Examination of Witness (Questions 180
- 199)
WEDNESDAY 6 FEBRUARY 2002
PROFESSOR DAVID
HUGHES
180. There are more people living by themselves.
I think there is a majority of single households. We have had
a significant occurrence of immigration. You talk a lot about
multicultural and multiethnic society. What are the implications
of all this on the nature of the market?
(Professor Hughes) It is increasingly differentiated
by lifestyle, by demographics and, as you say, by ethnic group.
Frankly, I think that brings opportunities. The more differentiation
there is in the marketplace, the less focus there is on raw commodities.
My general line on that is that in northern Europe we are not
the lowest cost producer of anything. We want to look to more
interesting, value segments that are appearing in most commodity
markets and focus on those. We should be in a better position
to take opportunities that arise from these value segments because
we are living right amongst our consumers, and there are 60 million
of them around us. So in agriculture and food we should be able
to identify the trends rather sooner than our competition.
Mrs Shephard
181. Professor Hughes, that is an extremely
interesting point because one of the areas that the Committee
found puzzling is the fact that there self-evidently has been
an enormous explosion of interest in food, if you judge it from
media coverage: television, radio and magazines. At the same time,
those who produce food - not those who process it but who produce
it - have been going out of business to the extent of there being
half the number of farming businesses now than there were when
I was Minister of Agriculture. What does the farmer do to increase
the saleability of his products in the context of what you have
just said; that is to say, that there is an expanding market for
added value food products? The flip panacea usually produced by
Ministers and others is, "Oh, there is niche marketing; there
are farmers' markets" and all this stuff. The reality is
that the farmers produce and the processors process. The processors
and retailers have power over what is required. It is difficult
for farmers to react quickly enough. How can one concertina the
players so that farmers have more input and more security in planning
their future? It is difficult within the overall context but they
are producing food that most people eat.
(Professor Hughes) Yes, of course it is not easy.
There is no switch, otherwise somebody would have pressed it.
Of course it differs by sector. Let us take fresh produce, where
probably there are shorter supply chains, particular for fruit
and vegetables, in the UK, much shorter than the supply chains
there would be for, say, red meat, yet prices have not been wonderful.
In general, in fresh produce there has been over-supply and that
explains the low prices to producers. Of course it varies within
the sector but whenever there is over-supply and you get a line
of would-be producers or providers lining up outside supermarkets
saying, "I can produce it for a penny less", you are
going to get pressure on prices. We have gone through, in the
last two or three years in particular, a depressed price scene
in fresh produce. I think it is recovering to a degree. What can
individual producers do to get closer to the market in fresh produce?
Let us do it sector by sector. I am a director of KG Fruits. That
is a farmer-co-operative of 75 farmers. We turn over £55
million; five years ago we turned over £15 million. We have
a majority of our fresh soft fruit in the market in our season.
We have genuine market power, even when dealing with large supermarkets.
The net price to the farmers is double from supermarkets than
we get from low-price and unstable wholesale markets, and so that
is one solution. It does not work everywhere. As we all know around
the table here, we do have not a wonderful track record of co-operation
in United Kingdom. Do not mention the "C" word (co-operation).
If you become organised, it can work. That is in fresh produce.
If we move on to red meat where you have supply chains which are
ridiculously long in many cases, where the market signals just
do not move up and down as they might, what does that reflect?
Again, as we all know, it is complicated. In part, that is subsidy.
In history, if a fair proportion of the farmers' income has come
from the market, which is Brussels rather than the market which
is the consumer, then it is not unnatural that farmers will focus
on those who provide the most predictable income. So that does
not help. At the same time, we have in red meat an industry in
transition with way too much capacity in, say, slaughtering. I
am always interested in why the market does not actually take
account of that; why are beef processors not going out of business
hand over foot, but it does not seem to happen that way. If an
abattoir goes out of business, it is picked up by another private
group who then operate at an even lower cost, perpetuating this
over-capacity utilisation in the sector. So with red meat I think
it is difficult for a whole combination of factors. Also, in many
cases the livestock enterprise might not be the main line, the
secondary enterprise, from a dairy herd, for example. Red meat
is more complicated. Let us move on to cereals. When I worked
with cereal farmers, I challenged them to get closer to the market.
