Examination of Witnesses (Questions 440-459)
MS PENNY
COATES, MR
IAN MERTON
AND MS
LUCY NEVILLE-ROLFE
WEDNESDAY 27 FEBRUARY 2002
440. Well, the processors are going round saying,
"Retailers are taking margins out of them" and now the
processors are taking margins out of the farmers.
(Mr Merton) I think we need to be clear
about what goes on here. We buy milk from our processors and the
processors decide the price they buy the milk from the farmers
at. We all understand the concerns, and severe concerns about
the British farming industry and dairy sector. There are other
ways to get costs out to increase returns for farmers. We have
been doing quite a bit of work through our dairy forum where we
have had all the farming interests round the table discussing
with the milk processors, eye to eye , what the real issues are
and how they might find ways to reduce costs in the chain to make
sure the farmer can get better returns. There is no simple solution
overnight but we are finding we can make some pretty good headway
in sharing the understanding. At the end of the day I think the
milk price is governed by the availability of display in the market
place. Obviously our milk processors, the people who process the
milk, buy the milk not us.
441. Surely the milk price is determined by
long term contracts. If farmers are being told now that they have
got to reduce the price by which they are expected to sell their
milk, that is not the market, that is what people predict that
they think that milk can be sold for. You have a big influence
on that. You need to be honest with the consumers and say, "You
cannot buy milk for this price unless you take more of a hit in
terms of your margins".
(Mr Merton) Yes. I think we have all
got a role to share here. Again, through our partnership meetings,
that is exactly the debate we are having. We are trying to be
real. What milk processors as part of their job have to decide
is how to constructively go forward with the farming community.
At the end of the day they have got to get a return that is viable
otherwise we will not have an industry. That is my concern, and
that is certainly Sainsbury's concern, we want a thriving dairy
industry as we go forward but we are one aspect of that chain.
The way to solve it is not by arguing between us who is at fault,
it is getting the issues on the table together and looking at
ways to solve it together. It is surprising what you can do when
you do that.
Mr Jack
442. We are inquiring about the possibility
of subsidy being removed over time from British farming. That
implies that farmers will have to find other ways to increase
their income. Your analysis of the food market suggested that
more value would be added by the development of convenience and
out of home food consumption. That takes the farmer further away
from the points at which extra revenue can be gained because value
is being added by people other than the farmers. How do farmers
get in on the act of acquiring additional revenue against the
background of a scenario that you three have painted?
(Ms Coates) I should think that on the
convenience food market, one thing we should not forget is we
still need the raw materials that we needed if people were cooking
from scratch. Although some of the preparation may be taken away
from home, the need for the raw materials and the continued growth
and requirement for raw materials is still there.
443. Let me just interrupt you and say that
in the milk sector farmers are debating whether they should vertically
integrate, should they? What is your recommendation, Mr Merton,
when you have your cosy milk groups? What are you saying to farmers?
Should they go to get their hands on the value further up the
chain or stick to being very efficient primary producers?
(Mr Merton) I do not believe they are
cosy milk groups, number one. They are certainly very active and
promote a lot of good debate. The question I think is how we take
this forward as an industry together. We have talked about co-operatives
in the past, that is one aspect which could be done, which would
help. Working and being part of the milk processing industry would
be another one. For example, when we take added value lines, we
do pay in the end more price for a better quality product because
that is what it is based on.
444. Who gets the benefit?
(Mr Merton) If I can give you an example
of something like meat. In "Taste the Difference" meats,
we are charging a premium to the customer and she is paying that
premium because there is a real difference. She can see that difference
and taste the difference and we pay both our processor and the
farmers more money for that sort of product. That is the way we
can share in added value. We all have to have a complete understanding
of the whole chain of events which is important for the farmer
so they know what to produce to get those premiums.
445. One other very quick question. Wal-Mart,
what lessons are you getting from them about the farmer-supermarket
relationship against the background of the United States where
farmer co-operation is very well developed and powerful branding
of primary products is the norm?
(Ms Coates) I think to answer that honestly,
the amount of interaction that we have with Wal-Mart, particularly
within the food business, is actually quite minimal. We are a
subsidiary of Wal-Mart, as you know. On the general merchandise
side of the business, Wal-Mart have had more influence because
that is their area of expertise, their participation in the food
market is relatively small. There are plans for us to get together
later this year and see what best practice learning can be transferred
but that is not happening until the summer time. At the moment
very little is the answer.
Mr Martlew
446. Firstly, there was a comment made before
that there was as much food sold for the catering sector as the
supermarkets. Is it your view that less local product goes into
the catering sector than the supermarkets?
(Mr Merton) From surveys we have done
on the whole that is a reasonable general statement that the catering
market tend not to look at that sort of area although I think
there are clearly some restaurants which specialise in those sorts
of things. As a generality, for the bigger catering sector, from
my understanding of it, that would be the case.
447. If that is the case perhaps we should talk
to some of the big catering companies. You said you had 3,000
local lines.
(Mr Merton) Yes.
448. I presume that is 3,000 local lines throughout
the country by the very fact they are local, they are not 3,000
in each shop or supermarket.
(Mr Merton) Yes.
