Examination of Witnesses (Questions 404
- 419)
WEDNESDAY 25 OCTOBER 2000
MR IAN
MERTON, MR
ROBERT DUXBURY
AND MR
BILL WADSWORTH
Chairman
404. Gentlemen, thank you very much for coming,
and thank you for the memos which you sent to us. You know what
the inquiry is about, so I will not go into that. Can I just begin
with a quote from that organ, The Grocer, of October 21st,
from Mr Russell Ford of Iceland. "You can buy your organic
basics, peas, carrots, bananas and apples from us at conventional
prices or you can go to Sainsbury and pay extortionately high
prices for the privilege of being able to be buy an organic kumquat
or starfish." I am not even sure I have ever bought a conventional
kumquat, and I am not sure if I would recognise one if it fell
off the shelf on to me. I thought that would get us off to an
interesting start. Perhaps you can just begin by identifying yourselves
so we have at it on the record. Mr Merton and Mr Duxbury, you
are from Sainsbury, and Mr Wadsworth, you are from Iceland. If
I can ask each of you first, what claims do you feel able to make
on behalf of organic production to your consumers as to organic
products? What is the nature of the claim that you are willing
to make?
(Mr Wadsworth) I am Bill Wadsworth of
Iceland Frozen Foods. In terms of the claim we feel we can make
to our customers it is that organic is an agricultural system
which benefits the environment. It does not use artificial pesticides
or fertilisers. It has a system of control of animal welfare,
which is of high standard. It prevents pollution and minimises
the risk to the environment. That is the key reason why we got
into organic and why we sell it to the consumer. There are consumers
who believe that it has a better taste, and there are consumers
who believe it is healthier because of the lack of pesticides
and chemicals in the food, and that it is more natural. Consumers
want more natural foods because of all the food scares. The key
thing to us is the benefit to the environment and the development
of sustainable agriculture.
405. Could I note that your claim is based,
first of all, on the process, secondly upon the basic environment
and the broad issues, but you do not make a claim about taste
or health, even though you recognise that some of your consumers
or suppliers may wish to?
(Mr Wadsworth) That is correct.
(Mr Duxbury) Good morning. I am Robert Duxbury. I
am Organic Technical Manager at Sainsbury. I have actually been
involved with organic foods at Sainsbury for the last 15 years.
406. You have an organic tie on, I think.
(Mr Duxbury) I have, and other items of garments as
well. I will not tell you which ones. Some you can see, some you
cannot. We actually concur with Iceland on this. We are aware
that there is a limitation to the claims that you can make for
organic foods, which are actually in one of the articles in the
European Regulation, so we cannot actually make a claim that organic
foods are superior in quality or have a superior nutritional advantage.
We would prefer to present the products to our customers and allow
them to make the choice. The choice is the most important thing,
as far as we are concerned. The customers can then make up their
own minds about which products they want to buy.
407. So you as a company would merely say, "We
believe you want to have organic products and our job is to give
you the option", but you would not, yourself, as a company,
make claims about it?
(Mr Duxbury) That is correct. We, in fact, started
selling organic foods in 1986 because we were getting customers
asking us to sell them. We have always responded to our customers'
requirements.
408. How short is supply? I was quite struck
by our previous witnesses who indicated that supply was not quite
as short as we thought. How short is supply?
(Mr Duxbury) It depends which product areas you are
talking about. The previous evidence was correct. In some areas
now the supply is easing, there is wider availability, and the
dairy example is a good one of that, but in other areas, particularly
when it comes to supplying British organic foods, clearly there
is still a lot of work to do. One of our fundamental desires is
to try reduce the amount of imported organic products and encourage
more British production.
(Mr Wadsworth) Again, I concur. The issue really is
the British product. The British farming community is reacting
very slowly to the opportunity of this new market, whereas other
countries are actually mobilising their farmers to produce organic
foods and make it available to us. If you take the milk and dairy
situation, we have actually built an ice cream facility in Cheshire.
We would love to use local milk for that factory. We are having
to import two thirds of the milk and dairy products to that location.
