Examination of Witnesses (Questions 220-239)
MR DON THOMAS, MS LYNDA JAMES, MR REES ROBERTS AND MR BOB BANSBACK
DR DEREK MORRIS, MS MARGARET SMITH, DR CLIVE RIX AND DR DOUGLAS COOPER
TUESDAY 11 DECEMBER 2001
220. I am just wondering if your survey would have shown rather different results if that sort of context had been introduced into some of the questioning?
(Dr Morris) I can only speculate; but I think the difficulty about it would be this. If one were to put the question, "This is what the farm-gate price for milk would be," or for some product is, "and here is what you are paying in the shops; are you concerned about that?", given that, typically, the farm-gate price is a small fraction of the retail price, you could well imagine that many consumers would say, "Well, yes, I am very concerned, I hadn't realised." I am not sure how far that takes you, because that should only have any impact if they then have an understanding of why the difference: is it profiteering, or is it the costs of manufacturing and processing and wholesaling and distribution, and so on?
221. I take your point. I think it is because I am concerned that their only real comparators are other supermarkets that provide something broadly similar, and therefore they are satisfied, as consumers, and in some ways I want to disrupt that satisfaction to get them really to think about it.
(Ms Smith) Could I just perhaps help. Of the 70 letters that we received from individual consumers, as direct evidence, I think about three actually raised this issue with us talking about the discrepancy of price at the retail level and the farmer level, so that is three out of 70; and one of them said that the concern was picked up after being portrayed in a recent television documentary, so this evidently is not something that a lot of consumers are exercised about.
222. I think we are going to come on a little bit later to what weight you gave to correspondence, so perhaps I will not stray onto that territory.
(Dr Morris) Can I possibly make just one observation. The alternative statement that could be made is, when a consumer spends £1 at a supermarket, the supermarket's profits will be approximately 5p, and that covers, obviously, tax and dividends and investment. I do not know how consumers would respond to that, but I suspect not greatly, one way or the other.
223. Let us think about where we can, or perhaps we can, make a comparison. I know you looked at this in your report. The difference between what people pay for their groceries here, in the United Kingdom, and what they would pay in the rest of the European Union; what are your findings on that?
(Dr Morris) Yes; that was, of course, one of the factors that prompted the inquiry, by no means the only one. So we went into that in very great depth, we surveyed several hundred products in several hundred outlets throughout Europe, and I do believe it is the only robust study of this nature that has been done, and I think has not been challenged, and the results were really quite clear, which is, depending quite how you do the comparison, UK prices were between 12 and 16 per cent higher, on average, than elsewhere in Europe. Now that would, of course, cover a range, for some products there might be no difference, at the other extreme maybe 30 per cent difference, but, on average, between 12 and 16. So, yes, there is that difference, and it is a cause of concern to consumers, because it leaves the question why. Perhaps the best way I can answer that is the following. An exactly similar comparison on 1996 data showed that the UK was marginally cheaper than elsewhere in Europe, and in the period 1996 to 1999 grocery price inflation in the UK was less than elsewhere in Europe. And one says, well, how can it be that prices were lower and they went up less, and they still end up 12 to 16 per cent higher at the end; and the answer is simply the exchange rate, the exchange rate rose a little over 30 per cent in that period. And the great majority of groceries are not internationally traded, something like 80 per cent of all the groceries you or I might buy in a supermarket are produced in the UK, so when the exchange rate changes the comparison changes. There is also a land cost effect; but predominantly it was the movement of the exchange rate.
224. Dr Morris, we might actually be straying into the areas that you cannot tell us about, from your point of view, but the supermarkets told us, in confidential terms, but I am not going to breach any confidences individually, because it all happened to be the same figure, when they told us that, their margins in this country, UK supermarkets work on 7 per cent margins, and we had information that the supermarkets in the EU generally were working on 3.5 per cent. That does tend to suggest that our supermarkets are making more money out of British consumers than European supermarkets are?
(Dr Morris) Right. One point I should stress is that, of course, all of the work that we did was only up until 1999, and the nature of our work is, once we finish an inquiry we finish, so I cannot offer any observations on more recent data. But if I can focus on the data that was available at that time, we found that margins had been higher but were coming down, and the average in 1999 was about 5.5 per cent across all the supermarkets we looked at. You are absolutely right that margins in most of the rest of Europe were significantly lower, about 3.5 per cent. That does not tell you very much by itself, and the main reason for that is that the capital costs of supermarket activity in this country are significantly higher, they can, in some cases, be up to six times as high as elsewhere in Europe; the main reason for that is the price of land, though it is partly to do with the fit-out costs as well. So that the proper measure of profitability, for international comparisons, is the rate of return on capital, and we looked at that in some detail. The evidence there is that the UK returns were broadly similar but fractionally lower than the average elsewhere, and we also did some comparisons with the US, though I do not think that much can be deduced from those. So that was one factor, but only one, leading to our conclusion that profits were not excessive in UK supermarkets.