449. How many food lines do you have altogether?
(Mr Merton) 20,000, within the total
of the store about 20,000.
450. Really although you have 20,000 in one
store you will only have about 300?
(Mr Merton) That would depend on the
store.
451. It is a very, very small percentage, is
it not?
(Mr Merton) It depends on the store.
There are some stores which would have a very strong demand for
some local products and if so we would range accordingly.
452. What I am really saying is you are not
doing very well if you are only got 300 or 400 out of 20,000?
(Mr Merton) I understand your question,
I would say it is worth £60 million a year so I do not call
that small.
453. How much?
(Mr Merton) £60 million.
454. Out of a turnover of what?
(Mr Merton) £14 billion.
Mr Simpson
455. The three of you represent large supermarkets
that in size, the number of people you employ, your share of the
market means that you are incredibly powerful organisations, certainly
as far as the British farming and food industry is concerned.
You slightly give us the impression, both in your written submission
and what you say today, that you are passive in the sense that
you have to respond to what the customer wants and to market trends.
I would suggest to you that you can be highly proactive. What
are you doing in terms of being proactive to help the British
farming industry? You have used some management speak, one piece
of which I have now got because I did not understand it. Putting
aside the gobbledegook what are you doing? To give one very, very
quick example. There is a lot of ambivalence as far as we are
all concerned. We want to buy British, we want food safety but
we are not prepared to pay a vast price. What are you doing in
terms of informing the public that if they decide to opt to buy
this piece of poultry it is produced under conditions which would
not be acceptable within the United Kingdom or perhaps in the
EU as against another piece? Do you actively promote on your supermarket
floors that kind of information so that the consumer can make
the choice, if they want to pay an extra 20 pence or 50 pence
for a product that meets those standards or do you regard that
as naive?
(Mr Merton) I do not think it is naive
at all. I think it is a very good point. If you look at some of
the things that we are selling, and you look at our packaging,
we do state certain things about particular products, for example
welfare, and that tends to be in some of the areas where we have
a slightly different quality and why it is different. We explain
to customers why it is. A good example from our perspective would
be "Taste the Difference" where we do list a lot of
issues about what those controls or differences are and make that
apparent to customers for them to choose. I think colleagues here
do very similar things.
(Ms Neville-Rolfe) Could I add something
to that? On British sourcing, you will have seen from our submission
that we do source a lot of our meat, milk and so on in the UK
and we have been big supporters of the NFU Red Tractor Scheme,
which I am sure you will ask them about to see how they feel that
is going, and similar schemes in Northern Ireland, Wales and Scotland.
Another thing we have tried to do which I hope responds to your
question is about transferring of know-how so we are investing
in Newcastle and Aberdeen in research into organics, which we
have identified as a big area, and we are then, through the NFU
and through master classes, trying to transfer some of that knowledge.
I think that is a concrete thing we can do where we can share
and help people to move forward. We have realised, also, on organics,
80 per cent—we do not make any secret of this—of our
organic food and drink is imported. We have set a challenge, a
target of a billion pounds of sales within five years and we are
trying to ensure that the British farmer gets more of a call on
that market. We have had some success over the last two or three
months in bringing in extra eggs and lamb and other things which
I can give you the details of. I think also what is important
is the industry working together. It is not something we do very
naturally but we do have the Institute of Grocery Distribution
and they have done a lot of work on trying to promote British
produce and made us work together in that respect. That work I
think is going to be taken forward more strongly following the
Curry Report.
456. Can I just say, Chairman, I heard what
Mr Merton said but as a reasonably frequent shopper in Sainsbury's,
it has passed me by, I have to tell him, and it is largely because
I represent a constituency that has got quite a lot of farming,
I have to search to find the kind of details that you are putting.
I would just suggest, and I am sure you are absolutely sincere
on this, that it needs to be put much further upfront. I am looking
for it, most customers it just passes them by completely.
(Mr Merton) If I may respond to that.
We are conscious we can do more and I think as you see us go forward
you will start to see a change in our packaging with that in mind.
David Taylor
457. What we are hearing is it not just tokenistic
window dressing? Come on, let us be frank, the local food that
you talk about, I think you gave the answer to Eric Martlew a
moment or two ago, £60 million out of £14 billion, is
that right? One fortieth of one per cent, is that supposed to
be a serious attempt to work with British agriculture in terms
of marketing local food?
(Ms Neville-Rolfe) If I might say, I
think there is confusion between what is British and what is local.
There is the local, the 3,000 lines.
458. I am talking about food.
(Ms Neville-Rolfe) We are very big customers
of British agriculture.
459. Go back to local foods, that was the question
I asked.
(Mr Merton) The local food has started
probably to gain momentum in the last couple of years as this
has become a customer requirement. Remember we are coming from
the customer angle. I think a lot of these suppliers are extremely
small and are not capable of producing large volumes, although
some of them go on to be potentially national producers for us
in some of the areas. I think by pulling this together—and
remember they are very small producers—we need to encourage
them to get bigger and bolder and obviously we are looking very
carefully at that with our customers in deciding how we take that
forward to get stronger. I think it is quite an achievement because
it is quite small volumes relative to the local community but
very important in terms of the direction we are all trying to
go in and particularly for British agriculture.
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