I found something depressing. I have just been working down at
Wye with 20 farmers between the ages of 30 and 40 in the 52nd
Worshipful Company of Farmers course. We have 20 entrepreneurs,
if you will, of an age where you think they would be thinking
ahead about where the opportunities are. When I challenged them
on cereals, they said, "It's hopeless. It is a commodity
market. We can do nothing to add any value whatsoever". I
just do not believe that. I think there are genuine opportunities.
They do not know what happens to their grain. We know they sell
it to a merchant but then, as far as they are concerned, the supply
chain stops. It strikes me that even in cereals, which is probably
the most difficult sector, there is an opportunity to select who
is buying my grain, what they want from it, is there anything
I can do in terms of additional service, in terms of changing
the variety to even add the smallest amount of value, whether
it be just pence per tonne. I think we working at that level.
We just have to look for opportunities. It is more difficult.
182. With cereals, for example, groups could
be encouraged, as it were, to unbundle the process and see where
the grain goes and what is useful. That is something where your
institution could perhaps help.
(Professor Hughes) Yes, but you would think the initiative
would come from the farm: let us get close to the marketplace.
That does not necessarily mean that the farmer has to add value
by becoming a processor. We should not fall into the trap of thinking
that the only way of adding value is for farmers to become not
only farmers but also processors by looking for that next step
in the supply chain.
183. That is what I am implying. I am implying,
for example, that our wheat goes to make pizza bases, for example,
that kind of thing, or our barley goes to making real ale or whatever
it might be.
(Professor Hughes) The start is: what is the use of
my grain? What is the highest value and best use of my grain and
how can I take some advantage of that?
Mr Mitchell
184. For the red meat, does that mean local
branding "Yorkshire beef for beefy Yorkshiremen" and
southern tastes for Londoners? Is there a market in that?
(Professor Hughes) Clearly there is. If you look at
market developments, then there is an increasing interest in local,
regional, what is the provenance, tell me the story. Again, it
is not simplistic. The line I can do in my talks is: Monday to
Friday we get by; food is fuel, if you will. I do not want any
hassle. Just eat it. I hope you enjoy it but we have not got the
time, for God's sake. That is the challenge for British agriculture
because we do not ask those difficult questions about the ingredients
in, say, the processed food that we are eating Monday to Friday.
I refer to it as the drudge period; it is drudge shopping; it
is drudge cooking, if we even do it; it is drudge eating to a
degree. Then on Saturday and Sunday we move into leisure mode
and, halleluiah! That in part explains the interest in cookery
programmes. At a time when cooking skills are going down, the
number of hours of television coverage of cooking programmes is
going up. As for those two days, and let us be old-fashioned and
call it the weekend still, where we might cook a meal from ingredients
and then we want Yorkshire beef, then give me the story, give
me the romance, the provenance, there is a genuine opportunity
there. We are much less price-sensitive when we are in that mode.
185. I hope this new world gives the farmer
the signal. He has signals now from subsidies to produce this,
that or the other. The new signals are going to be much more complex
and sophisticated, are they not? How are you going to get them
and respond to them?
(Professor Hughes) He or she can either take the initiative
and look out there and just observe what is happening in the marketplace,
or they will be told by supermarkets. I talked to Tesco last year
and a fair proportion of the consumer not complaints but inquiries
were about "Why can't we get that local— We used to
be able to get that special regional— What's the season
for—" Consumers are starting to be interested in the
what we refer to as niche products, which I think does a disservice
because increasingly people associate niche with very small or
hardly commercial. I do not think that is the case. That commodity
market increasingly has a value segment which includes a whole
variety of niche or special segments. That is expanding whereas
the commodity part is contracting, which is putting more and more
pressure on price in the commodity market. The question was: where
do you go for the signals? The signals are out there and your
supply chain partners should pass the signals to you.
Mr Martlew
186. It seems to me as though we were all shopping
at supermarkets, but the reality is that more and more people
are eating out, not just at the weekend but totally. How do you
add value to a product that comes to a restaurant?
