Examination of Witnesses (Questions 680-699)
MS JOANNE DENNEY, MR JON WOOLVEN AND DR RICHARD HUTCHINS
WEDNESDAY 10 APRIL 2002
680. What you have described in that scenario is a very complex piece of work. You have been offered £300,000 possibly with more money from the government. Is that going to be enough to do that and to provide a similar in-depth analysis for the two other areas you have identified, plus whatever else this steering group is going to do? Is it a question of the jam being spread thinly for the sake of doing something about the food chain that was not there before?
(Ms Denney) We are very grateful for the money we have received. I think we feel very confident on the terms of reference that we have for the Food Chain Centre, which is narrow and deep: it will not be all things to all people. Our main thrust is to provide good information for the whole of the food chain, consumer information
681. That was not the question I asked. It was about £300,000 with possible additional monies, given the in-depth study you have just described on red meat. That is a very big piece of work. Is the budget sufficient for that, together with the two other areas you are going to discuss with the steering committee, plus whatever else they might nominate themselves plus what the industry might suggest, or is it a question of the jam being spread too thinly?
(Mr Woolven) It is only the first year funding, and clearly government has had to respond outside the normal budget process in order to find some money. We have also had some secondees in terms of resourcing for the centre, and we have had some money from DTI via a separate scheme, the industry forum adaptation, and we have budgeted it which is sufficient for us to get a good start in the first year. After that, we hope, if we do a good job, that we will expand and as part of the budget procedure for next year that we will get additional funds.
(Dr Hutchins) Also it is important to add that the food industry will be giving a great deal of resource in terms of people's time towards these projects as well which has a considerable value.
(Ms Denney) In terms of detail, first of all there will be no overheads for the Food Chain Centre in terms of rent, heat, lighting and space. Secondly, we are getting people given to us in kind, and it is people which will be the biggest cost, and our role will be about facilitation. We need cash for paying our third parties to do elements of the work. Over the three year period, we have costed it out at about £6 million.
682. You have done a lot of work on benchmarking. Tell us about that and what the benefits are that it has produced. Can you give us some examples as to how benchmarking has been taken up?
(Ms Denney) Yes. We have done two pieces of benchmarking that will be of interest to the Committee, one is on fresh produce and one is on the livestock sector looking at all categories. Jon led that piece of work and worked with over 200 experts so I will ask him, if I may, to explain to you the strengths and weaknesses of each of the sectors as a result of that piece of work.
(Mr Woolven) There are various different types of benchmarking. The project that Joanne was talking about was really qualitative benchmarking, where we compared the UK with our strongest competitors around the globe and we did that in one study for livestock products and in a follow-up study we did it for fruit and vegetables produce and in each case we selected something like seven or eight of the best competitors around the world, and we looked at a list of different competitiveness criteria. Clearly there are a lot of different factors that influence competitivenessfor example, the fertility of the soil, the climate, the use of science and technology, the management skill base, etcand we brainstormed around 150 or so different competitiveness criteria and then we polled expert panels in each of these countries to rate their own country against these criteria for each of the different product groups, so for poultry, beef, field vegetables etc. Really it was a very large scale worldwide expert survey on strengths and weaknesses, and out of that you get a good strategic picture of where we need to focus our improvement. Those studies have filtered through in lots of different ways into DEFRA and into various trade bodies like the NFU; they have been looked at by retailers, and so on and so forth. So that, we hope, has helped to set an agenda for improvement and, if you would like to talk further about the specific conclusions of that, I am happy to do that.
683. Just give me one example from the beginning of the supply chain in poultry as to what noticeable difference I might see as a result of this work?
(Mr Woolven) This type of benchmarking was strategic and, therefore, it is about influencing different trade bodies and different companies in terms of addressing weaknesses and building on strengths. If I can refer to a different type of benchmarking, it would be easier to give you a clear example on how that feeds through, because obviously something that is strategic is sometimes harder to point through to specific actions. Another type of benchmarking is about comparing numbersit is quantitative. For many years, we have worked with retailers to do logistics benchmarking, and that is where each of the main supermarkets on an annual basis contribute data to us about the efficiencies of their logistics. That way we are able to produce overall industry data; we can track through time over a 20 year period how we have moved gradually towards a more just-in-time supply chain, but also you can look at the profile of each individual retailer. Now, it so happens that Tesco is one of the leaders in terms of retail logistics; also Safeway, and we know that spurs their competitors to look at some of their performance data and say, "Well, if Tesco can do it", why cannot we? Here is a target for to us improve to achieve that level of efficiency". That in turn, therefore, focuses and drives businesses to achieve the standards that the current market leaders are reaching and, having done some of the strategic background work, that is the sort of thing that we want to promote through the Food Chain Centresome of that hard data so you can take the best in class, show the others what is possible and give them some indication as to how you get there.