Although in some areas like liquid milk it may be easing, in manufacturing
we would like to have vast quantities of milk products which are
not available in the United Kingdom now and are not likely to
be available in the time-frame which we need.
409. You said, Mr Wadsworth, that British agriculture
was being slow to take advantage, and you said, Mr Duxbury, that
you would like to deliver more. One thing you hear from farmers
repeatedly is, "The trouble is, what happens if the premium
. . .". By that we mean the difference between the conventional
and organic price; we need not argue where it flows from, but
that would be a role that when the supermarkets get their hands
on this they want to be able to sell the food at the conventional
price, which is what the aim of Iceland is. Is it not terribly
dangerous for us to get into this sector, because are we not going
to find that we have exposed ourselves and we find ourselves in
a sort of collapsing movement simply because the pricing structures
which attracted us are deliberately undermined and the interest
of the supermarkets is to see it is undermined?
(Mr Merton) I am Ian Merton. I am the Trading Director
for fresh and convenient foods in Sainsbury, and have particular
commercial interest in the organic sector. I am responsible for
the organic sector and the development of it within Sainsbury's.
Clearly the issue of pricing is a key one and one that we have
always kept dear to our hearts as part of when we first started
selling organics back in 1986. Our policy on the way we have marketed
the product to the consumer, for her to chose between organics
and other conventionally produced products as a real choice, is
that we recognise that there are extra costs attached to growing
organics and we have always worked in partnerships with our supply
base to try and share understanding and knowledge in making sure
we are clear what the farming community and suppliers need, to
ensure a reasonable return. We reflect that in our retail prices
to our customers. The challenge to all of us is how we move forward
in trying to keep the costs of organic production down between
us and to share how we can work much better together. We have
been doing that ever since we have been in the organics operation,
and we have done it through a number of means, by sharing information,
initially through our SOURCE club which we set up and shared with
many of the suppliers we work with, trying to use the crop, because
part of bringing cost down is getting the economies of scale and
using the whole crop. Subsequent to that we have had a new club
set up called The Organic Partnership, which actually now shares
with our supplier base customer insights into what they are looking
for in their range, what they are asking us to do. Clearly, yes,
they do want prices to come down and be efficient, but our customers
are telling us that they want a wide range, they want organics
to be made easier for them to use and more convenient, and I think
that is particularly important in areas such as young mums in
the baby food market. 30 to 40 per cent of the market has already
switched to organics. That is customers taking the real choice.
The pricing policy we felt was appropriate was always to give
the best possible prices to the customer based on the real cost
of production.
410. Mr Wadsworth, you may want to add something
to that as well, but you have argued in your evidence to us that
by creating greater demand you are allowing large players to enter
the market and achieve the necessary economies of scale, but you
of all the retailers have identified yourself much more with the
philosophy of it. Your boss, for example, is clearly associated
with the green movement, but you have identified yourself with
what one might describe as slightly the religious side of organic
farming as well as seeing it as a form of agriculture. Do you
find there is any tension, or could be, between trying to turn
it into a mass market place and the fact that many people do identify
it with a sort of life style as opposed to merely a form of consumption?
(Mr Wadsworth) First of all, I would like to answer
regarding the price policy. In answering that I would like to
give you a few details about the actual cost of organic dairy
production. We have done some work in Cheshire on dairy farming.
