Examination of Witnesses (Questions 440
- 459)
WEDNESDAY 25 OCTOBER 2000
MR IAN
MERTON, MR
ROBERT DUXBURY
AND MR
BILL WADSWORTH
Mr Öpik
440. I suppose by Austin Mitchell's definition
I am one of those fussy, middle class consumers because I think
organic is quite a good idea. I also muse that more people shop
in Sainsbury's and Iceland than voted for any one party in the
last election, for those who wish to take note. Let me just be
clear that you feel that Krebs' comments were inaccurate? I do
not ask you to repeat what you said before but am I right in understanding
that you feel Krebs' comments were inaccurate, Mr Wadsworth?
(Mr Wadsworth) I believe he had other information
within his department which he should have used before he made
his comments.
441. Thank you. Maybe we can talk about that
on some other occasion. Secondly, you have made it clear that
Iceland is seen internationally around the world but is there
a pricing strategy that would be consistent with your trade goals
which would also make it possible to source a much larger proportion
of organic produce within the UK, for example long-term contracts,
that kind of thing? We have discussed this implicitly, I am just
wondering if you can give an explicit answer now, both Sainsbury
and Iceland.
(Mr Merton) I think there is an opportunity and clearly
we can do a lot more in the UK and we are working on that now.
At the end of the day, as I said earlier, if there is a requirement
to offer a product that could be British and an imported option
we see nothing wrong with that if we feel that there is a good
reason to do it and the consumer values that. Certainly our customers
do value, wherever we can, us supplying British produce and that
is why we take a strong stance on that. However, they are not
prepared to pay any price for that product. It is a matter of
balance. Of course we would want to support the UK farming industry
as much as we can and develop it, but if we felt there was a really
good product here we may offer the customer the choice. I think
that is the best way, to let the customer decide rather than bulk
it into one big conglomerate of one offer of one product only.
That may be appropriate for some products but not for others.
(Mr Wadsworth) Very simply, our customer is not prepared
to pay a great deal extra for many of the additional things we
have done, whether it be GM or the removal of colourings and flavourings.
All of our strategies have been about delivering products at the
same price to the consumer with an added value element and that
is what we are doing with organic. The issue to me in terms of
British versus non-British is very much price orientated. If I
move that product price by ten pence I can drop my sales by 25
per cent in the store. The difficulty, therefore, is there are
not many people prepared to pay that extra premium for it solely
to be British. If it was the same price, same quality, they would
prefer to buy British, and they do.
(Mr Merton) Can I just add one comment? We are all
assuming that the quality is the same wherever it comes from but
that is not necessarily the case. Clearly price is a key dimension
for the customer but quality is also a key dimension. There may
be a differentiator in the quality group for the British product
against the imported product.
442. How do you ensure that the standard is
the same? We touched on this with the previous witnesses.
(Mr Merton) I think we have got a very clear agenda
here and I would like Robert to say something after I introduce
it. Clearly we have been passionately involved in this since 1986.
We see it as a key issue and a very damaging one if the organics
ever get into the public domain of being questioned on the standards.
We have our own systems as well as working with the Soil Association
now to try to maintain standards in a conventional way and we
are also on the UKROFS Board. Most importantly, as we spoke and
I spoke at the World Organics Conference in 1996, which we sponsored,
I was invited to join the IFOAM group movement there, which we
took on board and said yes and we have supported it ever since.
We believe that this is a major way of getting a common standard
across the whole industry which is so, so important. So much so,
we have announced as from 1 January 2003 all our own label suppliers
will be to that standard. We think that is important because there
have been discussions going on this morning about this, that someone's
standards are a bit higher than someone else's, and clearly that
is a concern as well. We need one standard so customer confidence
is there. It is important that it is a clear standard, it is understood
by everybody and it is policed and audited to make sure it is
followed through. Do you want to add anything?
(Mr Duxbury) This point about harmonisation of standards
globally is critical to us and I endorse everything that Ian has
said. It is hard information that is required because there is
a lot of confusion out there about what organic is or is not.
Part of the background to what we are doing is providing more
information to customers and suppliers and to the market generally
but in amongst that is this attempt to get a harmonisation of
standards through the accreditation of certification bodies to
the IFOAM criteria and basic standards so that bodies, such as
the Soil Association and KRAV in Sweden or CCOF, in California,
are able to demonstrate that their crops and their production
has been of equal standard. This is a mechanism that is able to
do that. Hopefully we will be supporting that through and I would
hope other retailers as well both in the UK and abroad also endorse
this support.