(Professor Hughes) You are right; actually it is rather
early to get this unfortunate phrase "share of stomach",
which is what you look at in terms of the overall food market.
Clearly supermarkets, as we move through this decade, if they
do not watch it, will lose shares per stomach. They tend to measure
their success in how they are doing in the grocery market. That
is a static, even declining, market and it does a disservice to
them. They should be looking at something much wider. In terms
of the food eaten outside the home, if you will, what is the statistic?
Close to one-third of food expenditure is outside the home; that
does increase but very slowly. Interestingly, look at the supermarket
response. I follow Taylor Neilson, which is a market research
company working on when we eat out - how much we eat in and how
much we eat out. If you take the last four or five years, the
number of meals eaten outside the home actually is flat; it is
not increasing. However, if you then get into the segments, fast
food is going up but the white table cloths and the more formal
dining is going down. Why is that? I believe it reflects the supermarkets'
response to competitive pressure and also the restaurant quality
chilled meals that you see. Tesco Finest, Sainsbury Taste the
Difference, Waitrose Bistro are starting to claw back market share
that they were losing to the food service folk. That is the first
point. The second point is that of course one-third of our food
expenditure is outside the home but that one-third expenditure
is two-thirds service and only one-third product. Going back to
an area where I am very comfortable, which is in the fresh produce
sector, the amount of fresh fruit and vegetables that we eat outside
the home is a miserable amount. You think about it. Go to any
fast food outlet and what can you get that is fresh fruit and
vegetables? You get a little bit of lettuce and a slice of tomato.
We under-consume fresh produce when we are outside the home. Going
back to your question, which is "Are there opportunities
there?", there are genuine opportunities in a very competitive
restaurant marketplace. Restaurateurs are looking at ways they
can differentiate themselves. Getting back to the regional brand
or the special brand, they want a story. When we go out we want
a story. They are in a position to provide that story through
the food that they put on offer. However - there is always a flip
side - we are not in that mode if we do not know the story; it
is a threat because we do not ask where the service food typically,
particularly in that Monday to Friday drudge period, comes from;
we just eat it. That is where the chicken goes to. What proportion
of our total chicken consumption would be non-UK stuff? That figure
is probably 40 per cent. Five or seven years ago it would have
been 5 per cent for imported chicken. Now, that Brazilian or Thai
chicken, which is commodity chicken, is going straight into the
processed foods and into the food service business. It is the
same with red meat.
Diana Organ
187. I have to say that as a slogan for either
advertising or marketing "share of stomach" is not a
good tag.
(Professor Hughes) Let us keep that between ourselves.
188. It is being used only for academic purposes.
You have described, I think quite aptly, and I see a certain resonance,
drudge eating and preparation of food Monday to Friday and then
the weekend comes and you either eat out or you actually do have
a go at doing something that Delia has done a couple of weeks
before. In your memorandum you have actually highlighted the four
consumer megatrends to do with the size of the household, taste,
convenience, these issues that are driving consumers now. I wonder
if you could just outline the key elements of those and also how
you see the trend going over maybe the next decade. You have already
pointed out that convenience is something that perhaps 30 years
ago was not an issue but it is very much at the top of the bill
now.
(Professor Hughes) Again, if I look out to 2010 and
I try to get my audience to participate with me and ask them,
"What are the key factors that will have an impact on the
nature of food products we see on the retail shelves?" I
come very quickly back to income. Household income and what happens
to that is absolutely key. We all have to take a view on this
and make some assumptions. My assumption is that, fingers crossed
now, we will manage to squeeze two or three per cent real GDP
income growth points out of the year, as we have done in the past.