684. The difficulty with strategic benchmarking is that it is all rather aspirational and vague and not necessarily particularly action orientated. You may be able to disprove that statement by producing some concrete piece of evidence from the examples you have given.
(Mr Woolven) I think before you leap into action you clearly do need to have a strategy, and you need to target your efforts. For example, one of the results that is shown from our survey is that although we are quite good in the UK at some of the university-style background R&D, we are not as good at taking that to market and, therefore, by getting the hard evidence of that
685. That is scarcely ground-breaking. I think I must have heard that 100 times in my life!
(Mr Woolven) I realise that but we did have 150 different criteria which do go down to more detail than just that point. You can pick out those areas where we are lagging behind where there is no particular need for us to do so and you can say, "Yes, that should be a priority for improvement". That should then trigger a round of developing action plans. If I can quote, say, the red meat industry forum which has been taking place over the last six months, that took up the cudgels of this work specifically for red meat: it looked at benchmarking and what we needed to do on-going in order to get the numerical benchmarking; it focused on meeting consumer needs and on supply chain improvementsthree things that came out of that original study. It has developed a whole series of action plans and we are now in that action phase.
(Dr Hutchins) We might wish to send you a paper on the key results of these benchmarking studies to give you some of the detail.
686. That would be helpful but, if you take that red meat example, you said that one of the outcomes was to look at supply chain efficiencies. How did that work? What proposals are starting to emerge from that and what has that shown?
(Dr Hutchins) One of the key conclusions, and this will be no surprise particularly if you look at lamb or beef, is that there are huge opportunities to take costs and inefficiencies out of the red meat supply chains. Secondly, there are great opportunities for the red meat supply chains to improve transparency and flow of information up and down the supply chains, in exchanging and sharing best practice in those supply chains. At a very top level those are the kind of conclusions that are coming out and they will be of no surprise at all.
(Mr Woolven) That leads us on to the Food Chain Centre which is now taking it forward a step further, so by working with Cardiff University, who are experts in supply chain mapping, we will be picking out a series of supply chains and tracking them all the way through, looking for specific improvements and some best in class examples.
(Ms Denney) Most importantly, there will be transparency of costs for the first time so people will be able to see at each stage of the supply chain, who adds cost, who adds value, and where the waste is.
(Dr Hutchins) Also, the key factor to bear in mind is that to make any of this work there needs to be a commitment on behalf of all parties in the food chain to improvement, and that is quite a big hurdle to overcome.
687. You have said that there are great costs to be saved in the red meat chain but it would be useful to have a scenario describing the chain now and, secondly, with the costs taken out so we can see how it is going to happen.
(Dr Hutchins) I think that is a very good example. There are some extremely good comparisons, very simple ones, that you can make. We did this three or four years ago in a piece of work sponsored by DEFRA which looked at the beef supply chain but, if you compare the poultry supply chain with any one of the beef supply chains and look at the complexity of the number of players in those chains, you can clearly see on one piece of paper where the inefficiencies may lie and where the opportunities for improvement may lie.
Chairman: If you can make sure we have those it would be helpful.
688. From your perspective in the IGD, you see yourselves having a broad mission and you look up and down the total length of the supply chain: could you perhaps tell the Committee from your position, looking at the length and breadth of the grocery supply chain, what you think the strengths and weaknesses are of the British agriculture?
(Ms Denney) I think we need to go back to the research so in terms of the competitive position, if I can make a few broad statements and go to the detail through Jon. I think one of the most important things about the food industry is that we have a UK consumer who is very well predisposed to eating chilled, convenience and added value products. We run a just-in-time supply chain which, as I said earlier, is the envy of the world even though we do not get everything right every single day and we would hold our hands up to that, and one of the things that makes good business sense, if you talk particularly to the retailers and the manufacturers, is to make sure that, if we have this just in time supply chain, we procure the raw materials close to point of production or close to point of consumption. There is a huge opportunity there to exploit that, and there are some very good case studies of where that works well because we have done some work recently on local sourcing, so I think that is very important. Secondly, in terms of the UK, we have got some good things going for us in that, if we compare the UK in general terms to Europe, we do have scale. At the moment some of those benefits have been lostnot least of all because there are other factors which mitigate against UK farming doing well like currency, low incomes at the moment which are going to be a problem in the medium and longer term because they should be investing in people, technology, equipment and infrastructure but, if you are in the farming business, then really you need to be in one of two places. You either need to be specialist and nichei.e. have something which is very well differentiated from other people, in which case there are some players out there who we need to encourage and nurture and, at the other end of the scale, we need to make sure that the UK farming community, particularly those involved in producing quality commodities, have sufficient scale in order for them to make a profit. Against Europe, the scale does not look too bad. When you look beyond Europe, then it is clearly very challenging.
