Examination of witness (Questions 700
- 719)
TUESDAY 23 NOVEMBER 1999
RT HON
STEPHEN BYERS
700. We are second-guessing what will happen
with the deconstruction of Milk Marque into three elements, and
whether indeed those three elements will move into the processing
sector. The small processing activity that Milk Marque was involved
in is currently up for grabs and has no parent in this process.
We cannot tell whether that will be the outcome. One may hope
that it may be and that your remarks will be interpreted as being
broadly encouraging of that possibility.
(Mr Byers) In the conversations that those in the
industry have had with me I think they have indicated that they
are keen to get into processing. As you say, it will be their
decision.
701. Do you have any difficulty with the major
European cooperatives entering into the UK market place, bearing
in mind their dominance in their own markets, for example, MD
Foods, who have acquired processing activity in this country and
are major competitors here?
(Mr Byers) I do not have a problem. I happen to believe
that competitive markets will benefit the consumer. They also
benefit the industry. The only way to build a strong industry
is through competition.
702. Yet that particular company has an overwhelming
dominance in its home market and, therefore, is operating from
a position where it could easily "loss lead" in our
market to achieve greater strength here.
(Mr Byers) The issue there is whether someone with
a dominant market position is abusing that in their own country.
That is obviously a matter for the competition authorities. We
have certain powers in general trade arrangements to do with anti-dumping
provisions which may be considered. Someone can have a dominant
market position and not abuse it, and that is not a problem in
competition terms. There is a problem when a dominant market position
is abused.
703. To clarify that, using a hypothetical example,
if a number of major continental cooperatives—it could be
MD Foods—were to take a competitive stance in this country
deliberately designed to take out some UK competitors and they
used the strength that they had in their home markets where they
largely face no competition, that would be a concern that you
would want to address with the EU authorities and with the Danish
Government in that particular example?
(Mr Byers) It is always dangerous to comment on hypothetical
situations, but I will. Yes, obviously, we would not want to allow
UK industries to be put in that vulnerable position. We would
raise it with DGIV, the competition authority and with the Commissioner
in Brussels.
704. On a couple of technical points on the
exact way in which this particular inquiry went in your judgment,
Milk Marque lost substantial market share during the process of
the inquiry. Is that something that the process and your own judgment
can take account of? At the point of the referral, Milk Marque
probably had a market share of around 50 per cent. By the time
that the outcome was known, it was less than 40 per cent. Therefore,
that shifted the competition issue quite substantially. Incidentally,
it was potentially below the point at which the Competition Act
would now apply.
(Mr Byers) Of course, that was dealt with under the
Fair Trading Act where the cut-off is 25 per cent. That was not
an issue. It was clearly within the remit of the Fair Trading
Act under which this particular referral was made. So, in fact,
it did not become an issue in this particular inquiry.
705. But it would do under the new legislative
framework.
(Mr Byers) Then it would be a factor that would need
to be taken into account under the Competition Act.
706. Bearing in mind that these inquiries take
place over a period of a year or so, the shift in the market can
be quite substantial in that time. Presumably the legislation
allows one to exercise some discretion to recognise the way in
which the market has moved.
(Mr Byers) I think it would be one of those issues
that the Secretary of State, when considering the recommendations,
would want to take into account.
Mr Jack
707. A moment ago in your evidence you said
that competition helped to build strong industries. I imply from
that that you saw in the milk and dairy industry weakness. Can
you tell us in what aspects of the industry you saw weakness?
(Mr Byers) I was stating a general principle. If one
looks at the way in which the specific industry that the Select
Committee is considering has developed, in conversations that
I have had it has been agreed that product innovation has not
been an area that has been a success. Innovation often comes from
competition, to give one example.
708. That is the only example?
(Mr Byers) No, I am sure that there are many others.
That is the one I can think of immediately. It is the case that
one does not build strong businesses if one is in a situation
to abuse one's dominant market position, to quote again from the
Monopolies and Mergers Commission report.
Mr Curry
709. I return to a point raised by Mr Todd.
As you know, farmers are agitated at the thought that structures
which are successful on the Continent are expressly ruled out
in the UK. Why can we not do what they do? It is a matter of fact
that at the moment the food industry is extremely depressed in
terms of share prices, because the supermarket wars have washed
back into concerns like Express Dairies and Northern Foods. Also
on the Continent there are some extremely predatory companies
which appear to be trying to build a global activity. You referred
to there being a strong possibility that by the end of the period
the market may have changed considerably. Would you expect that
that process would now begin to take effect and that we may see
some foreign bids for British food businesses which are going
very cheaply at the moment in terms of how much one would have
to pay to buy them in return for quite a strong return on capital?