225. Just coming back to this issue of correspondence, and I note from the report that you received only 30 complaints from members of the public, and you took this as reinforcing the thrust of your evidence that there was generally a high level of satisfaction. We are used to receiving submissions ourselves, as a Committee, of course; but do you think it is fair to rely on the lack of complaints from the public as evidence of general satisfaction?
(Dr Morris) No, I do not think it is right to rely on it, I think it is factor. One has to remember that, at the time, the inquiry into supermarkets, and indeed supermarkets generally, were under intense media coverage, there was a major "rip-off Britain" campaign, people knew that we were investigating them, and, against that background, a very small number of complaints is, I think, significant, but no-one would ever rely on it. So we also then looked at the Consumer Association survey material, plus we did have, as I say, a very major survey of our own.
226. How did you publicise the inquiry amongst the general public?
(Dr Morris) One of the things we did was actually to hold a meeting to which the public could come, we held that in Birmingham, and so that was publicised through the press. We do always advertise quite widely in relevant trade magazines, and so on, but getting to the consumer, through that, is almost impossible; so if we want a consumer view the only way really is to have a properly-conducted, large-scale consumer survey.
227. How did the number of individual complaints compare with other Commission inquiries, just out of interest?
(Ms Smith) A bit higher, I think. I think they were quite high, in Commission inquiries; although obviously it depends on the inquiry. Another one where we had a lot of consumer complaints was contact lens solutions, which was one where, obviously, the individual consumer is closely affected. Just to clarify, in the Supermarkets inquiry, we advertised in The Times, the Daily Mirror and the Daily Mail, The Grocer, Supermarketing, and Retail Grocer in Northern Ireland, and I think some of those newspapers were intending, obviously, to pick up the consumer response.
(Dr Morris) But it is a very poor source of evidence really, because very few people complain.
(Dr Rix) We had a lot of correspondence on the new cars inquiry.
Adam Price: Okay; well thanks for that.
228. Possibly, one of the better ways might have been to do surveys of consumers in supermarkets, asking what their views were, as they were going in or coming out; did you not think of that?
(Dr Morris) We thought about that, but we were concerned about that, because if you go to consumers at supermarkets you have biased the sample; these are people who, presumably, by and large, like supermarkets, and you could get too rosy a picture.
229. I have to go to supermarkets, and I hate them.
(Dr Morris) But some people might hate them so they do not go to them, and you would miss those people; so actually we surveyed almost 1,000 people, who were approached in their homes by Opinion Research Corporation, and these were in-depth, 40-minute interviews, these were not just "tick a few boxes", and I think that is a more reliable way of getting at the overall perspective on supermarkets.
230. They seem to be more reliable than relying on people that write in, because if my post-bag is anything to judge by, they are not exactly representative of the general public; I hope, anyway?
(Dr Morris) We did not place reliance on the number of complaints submitted.
(Ms Smith) But there were 850 written submissions from all sorts of bodies.
231. Dr Morris, you have just mentioned that you were here when the Meat and Livestock Commission gave us evidence, and you probably recall that they talked about the price spreads that they have given to us in evidence. If I can just repeat perhaps the important figures and then ask you a couple of questions. The price spread for beef in October this year was 58.5 per cent, compared with 57.6 in October last year; for lamb, the figures were 67 this year and 62 per cent last year. So in both cases an increase. The increase in these price spreads has been a consequence of both an increase in the retail price and a reduction in producer prices. I take your point that this all comes after your report was published, but if we can use your expert knowledge; what do you think would be the reason for the increase in price spread in the lamb and beef industries?