If you take a normal dairy herd, if you reduce the animals from
300 to 200 to be able to meet the stocking densities for the ability
of the land to work[2],
the actual litreage has dropped from 6,200 to 6,000 litres per
annum per cow. The actual feed cost for conversion was £10
per tonne extra. The actual organic feed cost was £220 per
tonne, as opposed to the £115 per tonne (for conventional
feed). The actual deficit of cost from the conversion of the 2.25
year conversion period was figure was £100,000, about £60,000
of which they could actually retrieve over that period from grants,
if they are available, leaving a £40,000 deficit, which the
farmer would have to try and make up through the premium. On a
28p per litre premium he can actually return that money within
one year. If it is a five year scheme he could probably get a
return for the money with a price of 26p per litre. That is without
doing any work on supply chain to reduce the costs of the inputs
of the organic feed. That is where you can imagine that the farmer
at that time of the review, in Cheshire, was getting paid 16.7
pence per litre. The normal cost of production is about 20 pence
per litre, so he is getting below cost and that is why they are
going out of business. If you talk about a sensible price, it
could be around 24 or 25 pence on-going as a price. The premium
at the moment through OMSCo, which is very generous, is 29 pence,
but this week I believe that contract price has gone up to 33
pence. So from 16.7 to 33 pence is a hell of a premium for consumers
to pay. Our view, therefore, is that we can actually buy milk
on the continent cheaper than that. It is right to say that we
do want to see agriculture in the United Kingdom, but we also
have a large number of the population who live below the poverty
line, and they want natural foods as well as those who have good
salaries. If you are trying to deliver a choice to the whole range
of consumers and it is available at a cheaper price than some
of the premiums that are being paid, will come down when that
product is available. If farmers go into organic now with a business
plan based on 29 or 33 pence they will be in trouble in the future.
They need to be looking at where the price point will go in three
to five years' time and decide to go into that market at a sensible
level. The other thing that we would say to you is that during
the conversion period you still have the cost of the conversion
to pay for. If it is a five year programme and you have gone through
it, the next five year programme you have not got the cost of
conversion, and, therefore, again, you would be able to produce
a product at a lower price. The later you leave your conversion
into organic, the more likely you are going to be disadvantaged
because others have already been established and gone through
the conversion period costs and are producing at a lower price.
We are concerned about the high premiums drawing people into this
market and then they are being left out, and then they are going
to be blaming the supermarket or whoever else for not keeping
up that premium in the future. That could be an issue. Having
said that, we do agree that organic is partly about the holistic
view of landscape, which is why we gave £1 million to the
National Trust. We see that if you go into a future market you
either go, as agriculture, into the commodity market and go for
scale, go for GM, go for all the pesticides you can use and get
the yield and compete in the global market, or you can differentiate.
If you are going to differentiate, one of the benefits of areas
like Cumbria, the Yorkshire Dales and the South Downs, is the
actual landscape. That is where the consumers might be prepared
to pay more for a local product which is organically grown, whilst
also maintaining a local landscape and giving access to people
to enjoy that landscape. That is where we see a good future for
locally grown organic products, but in the commodity market it
is not good for farmers to go into organic simply because they
cannot survive in the normal world, because they eventually will
develop in the mainstream, and when that happens those farmers
will still be in the same position.
Mr Jack
411. Mr Wadsworth, do you think you do your
conventional suppliers a great service by using language like,
"if you follow the `use as much pesticides as you can GM
route'"? First of all, the GM route is not open to United
Kingdom producers and, secondly, most conventional producers I
know cannot afford to adopt the liberal regime which you have
just described in rather graphic terms. What are you doing to
ensure your customers do not lose confidence in your conventional
side at a time when you are rather zealously and evangelically
embracing the organic position?
(Mr Wadsworth) The view is that if you take the NFU
position, they are very keen on things like GM technology, even
in areas like Cumbria. I am opposed to some of their views, because
I do not think it actually helps the local agricultural economy.
That is my concern and that is why I am a little evangelical about
it. I do believe that there are farms in the United Kingdom where
organic systems will not be appropriate due to the climate and
the soil. Therefore, we are not saying that conventional agriculture
should be banned. It should be a question of choice. There will
be parts of the world, also, where conventional agriculture is
the best way to farm to produce products for communities. So,
we are not saying that, but what we do believe is that 3 per cent
of the land in the United Kingdom being organic is not a good
choice for consumers and does not provide anything like the balance
we would like to see.
412. How are you helping your customers—and,
perhaps, I can put the same question to Sainsbury's—to understand
that what is available that is not organically produced is safe
by every known definition of the word "safe" and that
farmers who are your suppliers in the conventional sense are also
trying to be environmentally responsible, et cetera, et cetera?
(Mr Wadsworth) To be honest, the United Kingdom farming
fraternity particularly is doing a lot of work now to actually
utilise the knowledge from organic farming systems back into conventional
agriculture to try and reduce the levels of pesticides being used.