That may affect the cooperatives. What attitude would you take
if that started to be the case?
(Mr Byers) I would not pre-judge the situation. Almost
certainly such a development would be referred to me, once again,
as a competition issue. Anything that I may say today may be interpreted
as pre-judging my view on the matter. In principle there is no
objection to a foreign company making a bid to acquire or to merge
with a UK company. We would then look at it on competition grounds.
710. Looking at the size of the businesses operating,
the industry looks fairly fragmented at the moment and now there
are three more with the cooperatives in business. In terms of
the trends that we have seen across a large part of the industry,
this sector is beginning to look quite fragmented and ripe for
consolidation.
(Mr Byers) I think the important issue is the extent
to which we can ensure that there is competition in the industry.
That is my responsibility as Secretary of State who deals with
these competition matters. Consolidation is then a matter for
the market and if that raises competition concerns, the potential
is that it would be referred back to the Competition Commission
now and then to the Secretary of State.
711. Returning to the report's conclusions,
when that came out, you stated in the press release—the
key word here is the adjective—that "An imposed restructuring
of Milk Marque would be a drastic step". Previously you said
that you felt that the industry should have a chance to work out
its own destiny but that you would rule out a drive into processing.
When the break-up into three bodies came up, you gave that a very
strong endorsement indeed in your press release. They were obviously
able to do it in a much quicker period than you had thought may
be the case. What were you talking to them about in the mean time?
When you told them how you were going to respond, did you not
say, "Poor old man, what you really need to do is to look
at a break-up here because I am going to impose it on you because
you know damn well that if you are going into processing that
is your only route, is it not?" Did such a conversation take
place? My assumption is that that was a sensible thing for the
Minister to do.
(Mr Byers) I took the decision not to have an imposed
break-up without consultation. In the nature of such matters,
one acts in a quasi judicial capacity. Although one receives
representations, one does not discuss what the decision may be
with anybody. When we decided, as a department, the way in which
we were to move forward, obviously we spoke to interested parties
on what the decision meant. Within a day of the decision I met
Ben Gill because he was very concerned about the undertakings
that I was seeking on the selling round. They were just about
to begin a new selling round and that would have implications.
I think I announced to the House in a debate at the time that
I would not require those undertakings for that particular selling
round because of insufficient notice. There were a number of meetings
with people. I simply made the position clear that I wanted to
see the competition concerns addressed. If they were addressed
satisfactorily, then I did not see any principal reason why moving
into processing would not be possible. I may have expressed that
to those who came to me and wanted me to clarify my thinking.
712. Is there not a sort of curious inverse
logic in this? The three intellectual steps seem to be that Milk
Marque says, first, that the break-up would be a disaster and
says that in its evidence to the Commission. Then it says that
we have to get into processing and the only way to get into processing
is to bring about the disaster by breaking up. That is the curious
logic we are faced with. Why do you think that this break-up will
not lead to all the terrible things that Milk Marque said it would
lead to when it submitted its evidence to the Commission? What
has changed in the atmosphere?
(Mr Byers) The change is that the Monopolies and Mergers
Commission has reported. It has taken into account the representations
and the evidence that it received from Milk Marque and it has
arrived at a series of recommendations. I have made my decision
in the light of those recommendations and I think Milk Marque,
very sensibly, and more importantly its members, have seen the
report. Clearly, they are unhappy with certain aspects of it,
which is why we are now subject to a judicial review. Nevertheless,
they have decided that there is a way forward: to create the three
successor bodies and, as a result, to address the competition
concerns, so being able to get into processing.
713. When you said in your press release that,
"An imposed restructuring"—meaning a break-up—would
introduce "worrying uncertainties for the industry. There
is a strong possibility that by the end of the period the market
may have changed considerably", presumably you had in mind
a different change from that that will now take place because
of the break-up. What did you have in mind when you talked about
the possible change for the market?
(Mr Byers) My judgment was that a forced break-up
of Milk Marque would be carried out in the face of considerable
opposition; it would have required secondary legislation going
through this House as it could be done only by order; I think
the industry itself would have diverted attention from trying
to build the industry from fighting off an imposed solution from
a Secretary of State and our calculations were that it would probably
have taken at least two years to impose a break-up on the industry.
