Examination of Witnesses (Questions 220-228)
1 MARCH 2004
MR KEVIN
HAWKINS AND
MR RICHARD
ALI
Q220 Chairman: Can I ask you one factual
question about the Forum, are caterers represented in the Forum?
I understand producers, processors and retailers are the other
growing sector is the catering industry, do they feature in the
Forum at all?
Mr Hawkins: I think there is a
member representing the food service sector generally. I think
it is fair to say they have not played a very prominent part in
our discussions so far but we hope to get them involved because
they are significant players in the market. They are represented
on the Forum, yes.
Chairman: If we can got on to the famous
code of practice, and I will ask Colin Breed to take that up.
Q221 Mr Breed: You will be aware we are
in the first two years—I think it is almost the anniversary—of
the code of practice and in fact the OFT are carrying out a review,
so far although they are in the middle of their review they are
taking more evidence their consultation with your suppliers and
their trade associations say that 80% to 85% of the respondents
claim the code has failed to bring about any change in supermarkets'
behaviour. I know that is an initial thought, but 80% to 85% of
your suppliers feel that it has not made any difference. I wonder
if you have any comment on that?
Mr Hawkins: At one level, as you
well know, and as the OFT have commented in the Report they produced
last week, they find it difficult to make any firm judgments when
the other party to the code, namely the suppliers, will not actually
make complaints under it and use the code to advance their own
interests or register disagreements or whatever. It takes two
to tango on these occasions and if the other decides, for whatever
reason, not to make any use of it it is a little difficult. In
terms of am I surprised we have this result, no I am not and that
is for two reasons, one is that the realities of the market place
have not changed in the last two years, it is still as competitive
as ever and secondly it all depends what you expected from the
code in the first place. I seem to recall the NFU for one and
some of the other smaller suppliers and trade associations saying
right at the outset and being quoted in the press back in March
2002 when the code was first launched that the whole thing would
be a waste of time, it was toothless and it would not change anything.
The fact that two years on that is what they are saying does not
surprise me.
Q222 Mr Breed: That is not what the NFU
are saying it is what the suppliers are saying and that is far
more important because they are your suppliers and the implication
is, and was in fact expressed by many of us at the time, the very
reason they would not use the code was because of the whole aspect
of the fear of complaining. That I suspect is demonstrated at
least in part by the fact that no one has brought anything to
the code yet 80% to 85% of your suppliers are still unhappy. In
the light of that and in respect of the OFT in their continuing
investigations how would you respond to a suggestion that that
code of practice should be given the force of law and that any
breach would therefore constitute an offence?
Mr Hawkins: For a start the code
is already mandatory and has been for two years on the big four
supermarkets and we regard it as every bit as binding as if it
were enshrined in an act of Parliament. When the code came into
effect, just before it went live we trained all of our buyers,
we revised all of our terms and conditions to bring them into
line with the code and we said to our buyers you must stick by
the code. The issue, as you well know, is that the code as it
was negotiated between ourselves, the OFT and other parties did
not emerge as a list of legally prescribed activities or practices.
It introduced the reasonableness test. When you have a reasonableness
test there is clearly scope for men of good will to disagree on
what is reasonable behaviour in the circumstances. I think the
NFU is now trying to make progress on this and look at what would
be a definition of reasonable behaviour sector by sector because
quite clearly there are differences both of commercial pressure,
structure, time scales, and all of the rest of it, between different
sectors of our supply base, commodities, versus branding and fresh
versus frozen, and if they can make some progress on that that
it will be very helpful. There is one point which frequently comes
up which you have not raised, and I will raise it now, that is
the suppliers' organisations say they would make use of it if
it was anonymous, if their name does not have to be disclosed.
OFT dispose of that by saying, almost like the principle of natural
justice, that if a complaint is made against you you should know
what the complaint is and who is making it and there should be
an open session in open court. If you want to make it more legalistic
and legally binding you would have to follow that procedure and
lawyers would have to be involved, and so on. The people who want
anonymity would not get it if it was legally binding formally
in the sense that you want it to be. The other point is on a common
sense basis if a big retailer is suddenly faced or any retailer
is faced with a complaint from a supplier and he does not know
the name, he just gets a recital of the facts and it is probably
not going to take long to work out who the supplier is because
the facts themselves will suggest one sector rather than another,
he can quiz his buyers and of course he will soon find out, so
to say there could be anonymity is nonsense. To my knowledge Safeway
has never de-listed a supplier for having an argument or raising
a grievance with us. The only reason we would de-list a supplier
would be for continued poor performance, failure to deliver repeatedly
over a period of time, failure to achieve product specification
and failure to achieve quality. It is those things that let the
customer down that really matter and which drive our relation
with our suppliers.