There are many people who are looking at developing those much
more responsible systems, but if you purely wanted cash out of
a farm, then you can utilise a lot of extra additional chemicals
and systems to try and maximise yield. That is not the same as
the majority of the UK farmers who are responsible, who are trying
to reduce the levels of chemicals and only use them where appropriate.
(Mr Merton) As far as the conventional product is
concerned, we do an education programme for our customers as well
as giving information to our suppliers about the difference in
techniques. We believe this is about educating customers so that
they understand and are clear about the difference. I have a number
of examples of leaflets here that we give out to suppliers and
our customers for them to try and understand. Clearly the conventional
production is also going through some changes. We have recently
led in the reduction of pesticides. You may or may not have seen
our TV ad which features Jamie Oliver actually saying that we
have now signed up all our British farmers to use that sort of
basis of production, which we think is leading the field and setting
a good example. We have also held conferences explaining this,
not only to try and get this through into the United Kingdom,
but also world-wide. We held world-wide conferences on both conventional
and organic. So we feel we have a responsibility here to do this
and spread the word and make sure that the differences are understood
and the costs and some of the other implications are well understood
by everybody.
Mr Drew
413. I want to look at the pricing issue, and
really it is the relationship between Sainsbury's pricing of organic
and non-organic milk, where there is substantial differential,
which really has an impact on lower price compared to Iceland,
where you have a very narrow differential. Can you tell us why
your differential is much greater than Iceland's?
(Mr Merton) Our differentials are directly related
to the costs. We all know some of the dilemmas that the current
dairy industry has. All our milk, whether it is organic or conventional,
comes from Britain. We are proud of that and it is part of our
company policy. As to the relationship between the two prices,
price was quoted earlier through OMSCo, where we did this long-term
deal to try and help farmers convert because we felt that we needed
to get the supply chain started in the United Kingdom in a fairly
new and invigorating way, and because we set the price at 29 pence
on a litre, to encourage farmers to actually get British milk
on the shelf to our customers. That has been successful and, as
you know, in conjunction with OMSCo we won a number of awards
on the basis of our initiative. Someone had to kick start it,
so we tried to take a positive view and kick start it. Since that
time, when it was first instigated, clearly dairy prices have
changed in conventional production. The differences that we are
seeing today in the supermarkets are that, to give you a figure,
our current organic is £1.21 and the conventional is 83p.
That is per four pints. That is directly related to the cost difference.
414. That is a litre?
(Mr Merton) I can work that out, but it is directly
related to the sort of figures that were being quoted earlier.
The average now in the dairy sector is 20p per litre compared
to 29.5p. It is in the same parameters in terms of proportion.
(Mr Wadsworth) What we are doing is actually trying
to provide consumers with the product at sensible prices. So,
much as with our dairy products—and we are moving into ice-cream—we
are importing some of that product at a cheaper price. Talking
about England being the best place to produce dairy products,
certainly that is why we built a factory in Cheshire because we
were hoping that that will be the case, but you have to accept
in the area of dairy farming that if you are really going to compete
with some of the people abroad, then it is not just the fact that
the climate and ground is good, but the other costs also. It is,
for example, the actual rent for the land, the cost of labour
and fuel. Those things actually make it difficult. If you take
the size of a farm, in days gone by maybe 100 milking cows on
a farm was quite adequate. Now we are looking at maybe 300. Soon,
if you really want to stay in long-term dairy production, you
may want to look at 500 or 600. At that stage you are starting
to go into three times a day milking from twice a day milking,
let us amalgamate three or four farms together, go into robotic
milking to save labour, the farmer becomes a manager and you take
a contractor in to reduce costs. That is what has happened in
other countries.
415. Can I ask you where you are importing from?
(Mr Wadsworth) Denmark, Holland and Austria.
Mr Hurst
416. In answer to David Drew's question you
gave a somewhat difficult equation to calculate as to the differential
between organic and non-organic. Are you able to give one or two
other examples on products of the price differential at retail?