(Mr Wadsworth) One thing I would say is inspection
levels in the UK vary as well as abroad. When we assume that the
UK is perfect and everything else is not, there is a lot of work
going on behind the scenes to make sure there is a consistency
of approach across the UK and inspection bodies are involved with
that and hopefully UKROFS will play a greater role in that in
the future. The difficulty I have got with IFOAM, which I think
is a great principle of having an international agreement about
one standard, so we are all working to the same standard, is it
is a voluntary arrangement, it is not accountable back to the
countries as such from a legal basis. I would like to see IFOAM
going more towards something where we can relate it back to an
international agreement and some regulation so we do have a consistent
approach but each Member State has its own access to that development
of that standard. The reason why I say that is the standards being
applied by IFOAM are often above European base line standards.
So we have a situation now where some inspection bodies are refusing
to accept something that has been certified as organic in another
country, in a Member State of Europe, refusing to accept that
product into a product in the UK because they are now working
to an IFOAM standard which has no bearing on European regulation
but is an international voluntary agreement. I will give you an
example. I have an inspection body that has approved a product,
we are producing it now, but they have suddenly written and said
"we will no longer accept the product that we approved from
Germany. You will have to buy that product from a UK approved
source covered by this one inspection body". When we have
asked them for the material details where they have got an approved
source they have not even got one in the UK that is approved.
By April of next year, at the current time, I would have to switch
off my ice-cream in Cheshire because the inspection body is insisting
that I use a material that is not available. The only thing that
I can do is move to a different inspection body that does not
have that requirement within its standards and then it would be
attacked because it could be seen as lessening the standard we
are working to. To me that is a nonsense in terms of the development
of an organic movement. We are tackling that as best as we can
but we have been down that route now of 14 weeks of getting our
products developed and approved by recipe and it is likely that
now, at the last minute, I will have to switch over to a different
inspection body which will take me another 14 weeks to get approval
by which time I might miss the actual production period for producing
products, which for ice-cream is the summer, which is not particularly
helpful. Those are the real problems that we can face within the
system. I would like to see some harmonisation of the standards
but we want some reality in terms of what is practical. The difficulty
of having one inspection body is the fact that they can set the
standard at any level they want and that can preclude you from
trading in certain areas which other countries would be able to
trade in.
443. Thank you. One last question, if I may.
That is a very, very useful set of answers on that and I think
we must take note of what you have said.
(Mr Duxbury) Can I just respond to one brief point?
We believe that the independence of IFOAM is its very strength.
In other words, it is not beholden to regulatory or, can I say,
commercial pressure. This is a truly independent body and I believe
that is very important for us.
444. That is very clear, thank you. A last question
and it is really just requesting a list. What are the largest
gaps between UK organic demand and UK based organic supply? What
products have the biggest gap?
(Mr Duxbury) Generally animal products and animal
feeds, grains, those sorts of products.
(Mr Wadsworth) It is the actual feed side that is
absolutely critical.
Mr Drew
445. Just going back to your certification and
accreditation issues, can I be assured that you are having discussions
with Government about how we may rationalise and improve what
the current procedures are?
(Mr Merton) They are well aware of our stance on all
of the issues through the UKROFS approach as well. We are very
passionate about getting this standard agreed, whatever it finally
is.
(Mr Duxbury) It might also be worth just quickly saying
that as retailers we are participating as a multiple retailers'
working group with the Soil Association, so we all sit in a similar
debating fashion as this, to discuss these standards directly
with the Soil Association.
(Mr Merton) We have been involved in this publication
which we have here for Members, if they wish it. While we feel
passionate, we are not involved in all of the articles in here
but this lays out some of the issues you are referring to.
446. That is true of Iceland as well, is it?
(Mr Wadsworth) We have provided some information before.
We do not have a great deal of dialogue on the topic directly
from Government at the moment.
Mr Jack
447. We have heard a lot in commentary so far
about the partnership arrangements that retailers are having now
with their suppliers but I think one of the central issues that
we will be interested in learning about is how you actually determine
the price that is paid to the producer. Mr Wadsworth has told
us of some innovative and interesting developments about the way
in which the cost factor can be reduced and, on the other hand,
we have heard that Sainsbury's take the same net margin on their
organic products as they do on mainstream. Just to square a few
circles here, can you tell us how these prices are determined
and what is the negotiation/discussion process within the context
of the partnership arrangements mentioned in your submission?
(Mr Merton) From our perspective we hold workshops.
On Monday we had a meeting of our TOP group which is The Organic
Partnership group to look at all aspects of the issues, including
cost of production. Obviously, the principles are set down—and
we make our principles very clear in our code of practice which
we published before the Competition Commission recommendations
came out—about how we negotiate and how we agree things
to be done with suppliers. Clearly there is a commercial slant
to that, but it does take into account, particularly on organics,
the cost of production and understanding what it is, sharing that
together, making sure that the arrangements we have, set against
what may be the alternative costs coming from around the rest
of Europe, are such that we can we can work together to either
reduce those costs and seeing how we can move this forward. I
think it is very much an open book approach where we discuss the
real issues together.
448. When you talk about discussing the real
issues together and having individual arrangements with individual
suppliers, you have given me an overview approach to it, but do
you also have some bilateral discussion with individual suppliers
to review their own cost structure?