(Dr Morris) You are right that I do not have knowledge of the most recent data, but if you go back to the data we were looking at, you did see increase in spreads even then, so the question you are posing was one we had to address, albeit the specific figures were a bit different. The MLC is, I think, a very good and reliable source of data on this, and they were one of three studies using MLC data that established increases in spreads for both lamb and beef. The problem was what was going on there, and there were really four, in a sense, competing explanations. One was simply that someone in the chain was profiteering; but the alternatives were, first, that there were increased costs in the chain, perhaps arising from some of the shocks that have occurred, and we heard about that earlier. Another factor was that quite a proportion of the animal that never goes to the retailer, hides, skins, risk material, and so on, seemed to be receiving very, very much lower returns. It was the collapse of export markets for skins, for example, I gather some risk material, which previously had had some positive value, actually now had negative value, because there were the costs of actually getting rid of it. So there was all of that, that was happening, which was hitting farmers, but did not relate to retailers. And the final explanation that the Meat and Livestock Commission thought was important was, over that period, there was a change in the balance of cuts, there was a move towards supermarkets focusing more on higher quality cuts. And the difficulty for us is that all of those could seem perfectly reasonable and plausible; the question is, which was right. And we have to remember our focus, our terms of reference, was supermarkets, we were not per se dealing with the whole supply chain, so what we did, to try to get round that, was, we demanded a very substantial amount of data from the supermarkets, first, obviously, on their selling prices, but secondly on the actual input costs to them, over a period of time, for absolutely precisely specified and standardised cuts of meat, so there could be no question of changing the composition. Other aspects of the supply chain, prior to the meat hitting the supermarkets, were therefore irrelevant to this, and we could focus very precisely on supermarkets' retail margins. And the results were, if I take lamb first, one supermarket had significantly increased its margin, though from a very low level, the others had all reduced their margins, and the overall average of that was that supermarket retail margins on lamb had come down by about a little over 35 per cent in that period. Beef, we did not study, and the short reason for that is, beef was in such crisis, there were so many extraordinary factors hitting beef, not least BSE, at the time, that we thought that we would be unlikely to get any useful information specific to retailers on that. But we did note that the price spread increase on beef was roughly the same as for lamb, but we were informed, and very plausibly too, that the cost increases were much bigger in beef than in lamb, and so we thought that any result for lamb (and we, there, as I say, found declining margins) would imply that, for beef, margins, if anything, would have fallen further. We also did this for milk, and we found quite a different picture there, retail margins on milk rose very strongly in that period, and, obviously, we took that up, in no small way, with the supermarkets. They said that near the beginning of the period there had been a very intense price war on milk and that their margins were negligible at the beginning, and they were taking an opportunity, when their input prices fell, to restore their margins. So obviously we checked all of that out, and that did seem to accord with the facts, the margins at the beginning of the period on milk were, in some cases, negative, but when they were positive very low. In none of these cases where margins rose did any of them actually get even to average supermarket levels, the actual figures are excised, but we would obviously have pursued it if they had gone higher.
232. Dr Morris, obviously, you have spent a lot of time on this and put a lot of effort into it, but I think the average lay person is going to think that, when the farm price at the moment is 20 pence for a litre, for milk, and it was down to 16 last year, and the supermarkets have been charging 45, 50 pence a litre, that is a huge difference. Now with sheep and cattle, obviously, there is cutting and the processing and the inherent waste, but with milk it is a product which is chilled and pasteurised and then goes to the supermarket; okay, it goes down the normal chains, the cool chains, and what have you, but it does seem to be a huge leap. And, as I said, a lay person is going to think that, well, admittedly, although your remit was to look at supermarkets and not the supply chain, one of the problems we had, when we were looking at the price in the food industry, in the meat and livestock industry, was that we were trying to look at the chain, and we thought, well, we will ask the Government to put it before the OFT and get the Competition Commission involved in this, because it is such a huge issue. And we were rather hoping, as our inquiry was quoted, certainly in the press release, that it was partly because of our asking for that that you got the job, that it did seem that that was the area that ought to be focused on, and it looks as though you have not really focused a great deal on that. But can you comment on this huge difference, milk particularly?
(Dr Morris) For the same reason, it is difficult, we stopped looking at the end of 1999, but, as I have described, the trend up until then was one of very substantially increasing margins, albeit from a very low level. I do not know whether that trend continued or not after then, it is just outside our time period; if it did then, of course, there could be a significant problem there, because margins had recovered very substantially. But it would just be speculation on my part, I do not know what happened to margins after that.
(Dr Rix) Can I add, from the milk inquiry that we carried out, it is not true to say that milk just goes from the farmer to the dairy and then onto the shelf, because milk is also going into products, so it goes into butter and cheese, and it is not just sold through supermarkets, but for doorstep delivery. So you cannot just say the price of milk to the farmer is 20p, on the supermarket shelf it is 50p, you would have to do the full calculation, it is much more complicated than you are suggesting.
233. It is more complicated, Dr Rix, but it is still a factor of 35p on a litre which is sold on the shelves. The supermarkets are paying that bottom price, they are not paying a higher price?
(Dr Rix) Yes, they are getting the margins Dr Morris referred to, which suggests that supermarkets are not making large profits on milk.