(Mr Merton) I think it is difficult because they all
differ and some products may well be much nearer conventional
prices, because of the yields and the equation of how they are
produced. On average most products are around 20 to 25 per cent
dearer, but when you move into some of the other more difficult
sectors like livestock, where you have organic feed and other
things to consider down the line, then clearly the price premiums
could well be higher. The secret of how we get ourselves more
efficient is the sharing through our partnerships, talking to
the farming communities, looking at how we can remove costs and
be more efficient together, especially when, clearly, we want
our British farmers also to be aware of what is happening elsewhere
in the world and the challenges we face. We think we have a responsibility
to share that knowledge and interest again and look at ways of
actually moving this thing forward. Also, we have celebrated the
fact that it is British and so customers, rather than seeing it
necessarily as a product, might well have a choice of a British
product and an imported product. If there are significant differences
it may well be that may be the way we have to face it. This is
very much about customers understanding what the issues are.
417. The baseline is a 20 to 25 per cent increase
over the retail price, but it may well be more. What is the differential
to the supplier in general terms?
(Mr Merton) We do not make any more profit out of
the organic sector at all, compared to conventional, and it is
a direct relationship to cost.
418. Mr Wadsworth?
(Mr Wadsworth) In terms of actual production systems
there is a 15 per cent to 20 per cent cost. It is there or thereabouts
the same, we would say. The issue then is how that translates
through to the retail price. Quite a few people actually operate
on a margin percentage basis, and, therefore, the manufacturer
would add his normal percentage on what is a 15 per cent higher
price, which gives a greater differential in cash difference which
translates into something higher than 15 per cent with which you
started. That is one thing you have to watch in terms of control.
We have launched a range of frozen vegetable products which are
launched at exactly the same price as our conventional ones the
week before, and it replaces the conventional product, it is not
alongside it. If you wanted to have the choice you can buy conventional
in the brand and the own label Iceland brand is organic. A 2 pound
bag of carrots is 99 pence, six pack tomatoes, again, 99 pence,
and that is delivered to the consumer. We have had to pay the
farmer the additional cost for what they do and we have actually
taken a margin hit in our business this year of £8 million.
We believe that will then allow the product to get to the consumers
and we intend to gain our share of the additional sales by making
the product available at that price. It is a pure commercial thing,
because our investment is into developing the organic market which
will then pay us back along with the farms producing products.
419. That has a long-term risk to the farmer,
or could do?
(Mr Wadsworth) Not necessarily. What we are doing
is working with farmers on a long-term basis. Any farmer that
is working with Iceland can sell their product for more money
any day of the week to another supermarket. The farmers that come
and work with us actually have to understand the philosophy that
we want to make organic mainstream, we want to take it to everybody,
because when you do that you have a greater impact on the environment.
Therefore, for us and those farmers it is something that we get
into three and five year contracts with, because they believe
in what we are trying to do. To help them, which is quite unusual,
what we do is actually work with the rotation of the crops. In
America, for example, we might want the peas on the farm, but
we will agree to contract to take the sweetcorn and potatoes so
that we can share the cost of the organic production over the
three years. Organic potatoes can be funny shapes, so we will
use the good round potatoes in our normal supply, but as to the
other ones, we as the retailer become responsible for those and
we might have to develop a product like shepherd's pie with a
potato topping to utilise the other product to reduce the cost.
It is not just simply a question of, we want to buy, we will pick
up from the farmer. Last Christmas we bought 10,000 tons of animal
feed of non-GM soya to help farmers build towards organic. That
is direct involvement with purchasing materials to help farmers
reduce their costs so that they can compete better and get their
prices right. We believe we are committed to these farmers. There
is no point in doing what we are doing if there are not sustainable
farms.
(Mr Merton) Some of the things that have been said
by Mr Wadsworth are moving in the right direction, but I think,
from our perspective, we are doing it on a big scale. From our
point of view we have 1,000 lines in our organic range and we
have already begun to bring out ready meals and all the other
things that customers are asking us for from the organic production.
Clearly, as we are a large national supermarket, I believe in
terms of scale we are already doing this in a big way, just to
add to his point.
2 Note by Witness: This is not based on the
stocking densities as laid out in the standards for organic production
as the limiting factor is the reduced grass growth as a result
of the withdrawal of the use of artificial fertilisers. Back
|
