Supplementary memorandum submitted by
the Director of Communications, Safeway Stores plc (A 61(a))
1. THE BALANCE
OF BARGAINING
POWER IN
THE FOOD
CHAIN
1.1 Towards the end of the session with
Tesco, JS and Asda, one member of the Committee suggested that
it suits the major supermarkets very well to deal, albeit indirectly,
with thousands of ill-organised farmers.
1.2 Although superficially plausible, this
view is mistaken. There are solid, practical business reasons
why the major supermarkets favour more collective organisation
by farmers and a more structured supply chain. Food retailers
are interested primarily in securing assured supplies of meat,
milk, product and other commodities which are delivered to consistently
high quality and safety standards. The existing, highly fragmented
structure of the primary production base makes this difficult
to achieve.
1.3 The specific disadvantages include:
— Lack of scale economies, leaving
too many high cost producers dependent on subsidies for their
survival.
— Difficulties of on-farm inspection
aimed at ensuring that basic hygiene and safety standards are
being met, ie the available resources for inspection have traditionally
fallen short of the demands imposed by a fragmented producer base.
— Continuing over-reliance on speculative
production, especially in the sheep and cattle sectors, where
50 per cent and 38 per cent of herds respectively are still sold
via open livestock markets.
1.4 Although gradually declining in importance,
open livestock markets represent a continuing potential threat
to animal health. Contrary to popular belief, FMD was not spread
by transporting animals over long distances. If animals are transported
directly from a farm to an abattoir for slaughter, that in itself
presents no threat of infection to other animals. The problem
arises when animals from a number of farms are mixed together
in livestock markets. It will be remembered that at the start
of FMD animals from the farm at Heddon-on-the-Wall went through
two livestock markets before being sent on to other areas of the
UK.
1.5 My personal vision of the future—one
which I believe would be broadly shared by other supermarkets—envisages
a much more concentrated production and processing sector, integrated
either through cooperative ownership or by dedicated supply relationships
based on long-term contracts between farmers, processors and retailers.
Such contracts may include guaranteed minimum farmgate prices,
where market conditions permit.
1.6 The claim that the existing balance
of power works in favour of the major retailers and that the latter
must, therefore, be very happy to keep it that way is based on
a very superficial view of how trading relationships are conducted.
The major supermarkets are strongly in favour of changes which
will:
— Enable them to communicate consumer
needs up the supply chain very quickly in the expectation of a
rapid response.
— Secure reliable supplies of quality
food at competitive prices from the farming and processing sector.
— Ensure that any further threats to
consumer confidence arising from health and safety issues in any
part of the supply chain are quickly identified and dealt with.
1.7 These changes will need to be in place
before CAP reform becomes a reality. If not, then the reality
of reform itself will force them through but at much greater cost
to the farming and processing sectors.
1.8 The overriding need for UK farming—in
all sectors—is a sustained recovery in profitability. There
are only three ways in which this can be delivered:
— Higher farmgate prices.
As subsidies are being gradually phased out,
with a cumulative deflationary effect on many farmgate prices
(as tariff barriers against non-EU members are reduced and the
EU itself is enlarged), the only feasible option is to cut costs.
Collaboration and cooperation will be the only way forward for
many farmers.
1.9 How will this be achieved? Sceptics
believe it never will be, quoting the tradition of individualism
which is said to be inbred in British farmers. I would prefer
that we approach this issue along more pragmatic lines by focusing
on the motivation to cooperate and the organisation structures
required to facilitate it:
— The severe reduction in farmers'
incomes since 1995 and the prospect of further reductions thanks
to CAP reform ought to provide enough motivation for many farmers
to think about alternative ways of staying in business.
— Continental cooperatives have flourished
partly because farmers who invest in them have had the opportunity
to make capital gains. French co-operatives, for example, are
organised on the same lines as a Société Anonyme,
ie a limited company. In the UK, by contrast, we have organised
many cooperatives on friendly society principles, ie whatever
dividends or payments a farmer gets, his basic investment remains
the same.
— Continental cooperatives are also
supported by an approach to competition, within current EU rules,
which allows high levels of concentration and permits state aid
to bring these about which would be impossible in the UK. Costs
will be substantially reduced only if co-operatives or other collaborative
ventures are allowed to achieve sufficient scale economies—which
in a declining commodity product may well imply a dominant share
of the market.