If we all believe that, then we will see a continuation of current
trends. If we were into cataclysmic recession, God forbid, then
it is something else. You have got to take a view on what is going
to happen to income. I think income will continue to increase
and that the relative importance of the expenditure on food in
disposable income will continue to decline. It is 12 per cent
now, or whatever it is; by 2010 it may well be 8 per cent. In
my parents' generation it was 30 per cent. So by February 2002
there is a constant decline. That goes back to my point about
the relative importance of price decline. This focus on convenience
of course is largely linked to one or two people households where
both are working outside the home. I just think that is going
to continue. At the margin there may be some lifestyle things
- "hang on, our lives are out of control; we do not see our
children; maybe one of the partners should be back in the household"
- but that will only be at the margin because most of the women
will not want to give up that financial independence. If you look
at the divorce statistics, increasingly those women will say,
"I may have to do this on my own and, if I am going to do
it on my own, then I need a career and I need that income".
I think we will see a range of convenience food products in 2010
which will then astonish us by current standards. That is why
also you will see a huge leap in the way that we procure food.
I cannot believe that we will be shopping in supermarkets in 2010
as we do now. It just seems to me so unlikely.
189. Where will we shop then?
(Professor Hughes) It will be delivered to us or there
will be a point closer to home. Going back to this notion of drudge
shopping, and I do not want to trivialise this discussion, you
just have to go to a supermarket on Thursday night at 6 o'clock,
aisle 12, and what do you see? What is the ambience? There is
stress. People do not want to be there. In 2010 we will look back
on that and say, "Why on earth did we do that?"
190. Not being flippant about it, men have never
liked doing that and they have always left that drudgery to women!
On the point that you made there about increased convenience,
different methods of shopping, will there not be a huge differential
in income levels? We are talking about the growth of single households.
Many of those single households will be poorer households, either
because they are elderly households or because they are single
parent households. Our farmers are saying to us all the time,
"People buy on price. How can I get my return?" I am
just a little concerned about the implications for UK farming
if the scenario you paint is that we will not be going through
the supermarket chain; we will be buying absolutely against taste
and convenience and experience, but I am not so sure. I wonder
if you could put into place where the price element comes in,
particularly for that section that is poorer and the single households.
The farmers tell us people buy on price; they do not buy British
chicken because it is more expensive than the Thai chicken.
(Professor Hughes) They buy it on price if they see
there is no difference versus whatever the item is. If they are
comparing items and they look identical, they will buy on price.
If there is a criticism about our British food on offer that I
would make, it is that we have added attributes that we believe
consumers want—animal welfare or special taste—and
then we do not communicate that to the consumer. If we do that,
then they will buy on price. Getting back to your question, if
we get one-person households or lower income households, of course
what they want is the same food as everybody else; they will be
buying convenience products which will be of lower quality and
at a lower price but they will not eat different food. The farming
challenge as we move to an even wider convenience food offer is
that the farmer increasingly becomes the producer of low priced
raw materials to which others add value. That is the challenge.
191. The other issue you have just touched on
there is about increasing groups of wealthy consumers who are
concerned about animal welfare, about the method of production,
whether it is GM or not and whether it is organic or not. You
are saying that it is not often recognised. That may be a way
for our producers, our farmers who are operating in those esoteric
fields, to get the pay-back and the recognition of better animal
welfare standards, organic produce, local produce and regional
variety.
(Professor Hughes) We have to be careful to make sure
that what we perceive to be market signals, like more animal welfare
and being more environmentally friendly, are actual market signals
and not signals from very well organised and very powerful lobby
groups who, if we do not watch it, can get ahead of the market.
I am not discounting that in the very least but if we establish
a cost of production as we respond to this which is higher than
world terms, although we have a more attractive and quality product,
if the market is not ready for that yet, then they will not pay
for it.
192. Is the market ready for it now?
(Professor Hughes) A proportion of it is, but just
a proportion. For example, on pork products I would suggest we
have got ahead of the market with sow tethering, et cetera. In
principle that is: yes, we are interested in animal welfare. Most
people do not understand it and we have put in a cost of production
for pig farmers in the United Kingdom which is to our disadvantage.
I think by 2010, again without trivialising it, the consumer will
be nearer the citizen on these matters. By 2010 we may be out
of business.
Mr Lepper
193. I am interested in the point you have just
made about the extent to which demand for organic, environmentally
sustainable food, et cetera, might be a result in part of campaigning
by pressure groups. It is an area that we explored a little bit
last week. Other than what is actually sold over the counter,
are you aware of any ways of measuring that demand for those additional
factors, other than price?