689. You categorised two areas that are important. Can you give me some rough guide to where you think British agriculture at the moment is positioned in that? Are we talking about the majority of British agriculture falling into one or two of these categories? Is it less than that or more than that?
(Mr Woolven) There is a relatively small but growing proportion which is focused on niche markets; clearly organic is one example of that and I am sure everyone is aware of the rapid growth of organics. The majority is still in the commodity market, in some cases able to compete fairly effectivelyalbeit struggling a bit because of the current exchange rate differential with Europe, and in some cases fighting a rearguard action and needing to do something quite fundamental perhaps to be able to compete in a commodity area. So still the great majority is not in niches and therefore, whilst we would expect some of those niches to grow and for there to be good opportunities, you cannot rely on that alone for the salvation of agriculture in totality.
(Ms Denney) Just to put the organics into perspective, it is a rapidly growing market: it grew by 33 per cent last year but is still only valued at about £800 million, so we are talking maybe at best 2 or 2.5 per cent of the total.
690. You outlined strengths and potential strengths of UK agriculture. What would be the two main fundamental weaknesses of agriculture at present, beyond exchange rates and that kind of thing?
(Mr Woolven) If I refer to some of our research in terms of those international studies, one I think is to do with staff: there is perhaps a chronic problem in terms of the image and morale of farming and current levels of profitability and, therefore, it is very difficult to attract new people into that industry. If that is not addressed quite shortly, then, as current generations of farmers retire, there could be a major gap in terms of succession. The lack of profitability in recent years is resulting in a lack of investment and that is something that will concern us considerably. That means that we may start to slip behind in terms of modernising our equipment and facilities, and also I think a really important issue is to do with our international image which has been badly dented by BSE and by foot and mouth, and that means that the tremendous effort that people like Food from Britain are making to try and redevelop our export market is really clearly working against a perception difficulty. So, if we can address that and develop some strong brands, I am sure that is part of the solution.
(Dr Hutchins) I think it is slightly misleading to generalise because there are huge differences between sectors. Generally speaking, if we compare white meat with red, there will be huge differences in efficiencies.
(Ms Denney) The other point is that those export markets also in the livestock area are absolutely key because the UK consumer does not eat the whole carcass, so for the economics to stack up, certainly in the livestock sector, they need to have markets for those bits of the animal they cannot take to market in the UK.
691. If we removed EU agricultural support for UK farming, what impact would that have on those strengths and weaknesses that you have outlined?
(Mr Woolven) Certainly, if you just took it away from the UK and not from the rest of Europe, which is still where we largely compete albeit the world stage is increasingly important, then I can only envisage it would have a drastic further effect on profitability and, given that the lack of profitability in recent years is resulting in low morale and low investment, then I can only say that I think the results would be catastrophic. It would be very different if this was part of a process hand-in-hand, a subsidy reduction (a) across Europe and (b) ideally across the world. That is a very different story.
(Dr Hutchins) We must look positively at the opportunities which are presented by the removal of subsidies, and there will be opportunities for proactive farmers to move into niche markets and to specialise, to move out of food production into tourism and, for example, to diversify or to become low cost providers of raw materials to the UK and to manufacturers.
692. In the memorandum which you submitted to us, you list your corporate membership and the list runs to about ten columns. Primary producers fill approximately one sixth of a column. Can you tell us why so few farmers and primary producers are members of the IGD?
(Ms Denney) That is a fair point. IGD has traditionally been a membership organisation: we have focused very much obviously on the big corporate organisations to start with. We have 550 members including their subsidiaries: they cover about 70 per cent of consumer expenditure on food and grocery. We recognised three or four years ago that our links with the farming community were not strong: they were unable to pay or were less inclined to join IGD membership and what we have done, irrespective of membership fees, is tried to gear a large part of our programme on the farming sector. In order to do that, we developed, first of all, I think it would be fair to say a good working relationship with MAFF and obviously continued that with DEFRA: secondly, we have worked very closely with the MLC and the NFU; we have good links into DARD and Scottish Enterprise; and what we have been doing is a whole programme of work for the farming community. So three years ago we took a sectoral approach, looked at the poultry sector, and shared that information widely with other stakeholders to get the messages out there: we have done some work on the beef sector which we mentioned earlier, and we will be sending you that report: we had a look at some of the challenges facing the fresh produce sector: we set up this very small producers' support initiative, where we tried to be the "dating agency", if you like, between small producers and larger players who were willing to share knowledge and expertise and help them in their businesses. Obviously they are in a different sector but more recently, in terms of the farming community, we have become a preferred supplier of NFU and we have been running workshops around the country for the farming community on the consumer, on the supply chain, on business opportunities: we have worked with the business in the community and the Prince of Wales on his rural action programme to identify opportunities for local sourcing to see what makes people successful and what does not, and we have been walking the supply chain with anybody and everybody who is prepared to have a look at the challenges that face everybody throughout the chain. Membership per seno, but we are doing a lot of work in that area and using our very broad network of contacts to share the work we do and the information very broadly.