Q223 Mr Breed: On that basis you would
not mind if it was then a force of law because, as you said, it
is mandatory anyway and that would not make any difference.
Mr Hawkins: If people believe
that giving it the force of law is going to encourage the people
who will not participate in making it work then fine but let us
be under no illusions that in so doing they are going to preserve
any kind of anonymity.
Q224 Mr Breed: Accepting all of that
nevertheless as far as BRC are concerned—
Mr Hawkins: I am speaking on this
issue for Safeway.
Mr Ali: We represent a range of
large to small retailers, including the big four, and they have
decided not to come along in an individual capacity.
Q225 Mr Breed: Has the code of practice
succeeded or failed?
Mr Hawkins: It has failed because
it has failed to engage the people for whom it was designed to
protect and in whose interests it was designed to operate, and
we said so very plainly to the OFT. The issue now is where do
we go from here?
Q226 Chairman: Okay. Just to finish,
looking ahead five years, what is likely to happen to the price
of milk? What do you see from a retailer's perspective, not what
you think will happen to yourself, because you will be able to
survive come what may, give us a quick picture of what will happen
to the processing industry, the producers or the industry?
Mr Ali: Dairy farmers will be
fewer in number, dairy farms will be larger, the productivity
of dairy herd will increase and there will be fewer cows. As far
as the process sector is concerned there will be bigger, more
modern processing plants.
Chairman: Okay.
Q227 Mr Jack: That is it, we are going
to have bigger plants and less cows. What about product development,
do you feel optimistic there will be new lines developed to try
and give something of a lift to the dairy industry in the United
Kingdom?
Mr Ali: I hope in five years'
time as regards new product development the work of the Dairy
Forum will have yielded results and the work of the food chain
sector will look at a more efficient dairy sector and the chain
which responds to what customers are buying will have improved,
product innovation and markets will have improved and the links
between farmers and processors and the link between processors
and retailers will have improved. We also hope that the Common
Agricultural Policy will allow farmers in the dairy sector to
produce what the market wants.
Q228 Mr Jack: Let me ask you one final
thing, both of you have mentioned the Supply Chain Forum and some
of the other structures which have put in place following the
Commission on food and farming, given that the farmer is driving
to pull himself up by proverbial boot straps do you sense that
retailers are starting to recognise that and to support it or
is it always going to be a question of, well good on you for trying
but we will make our choice based on best value, best product,
and it does not matter where it comes from?
Mr Hawkins: That is not the case.
For a start one thing that has not been covered is the work of
the Food Chain Sector. The Food Chain Sector is now looking very
hard at the dairy industry supply chain to see what costs can
be taken out. I know that focus on cost reduction to the exclusion
of everything else can in fact be a recipe for profitable decline
but that is not the business we are in. What both the Food Chain
Sector and the Dairy Industry Forum are about, as I mentioned
earlier, is how we can accelerate the process, of the product
innovation and that must be in the interests of the producer.
The problem is with dairy, as indeed with so much in British agriculture,
that traditionally the farmers have stood apart from the processors
who in turn stood apart from the retailers and the idea of a much
more closely integrated operation, as we have seen develop in
some continental countries, for a number of reasons has never
really been taken on board. There are one or two exceptions to
that, poultry and to a lesser extent the pig sector. In great
swathes of the industry there is still this arm's length relationship.
Just to add to what Richard said, in another few years under the
pressure of CAP reform there is going to have to be a lot closer
relationship between the producer, processor and retailer, not
a non-adversarial one, because there will be always be an adversarial
relationship over a short-term contract with or without a code
of practice with or without the force of law or bringing in the
regulator or Ombudsman or whatever, nonetheless I think that a
closer working relationship and more transparency, however you
define that, subject to commercial confidentiality is the way
it will go. If that helps to build confidence it will accelerate
that drive to innovation which is the only thing that is going
to, as I said earlier, provide growth in the industry.
Mr Ali: Just to add to that, Ben
Gill from the National Farmers' Union said before he stepped down
as President, he was very clear that with the introduction of
CAP reform larger processors are going to have to get more involved
in their supply base because CAP will not be stimulating over-production
and if there is over-production you can buy lazily. If you do
not have over-production stimulated by bureaucrats then quite
clearly as a buyer of primary products you have to be more involved
in the supply base. I think certainly on liquid milk large retailers
are already looking at that.
Chairman: Okay. Gentlemen, thank you
very much. We will send you the figures so you can comment on
them. You have missed what I said earlier, I will repeat it, if
there are things you said it is hard luck you cannot unsay them
but there may be things you wished to have said and you would
like to probably respond to our figures then feel free to send
them to us as quickly as possible so it can help us in our deliberations.
Thank you for attending.
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