(Professor Hughes) If I may dwell on that, and while
I do so, I was up at Harrogate the other day at the Soil Association
conference and there was an interesting paper, again by Taylor
Neilson Market Research, on "The Market for Organic Food".
So much is said about organic food and it is great stuff, all
good stuff. Their statistic is that between 6 per cent of households
purchase 60 per cent of the organic food; that means that 94 per
cent of us, the rest of us, are purchasing 40 per cent. That 6
per cent of households that is purchasing 60 per cent of organic
food I would characterise as the Waitrose shopper: older women,
better educated, higher income. Yet, as I read the press, apparently
there are great swathes of interest in organic. There may well
be but they are smaller segments than you imagine, although that
is not to say that they will not grow. Your question was how can
you measure how much people are willing to pay for animal welfare.
It is very difficult. To my mind, you have to put it on the shelf,
but in doing so you have to communicate the benefits. I have not
seen that. So when farmers shriek with rage because consumers
quote "Only buy on price", I think they have missed
the point. The consumer has failed to work out what the benefit
is. Consumers do not shop on price; they shop on value and value
is the relationship between price and quality. If we elect not
to tell them about the quality attributes, then they just shop
on price.
194. We come back to the point you have made
several times about communicating.
(Professor Hughes) Yes, and I think that is absolutely
critical. Put yourself in the place of the shopper. You are in
that store on Thursday night, aisle 12. You are going to be there
once a week for 40 minutes. There are 30,000 products here and
you want to get away. The last thing you are going to do is take
products off the shelf and spend five minutes exploring the ingredient
mix and what have you. Even if you ask the difficult question:
actually what is quality assurance in British pork, or whatever
the little label is, then it is most unlikely that anybody in
the store will be able to tell you.
195. You have suggested, I think, that farmers
could do more perhaps to put pressure on the next stage in the
food chain, the supermarkets or whatever, in terms of the communication
challenge.
(Professor Hughes) The little red tractor was a start
perhaps in the right direction. What we need is some shorthand
mechanism for explaining to consumers and others in the food chain
what quality attributes we are bringing to our products.
Mr Todd
196. You are a Sainsbury's professor, I think.
(Professor Hughes) I was.
197. Your description still is that on one of
our sheets. You have emphasised the issue of information. For
those of us who have store cards - and I would be surprised if
anyone around this table has not got a store card - the supermarket
we go to has a great deal of data as to what we purchase or they
can access that data. What they do with it, I do not know.
(Professor Hughes) That is a good point.
198. Surely it should be possible to provide
better tailored information to consumers on exactly the sort of
issues we have been talking about. If I go into Sainsbury's I
can swipe my card now and be told that I can get 20 per cent off
nappies which, sadly, is a bit irrelevant to me as a consumer.
What it does not do is introduce me to an offer which may be relevant
and related to my buying habits. What really ought to be there
is something which allows people to make those sorts of choices
which says, "OK, I am interested in organics, press this
button. I am interested in locally produced products, press this
button" and it will actually produce for me a list of items
that I may be interested in with appropriate offers on them. I
do not know whether that is available but it should be.
(Professor Hughes) That is a very good point. They
now have that capacity but they are not utilising it. They are
largely sitting on the data. They are not stupid; they recognise
that it has enormous value. The sort of thing you are describing
is analogous to, say, Amazon.com, for those of us who use that,
where they say, "We notice you bought this book. You would
probably like this book and the other one". We are coming
that way. Within two or three years, there will be an individually-tailored
offer and, as you say, when you swipe the card it will say, "Thank
you, David and Susan, for coming into Waitrose" or wherever
it is, "and your special offer is a bottle of olive oil,
which we are going to give you. We know you like it". It
will be micro-marketing, which they will do electronically. Yes,
we will have a much better opportunity to communicate directly.
199. Linking that back to the farmer, that will
be a way in which you can give many of the core messages which
you need to communicate.
(Professor Hughes) Yes.
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