1.10 A much more concentrated production
and processing base does not, therefore, necessarily mean that
cooperatives will be able to lever significantly higher prices
out of retailers and, therefore, the final consumer. It does,
however, open up the prospect of a much lower cost base. The major
retailers would welcome this outcome and will do what they can
to encourage it. Further action is required, however, from the
Government, the OFT and the Competition Commission. We also require
a more rigorous definition of the role, resources, management
and success criteria of the Curry Commission's proposed Collaboration
Board.
2. "LOCAL
FOOD"
2.1 There is a good deal of confusion surrounding
this term, not least on the part of many consumers. In everyday
discussion, the term may cover, or be understood to mean:
— Food produced in the UK
— Food produced near to the final customer
— Food which carries a regional, county
or local brand identity
— Food which is produced and purchased
locally for sale in a supermarket or other retail outlet.
2.2 As there is no standard or agreed definition
of what constitutes "local food", retailers will give
widely varying answers to the question of how many such products
they sell.
2.3 In any event, even if there was an agreed
definition, merely quoting the bald numbers of products on sale
in supermarkets would tell you very little about what is actually
happening in the market place. The key issues are:
— How much consumer interest in/demand
for local/regional products is there at present?
— What factors influence consumer demand?
— Are there any constraints on the
supply side which will inhibit future growth?
DEMAND
Last month, the IGD conducted 8 focus groups
across the UK and a further 1000 consumers were interviewed nationally.
The details will be published at the end of March. The provisional
conclusions, however, are that:
— 59 per cent said they were interested
in buying these products.
— 38 per cent said they would always
or usually look for such products if their main supermarket stocked
them.
— 57 per cent said they would expect
to pay more for a product they would normally buy if it had been
produced locally and to the same standards. The IGD warns, however,
that this answer should not be interpreted as representing a "willingness
to pay". Consumers said that the price they would pay depended
on the individual product and the attributes it offered.
2.5 The overall conclusion of this research
is that while a large number of consumers are interested in buying
"local" food, they are unlikely to compromise their
usual standards of quality, appearance, cost or availability.
Local foods need to be able to compete in the market place with
the range of products already on offer.
SUPPLY
2.6 Turning to the supply side, there are
three potential constraints on growth:
— The tendency for local producers
to focus on primary products for which consumer demand is static
or declining.
— The technical and managerial limitations
of many small enterprises.
— The lack of a local processing infrastructure.
2.7 Local producers must understand the
retail market and, in particular, the underlying trend in consumer
demand towards meal solutions which are convenient, innovative,
pleasurable and offer good value for money. This implies the capability
to deliver a range of added value products, as distinct from those
commonly associated with local food such as produce, cheese and
fresh meat.
2.8 Some small producers have major problems
in reaching and maintaining the standards of product quality and
safety which large retailers require from all suppliers. The current
legal framework of due diligence puts the onus very clearly on
retailers to ensure that the products they sell achieve high standards
of safety and quality. A prospective supplier must therefore be
prepared to undergo a factory or premises audit which will establish
their fitness for purpose. In some cases this is likely to reveal
serious shortfalls which the retailer and the supplier will then
have to work together to correct. Given that the big four supermarkets
already have hundreds of small suppliers on their books, they
will have to be satisfied that additional management time invested
in bringing more of them into the supply chain is likely to be
cost effective.
2.9 The weakness of the local infrastructure
may also inhibit growth. As Curry points out, raw materials grown
locally may well have to be sent some distance for processing
and packaging because these facilities are not available close
to the point of production. Food processing is a volume-dependent
business where scale economies drive profit. Over the past 20
years, processing in all the main commodity markets (meat, milk,
product, cereals) has become more concentrated in larger units.
This trend will continue and will more than offset any increases
in transport costs (or "food miles"), which occur as
a result.
CONCLUSION
2.10 The long-term growth prospects for
"local" food are, therefore, uncertain. The apparent
growth of consumer interest reflects the continuing demand for
something new and different. Consumers will not, however, tolerate
any significant departure from their normal standards of quality,
availability and value.
2.11 There is, of course, a fashion element
in "local" food which may not be sustainable. In practice
a good deal will depend on the ability of retailers and producers
to work together to develop products which reflect consumers'
changing lifestyles and do not require advanced cooking skills
or a big investment of time in the kitchen. Retailers will therefore
continue to develop the market by extending their ranges through
trial and error until supply and demand achieve some increase
in equilibrium.
8 March 2002
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