(Mr Woolven) So we do not have much direct membership from primary producers but lots of indirect membership via people like NFU, the Meat and Livestock Commission, the Home Grown Cereals Authority, etc.
693. But how can you encourage that one sixth of the column to go up to two or three because, in any organisation, we know it is the presence of people that is absolutely crucial in getting their point across. Are we talking about the fact that there is virtually nothing a year ago and you gone up to one sixth? What has been the growth rate?
(Ms Denney) In terms of IGD itself?
(Ms Denney) In total IGD terms it has been fair to say over the last three or four years we have been growing at about fifty companies per annum.
695. I am thinking in terms of farmers and primary producers. Are we talking about the fact there was hardly anybody three or four years ago?
(Ms Denney) It would be fair to say we did no work in the farming community about four years ago and had no members within the farm community.
(Mr Woolven) Other than the NFU, who have been with us a bit longer.
696. One of the things that came out of the Downing Street summit on 26 March was an agreement to encourage food manufacturers and the smaller supermarkets to apply voluntarily the principles and practices that are in the code of practice on supermarkets dealing with suppliers, which sounds very good, but we had evidence from some of the supermarkets at our session on 27 February and one of the points that came up there was some discontent about not having been consulted on the operation of that code of practice. I think among your membership you do have all of the major supermarket chains. Is your feeling that the supermarkets are going to sign up to that voluntary code of practice and that that initiative is going to proceed successfully?
(Ms Denney) I think that is very difficult to say at the moment; I would say the jury is out. First of all, as you probably are aware, per se we were not involved in the development of the code and clearly we are not there at the trading interface. What people tend to forget about the code of practice is that it was not designed per se to govern trading relationships but was more about stopping anti-competitive behaviour and to ensure that there were not too high barriers for entry for people wanting to come into the market place. Clearly the two are not mutually exclusive but it was not designed per se as a remedy for trading relationships, although a lot of the media and everybody describe it in that way. That having been said, if people believe generally that the code of practice is worthwhile, peer group pressure will prevail and I think there is a very good chance that people will either say, "We will do this voluntarily" or "We will use it as a building block on which to do something even better", because, if it becomes good practice, everybody will want to do it.
697. That is from the supermarkets' point of view and I take your point about that. How does one sell that code of practice to those involved more directly in agriculture? What is there in it for agriculture in the United Kingdom?
(Ms Denney) I think the challenge there is that it has been designed for the retailers in order to try and govern their behaviour, but most of the retailersnot all and not in every casedo not operate directly with the farmers. They are operating at one or two removed in terms of position in the supply chain, so I think that is a real challenge.
(Mr Woolven) May I add that it could be very helpful in building a better climate of trust and that is something that is really important for the Food Chain Centre where we also hope to contribute to that climate of trust through areas like better transparency.
698. Is this exercise not a bit of a meal because, looking at the DTI's press release of 18 December, it says for starters that Asda, Sainsbury, Safeway and Tesco were asked to sign up and Somerfield said they would sign the undertaking when their market share had risen to 8 per cent, which may be some long way off. There was a quotation from the Competition Commission which found that undue exercise of buyer power by supermarkets in the circumstances identified in the supermarkets' report has effects which are against the public interest. I think a lot of people in the farming and growing community thought this would be the document that would give them a bit of leverage against the huge buying power and excessive use of that buying power in commercial terms vis-à-vis prices but, when you look at it, it is really a code of apple pie and motherhood good practice about how to trade properly, as opposed to a practice which says, "I respect the smaller supplier; I understand if I lean too hard I could have some difficult effects on the supply chain". Do you have a view as to which is the more correct interpretation from the supply side of this document?
(Mr Woolven) I come back to the fact that this was the outcome of the Competition Commission inquiry into supermarkets, and in many ways it is technical in that it looked at a series of practices by retailers which the Commission felt might distort competition in their supply markets. It said that that will only distort competition in those markets if the retailer is of a sufficient scale, and it is designed to address that specifically and, therefore, really that is what it should be judged by. A lot of people have been seeking a much broader code of practice which is about harmonious trading relationships, and this could be seen as one step on that but it is not designed specifically for that.
699. You sound almost like a spokesman for the DTI defending the status quo. I am sure that was not your intention!
(Mr Woolven) It was really just an observation.