I felt in the circumstances that that would not be the best way
forward. As a result of that, and maybe two years of bitter fighting,
many members may have left Milk Marque because of the situation
that they were in. We know that numbers are declining anyway in
terms of farmers in membership of Milk Marque, and so the industry
would have changed considerably in terms of the way in which Milk
Marque could operate. Taking all that into account, that is my
general approach to things. If people voluntarily can see the
benefits of a particular course of action that must always be
the best way forward.
714. If I had wanted to say that in a press
release I do not think I would have used the phrases that this
press release used. You say in a free-standing sentence: "There
is a strong possibility that by the end of the period the market
may have changed considerably". Following what you have just
said, did you have in mind that you expected people to keep drifting
away and that Milk Marque's market share would keep going down
so that after a period it would be a small force in the market
and would no longer be a problem and it would have faded away?
(Mr Byers) I am not sure that "faded away"
is a good description. I think two years of a campaign to retain
its single status would have been quite damaging for Milk Marque
in terms of whether its members felt that it was representing
their interests. It is quite a surprisingly dynamic market. There
would be a lot of change in the two-year period that we are talking
about. There would be lots of new products: cheeses, yoghurts
and so on. I believe there would be quite a significant change.
Of course, in those circumstances, not being able to get into
processing would have been a considerable handicap in that developing
market.
715. I do not ask this question in a facetious
way but one of the matters that is constantly argued to us is
the increasing difficulties of the smaller farmer. We have had
evidence that the average size of producers is now perhaps over
the half a million litre mark. It is surprising how many smaller,
traditional, family farmers with only 40 cows still exist in the
UK. Do you think that those changes may well accelerate consolidation
within the dairy producing side of the industry itself? Is that
a legitimate concern of yours, or is that something that is outwith
your range of concerns?
(Mr Byers) It does not need to do that. Indications
from successor bodies are that they are mindful of the need to
tailor their own services to small producers. As Secretary of
State for Trade and Industry I am conscious of the need, through
our normal support for small businesses, to be mindful of trying
to ensure that the support that we offer becomes more widely available
to the agricultural sector. It surprises me that a number of the
schemes that we offer are not available to agriculture. One of
the first things I was able to do on coming in to office as Secretary
of State was to extend the small firms' loan guarantee scheme
to cover agriculture as it did not before. We brought it in earlier
this year. I know from many small businesses that usually proves
to be a very useful form of access to finance. Now that we have
made that available to agriculture generally, I am sure that the
small producer to which you have referred will begin to see some
greater opportunities if they need them. On the specific point,
I think the successor bodies are mindful of the need to assist
those smaller producers.
Chairman
716. With those comments about the assistance
that your department wants to give agriculture, is that a bid
from the DTI to take over the functions of MAFF?
(Mr Byers) No.
Chairman: A surprising answer!
Mr Hurst
717. Secretary of State, in reply to one of
my colleague's earlier questions you spoke about the disadvantages
that flow when there is a lack of competition. You gave one example
of the lack of products or product innovation. Would it not be
right that product innovation comes from the dairy companies?
Are you suggesting that there is not competition between the dairy
companies?
(Mr Byers) One of the benefits that will come from
allowing vertical integration into processing is that we shall
have the opportunities that Mr Todd mentioned as happens on the
Continent where we have seen some very interesting product innovations.
I do not know whether there is some sort of synergy between the
producer and being able to process that allows you to do that.
We may find that out in the UK in the not too distant future.
That is an opportunity that is there. Even with the processors,
if there is not effective competition then the case for product
innovation is simply not made.
718. Is there not a danger that the dairy companies
would say that there has been competition among themselves but
notwithstanding that competition there does not seem to have been
product innovation thus far? You are now going to argue that if
there is vertical integration the producer will drive the system.
(Mr Byers) That may be so. I am trying to identify
a reason why. There is a wider issue in the UK that we are tackling
within the department concerning innovation generally. We are
not as successful as we should be in transferring ideas into products.
That is a general problem that we have in the UK. We need to find
ways of overcoming that. In continental Europe in this area we
see a far greater product innovation than we witness in the UK.
I do not know whether it is a cultural matter. I am not sure whether
it is a competition aspect in this particular context.
719. It may not be. Mr Todd made particular
reference to Denmark and they appear to be operating in a quasi
monopoly situation and yet there would appear to be greater product
innovation there than in the semi-competitive situation here.
(Mr Byers) Members of the Committee may know better
than I whether in Denmark there is perceived to be potential competition
from cross-border products. That may be a driver as far as product
innovation is concerned.
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