr Honeywell) In our case I know the
general saying would be that volume is more important to us than
per cent margin. We have got to give up per cent margin and then
we will create volume because that brings the other costs down.
You are not just trying to get a bit more margin all the time,
you are trying to drive that volume through.
Mr Paterson
745. The MLC estimate there has been a ten per
cent increase in the price spread between producer and retail
prices for beef since 1995, and an 18 per cent increase for lamb.
We have had figures since we saw them which show the spread is
increasing, but the figures do not take account of the meat sold
in the manufacturing sector. Do you have any price spread data
for meat products?
(Mr Molloy) The straight answer to that
I am certain would have to be no because I do not think you can
make the same comparison that the MLC makes between straight cuts
of meat, joints and roasts and things that you would find in the
red meat counter in a supermarket compared with the carcass price
to the farmer because our products contain meat, but it is between
seven per cent and 98 per cent depending on the product. So it
would be very hard to estimate a change in the average spread
of the raw material carcass meat price to the end product price
over the counter. As we said, the nearest we could probably get
to that would be to say that whereas the average beef price has
reduced by about 24 per cent, there have been price decreases
on some of the high beef containing products of the order of 15
per cent. From that you could conclude that there is an increase
in the spread if beef is the one ingredient in all of that mix
that has reduced in price more than any other. If that is an indication
of an increase in spread, then there is, but it is not indicative
of the fact that that decrease in the beef price has been necessarily
compensated by the smaller decrease in the retail price given
all the other costs that go into the retail price as well.
746. Setting aside the other components of a
burger, the meat content would be 98 per cent, the market demand
for prime cuts is now above the level before the BSE crisis and
there must be a large volume of forequarter and flank beef looking
for a home somewhere. Surely that meat must have gone below the
25 per cent general drop which you have seen in the market for
steers.
(Mr Preston) No, the lowest we got to
was about 28 per cent, but we have maintained our suppliers over
the last two years. When we stopped using a mix of imported and
UK meat in March of 1996 we went straight back into the marketplace
to our five or six suppliers and told them to go and buy beef
and supply beef and we would sort the price out as we went through
the year in order to keep them and us going. Where there was a
dual market at the back end of 1996 we did not play in that dual
market, we played in the new production. There was this twin of
new production meat which met all the regulations. There was then
this underlying market of imported meats which were still coming
in and meat which had been recycled. If you are looking for the
bottom price of fore and flank, you could get meat at about £800
a tonne a year ago but it would never have met any specification
that we could have used, but it was there and it was available
and other companies did use it. The meat we then bought was roughly
at about 28 per cent of our pre-BSE price. We are now at about
23 per cent of our pre-BSE price.
747. But you dropped your prices. I think 10-15
per cent was quoted.
(Mr Preston) We had to get back into
the marketplace. We took nothing but hits through 1996 because
otherwise we would have had no business.
748. How much of the 13 per cent balance is
taken up with promotion, extra space?
(Mr Preston) I do not know that.
(Mr Molloy) More than all of it would
be taken up by the increase in the average factory costs due to
the reduction in volume because the net trading margin has reduced
very considerably. I am not sure.
749. That is because of mothballing plants.
(Mr Molloy) There has been a very significantly
reduced trading margin on those products. All I am saying is that
the two bits of the equation, the drop in the cost of meat by
24 per cent and the drop in the price of the finished product
by 15 per cent, do not represent a complete picture of the resultant
economics of production of that product.
750. Where did this glut of fore and shank meat
go? You are saying you could not buy it.
(Mr Preston) It has been used over the
last year and a half. Producers would have kept that meat as stock
and have worked their way through it, catering producers and whatever.
They have not been coming into the market. They are only now starting
to come back into the market because that stock has been finding
its way through. We are now starting to experience very slight
movement in beef prices. They are now starting to go up and this
is a combination of numbers which are there and of people coming
back into the market who have not been there for a long time.
751. Do you think we are over the hump on beef
prices? Do you think we are going to see a trend upwards from
now on?
(Mr Preston) You call it a hump; I do
not.
752. Getting over the glut.
(Mr Preston) The glut has gone.
753.It is the forequarter of beef that has been
holding the whole market down. We have seen a steady increase
in demand for the prime cuts, but it is the forequarter and the
shanks holding everything back. You are saying you could not use
it.
(Mr Preston) People do not use that kind
of meat in the winter. There are supermarket meat sales which
takes a proportion of it, but the biggest use for fore and flank
is by burger manufacturers from Easter through until the end of
September. It is not just us as frozen meat producers who use
it but the McDonald's, the Wimpy's and the Burger King's. That
meat is then soaked up during the summer. So suppliers, in terms
of the abattoirs, will hold that meat over the winter period anyway.
(Mr Kirby) It is worth remembering that
from BSE up until about six months ago the biggest user of forequarter
meat was intervention. The biggest user has not been put aside
at the moment, but that distorted the market price. Another big
factor is that from BSE onwards the specification was widened
for intervention, whereas before BSE only the top grade animals
went into intervention. It was decided to widen the band so a
bit more rubbish went in. I cannot put it any other way. There
was not quite the availability of meat. Although the price was
weak, the specification was not always there.
754. But your intention is that the extra cost
of specification, of mothballing plants, has more than covered
the 13 per cent price gap which we seem to have here.
(Mr Molloy) Yes.
755. And the quality spec also did not enable
you to produce a lot of ownership products to stimulate the market.
(Mr Molloy) Exactly.