(Mr Merton) Yes, of course. That is part of our business
plans approach with the supplier. At certain times we have the
suppliers together to talk about how we network and keep costs
down, and at other times we have specific discussions with the
supplier.
449. Would I be right in assuming that you could
have a situation where you have a range of suppliers for the same
item receiving different prices?
(Mr Merton) That would depend on the circumstances.
Obviously, they need to understand if there are prices that can
be obtained in the market place for that particular product. We
would like to have all the same price. There may be instances
where for some particular reason we may pay a slightly different
price to different suppliers, and that will depend on the arrangements
we have with them.
450. This partnership sounds wonderfully cosy
at a time when you are still trying to increase the volume of
supply, but having been on the receiving end, in the other end
of the sector, of the pressures that supermarkets can put on sellers,
how long do you think this cosiness is going to sustain itself
before we get into the rough and tumble of a market place, because
if enough people come to be in organics we will be back in the
ton to ton commodity stakes before we know where we are?
(Mr Merton) I do not think it is a cosy relationship,
as you describe it, I think it is a realistic relationship and
also addresses the real issues in the market. If there are cost
pressures to come down the line, ie, over capacity, there are
a number of ways to tackle that issue. One is to bring the price
down, and that may be one particular route we can take. The other
way is to find ways to use that product in different ways. You
would diversify whether it is into ready meals or producing other
types of products that can use the crop. If you then have a world
over-supply of that particular crop, you may have to face a price
issue.
451. Does partnership across the piece mean
also transmitting back to the supply chain some of the messages
that might inhibit people from getting into over-supply positions?
(Mr Merton) I think that is a very good way of explaining
how we have to have this realistic relationship that does not
shy away from the realities that may come. We do address what
is coming down the line and what could happen, because it is important
that before investing in a big way in whatever way the farmer
does, they are aware of the risks in the market place.
452. Is there a risk that partnership might
encourage the Competition Commission to revisit your territory
in the interests of consumers?
(Mr Merton) That is for them to decide. I think we
believe we have an open working relationship, which is why we
have our code of practice. We are very clear about what we are
trying to do. Inevitably, as ever, you do get some tensions along
the way, but we believe we are operating fairly, as I think the
Competition Commission gave us credit for in their findings. Clearly,
the most important thing is you cannot have a partnership without
everyone being happy, because partnerships do not go forward without
that.
453. I think there are many conventional growers
who would like to have the same degree of feeling of intimacy
which your partnerships and your organic sector are giving the
impression of?
(Mr Merton) We do have partnerships in our conventional
growing too.
454. We can debate that, but not here. Mr Wadsworth,
is there anything that you would like to add on the question of
partnerships?
(Mr Wadsworth) Our relationships with our organic
producers are totally different to our producers and suppliers
of other products, simply because of what we are trying to do
together. This creates something that is very difficult and people
say is impossible, so you have to have a lot of trust in each
other and you have to spend time getting to know each other's
operations far more than people would normally do. We do find
that it is a totally different partnership from conventional.
Mr Todd
455. The last group of witnesses were questioned
on the issue of looking at the relationships in the supply chain
through to the retailer for organic produce. It was suggested
that the Government had a role in examining particular areas where
there may be problems. Would you share that view?
(Mr Merton) I think we supported the Targets Bill
and the reason we did this—
456. That is not the question I asked. I just
want to stop you there and say I am going to come back to that.
If you could address the particular thing on targeting particular
areas of inefficiency and ineffectiveness within the supply chain,
we will come back to the Targets Bill.
(Mr Merton) I am sorry if I jumped the gun. The reason
I alluded to that is we believe in most cases supply and demand
in the normal marketplace can cover a lot of these issues. Our
concern, and I would refer to the Targets Bill, is we are worried
about the unlevel playing field and if Europe has more subsidies
available to their farmers this will bring pressures on the UK
market and it will not be able to develop at the pace as otherwise
it might. It is really the level playing field issue that is important.
That is the role we believe Government needs to be aware of so
that we can give the UK farming industry the opportunity to compete
fairly and develop. Beyond that, we think a lot of it is down
to supply and demand in the marketplace, as normally.
457. We have had other witnesses, not this morning
but before now, who have questioned whether subsidies from Government
have an appropriate role in a market economy of this kind and
whether the most sensible approach should not be to let yourselves,
having identified a shortfall in supply, fund through the solution
to that problem. Do you share that view?
(Mr Merton) Yes. I think on the whole we think we
can work and try to find solutions to those areas.
458. And fund them if necessary?
(Mr Merton) It depends what you call funding, but
certainly encouraging. We have done this in a number of the examples
I have already given where we have encouraged and used ourselves
as consultants in effect.
459. But you have not directly funded conversion
yourselves, for example?
(Mr Merton) Not directly conversion.
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