234. That I find extraordinary.
(Dr Morris) Would it help if I just gave you an overall statistic; the income to farmers and other primary producers, in relation to grocery in the UK, in 1999, was about £8.3 billion, and consumer expenditure on those products in the shops was about £63.3 billion. So, if you at random take any product and compare what the primary producer is getting in relation to what the consumer is paying, the average answer is about an eighth, and I think we must presume that the vast generality of products are not ones where huge profits and profiteering is occurring. And part of the difficulty is just that people, I think, generally, do not appreciate, we had not appreciated before we looked at it, just how much of the costs that consumers finally pay is after the primary producer stage.
235. Does that very complexity, we heard earlier this morning about the length of the supply chain and the different players in it, does that actually suit the supermarkets, in that when it comes to something like this they can point to so many different things that could be responsible that they can actually hide their profiteering?
(Dr Morris) I do not know quite what attitude they take; all I could say is that the methodology we adopted, that I have described, was one, as it were, from which the supermarkets cannot hide, it simply focused on what they were paying and what they were charging, and therefore what revenues they were getting, out of which, of course, they had to cover their own costs, and hence what profit were they making.
236. But there are other factors; for instance, you said about the more expensive cuts. Now it is the supermarkets themselves, one could argue, or it may be the case that supermarkets have chosen just to focus on selling the most expensive cuts, which they can get the biggest profit on, and do not want to take the other cuts; and those of us who like a good stew or casserole often go to the supermarket and are very disappointed with what there is on offer, the cheaper cuts, they are not pushing those. So they are looking to someone else to pick up that cost, whereas if they had a more holistic, comprehensive approach to selling butchery products perhaps some of that cost they could have picked up, or, at least, on a lower margin?
(Dr Morris) I guess that must be a question for the supermarkets, why would they not go for the more holistic approach. I would speculate their answer would be that they are very much driven by consumer preferences, in this respect. I cannot myself see any reason, given what we have seen of margins on the meat that they do sell, which anyway up until 1999 by no stretch of the imagination could be regarded as excessive, on the contrary, I can see no reason why they should choose to determine "we will sell this product," if it is not really what consumers want. I would think they would be driven very much by consumer preferences.
237. Of course, the other aspect of this is that their suppliers are essentially the packers, they are at the end of that chain; this is why we wanted the whole chain to be looked at, because we had seen there were significant problems with that chain, as we thought, but we had not got the resources or the ability to look at it?
(Dr Morris) Right; and, of course, the reference to us did not involve or require us to look at the whole chain, though, obviously, we learned quite a lot about it, in order to focus on the supermarkets area.
238. I think this probably accounts for some of the disappointment that the farmers and producers have seen in terms of your report, in that you were not focusing on the areas where the problem might be; but, again, that is history.
(Dr Morris) There was one other reason why we did not look at the whole chain, which was, we very quickly found that there had been three very detailed studies, including the MLC one, and, by and large, the three studies, MAFF was another one, and an LE one, came to fairly similar conclusions. So I think, even if we had had a duty within our terms of reference to look at that, we might have felt that it was not a good use of public money just to replicate that again; those results are there.
Chairman: It might have had more weight if you had found there was profiteering in the system though.
239. I realise again, of course, that the recent period falls outside the time period of the inquiry, but one of the interesting developments recently was looking at the effect of the reopening of the export market for lambs on the domestic prices offered to domestic producers by the supermarkets; and there was quite a significant immediate effect on the kind of prices available offered to domestic producers by domestic supermarkets by the opening of the export market. Now you could read that as a kind of natural market clearing mechanism, or you could read it as prima facie evidence of the fact that the supermarkets were in a position to abuse their market power, in fact, effectively operating as a cartel in relation to suppliers, because, of course, they knew that they could offer a lower price, because the export market was not available to compete for the primary product from UK producers. I am wondering if you have any views on that, and whether you think it would be useful to reopen the inquiry because of this quite remarkable phenomenon?
(Dr Morris) Yes, I could express a view. As your question indicates, there are two interpretations here. To the extent that what has happened reflects what you would predict in market circumstances, demand increases, because of the opening of the export market, prices rise, that would seem to be perfectly reasonable. To the extent that supermarkets are using practices which essentially are abusive practices, which they can only pursue because of very substantial buyer power, then that is not acceptable. And, as you know, our report did find that there were a number of such practices, not any evidence of cartel activity, but of individual exercise of buyer power in an anti-competitive way at the expense of suppliers. So I suspect that both have been operating, and we would hope, as a result of our report, that the latter set of activities would now cease. We did not give a clean bill of health, by any means, to supermarkets, in relation to suppliers, quite the contrary.