(Mr Honeywell) We have had to do everything
we can to get customer confidence back and that has meant going
to nominated abattoirs, nominated cutting houses, trying to get
traceable into it and all the time that restricts where you can
buy from. If the demand is there for the primer cuts then people
are going to buy the offcuts very keenly. It will change at some
stage.
756. But you are now going to get squeezed the
other way. If demand picks up the stock has been cleared.
(Mr Honeywell) It is all about supply
and demand. If the demand is high then the price goes up. If the
demand is low then the price goes down.
(Dr Heaney) The BSE crisis for our industry
was perhaps one of the nightmare scenarios in many ways because
we had a market that was stone dead overnight. In trying to improve
the position of that market there was money being poured down
the drain on one side, i.e. in plant, people, stocks, you name
it. We were trying to generate strategies which would boost consumer
confidence and we have heard about some of those today. We were
reacting to the view of our immediate marketplace, which is our
customers, the retailers, who perhaps saw, as we did, that the
price would have some bearing on whether you could survive in
the market and there were some widely publicised examples of that
at the time. We somehow or other had to try and bring all of these
issues together and manage our business over the last three years
against all of these opposing pressures, but the net outcome,
as we have heard today, taking all the leverages that have come
into play, including beef price drops and increased costs and
so on, is a serious trading margin deficit. I think that is true
right across the trade.
757. Would it be possible to let us have a break
down in percentage terms of which is going on mothballing plants
at the cost of meeting the new regulations?
(Dr Heaney) I can certainly take that
request back and see what can be done about it.
Mr Edwards
758. Do you think all sectors have suffered
in this crisis or do you think the farmers have suffered even
more?
(Mr Molloy) We believe that our industry
probably suffered more than anybody else in the immediate aftermath
of the BSE crisis, hence our approach to the government. We made
very very strong approaches to the government. We contributed
to the Coopers & Lybrand major study on the effect of BSE
in 1996, as a result of which we had hoped for some compensation
for the industry. We took that up with ministers and we were waved
aside on grounds that they had already given so much compensation
to the livestock industry. We do not think the retailers suffered
as badly because they simply sent the stock back for our members
to destroy at our cost. So we thought we were squeezed between
the retailers on the one hand, who were suffering a loss of sales
but not actually paying the direct costs of the destruction of
the product which our members had to do, and the livestock industry
which was getting compensated at the time. That is how we viewed
the thing in 1996 in the immediate aftermath. It cost our industry
very dearly and some of our members their businesses and their
livelihoods. To understand how the relativities have moved in
the last year or so is a bit more difficult because we have been
very very slowly pulling back some of the sales that we had lost
and we have not got the stock losses to cover, whereas, of course,
the farming industry is now receiving a lower degree of compensation
for culling and a slaughter premium and they are affected directly
by the loss of the export business and the attractiveness of imports
because of the value of the pound. So one can understand the problems
that farmers have got right now. They are different in kind from
ours. It is very hard to answer that question directly.
759. If you could detach yourself from your
own industry, although given your expertise, what advice would
you give to the livestock producers in Wales at the moment?
(Mr Molloy) I do not think I am qualified
to say.
(Mr Kirby) Get the export market back
for beef. We all know the pound is overvalued and pork and lamb
is suffering by it.
760. That might be your advice to government,
which I was going to ask you anyway.
(Mr Molloy) I think the best advice would
be to press the government as hard as possible to do what the
government is undoubtedly doing, which is trying to lift the export
ban. The two big problems facing the livestock industry are the
export ban for sure and the value of the pound. They are very
difficult problems. The government is acting on one, but I am
not sure about the other one.
761. What about the lamb producers of Wales?
(Mr Kirby) The French market is so important.
It is purely down to the higher value of the currency on lamb.
It is not only the Welsh farmers but the English farmers who are
struggling badly and it is probably more the hill farmers than
lowland farmers.
Chairman
762. Can I wind up with a couple of questions
which we need clarification on. What proportion of frozen meat
products are now sold as manufacturers' own-brands?
(Mr Honeywell) On burgers it is about
40 per cent.
(Mr Molloy) Frozen red meat products
(from information from a booklet prepared by one of our members)
was 34 per cent last year. Specifically on burgers, 39.3 per cent.
763. It would be very useful if we could have
a copy of that booklet.
(Mr Molloy) Certainly.
764. Who would be making those "own-brands"?
(Mr Honeywell) The bulk of if comes from
the Irish manufacturers. It is a market we would very much like
to be in and we pitch for it and we try to be as competitive as
we can, but it always goes back to the Irish.
765. To what extent are the major multiples
influencing or dictating your prices and does that affect the
rates of return that you are experiencing?
(Dr Heaney) I think it would be wrong
to suggest to you that they did not have power and they are business
people, they use their negotiating power as best they see fit,
that is what they are there for. Therefore, these days it means
that for those of us who offer an independent branded product
into the marketplace what we offer has to be seen in consumer
terms to be a better buy, but it means that we have the dilemma
of having to continuously support and advertise both our company
brand and product brand, if indeed there is one. In our case there
is not any more. We have to continuously bring this to the notice
of our consumers and that costs a great deal of money. Therefore,
when we enter this negotiating marketplace we are bringing to
the marketplace a product which we believe, both in terms of its
recipe formulation, its development input, its manufacturing,
its hygiene, etcetera, etcetera, etcetera, is more appealing to
the consumer and consequently the consumer recognises a price
premium often between ourselves and the own-brands because the
retailers do not have to carry many of those additional costs.
So it is a tough negotiating market.
Chairman: I would like to thank you very much
indeed for coming this morning. It has been very useful. We have
got a lot of interesting information to help us with our inquiry.
Thank you all very much indeed.
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