Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 140-159)


6 JUNE 2007

  Q140  Mr Love: You only operate a Christmas scheme, do you, okay. Can you give us some indication of how much of your income derives from the interest that you receive from the savings scheme?

  Mr Stewart: In terms of our net income, if we look, for example, at the year ending March 2006, we earned a net margin of about 1.5% on our turnover, and just over a third of that was interest income. So it is a substantial part of our net income.

  Q141  Mr Love: It is about a third of your net income?

  Mr Stewart: Yes.

  Q142  Mr Love: You talked earlier on about the formation of a Trust and we are pleased to hear that you have now concluded an agreement. Will the setting up of that Trust affect the interest payments? What will be the cost to you of setting up this Trust arrangement?

  Mr Houghton: Effectively there will be a cost associated with running the working capital and the timing of it because cash will be held in trust when you could be using it for running and paying bills as we go through. But we see that as a cost to the business and it is not significantly prohibitive for us to do that.

  Q143  Mr Love: To offset that additional cost to you will that lead to any additional cost to the consumer, to offset?

  Mr Houghton: We do not anticipate that being the case. We are keen to provide a service. We need to be price competitive; we are selling vouchers on low margin, there is not much scope to actually charge a customer £101, for instance, for £100 worth of vouchers. So we see that being taken up in efficiencies and not passed on, if at all possible.

  Chairman: John Thurso.

  Q144  John Thurso: Can I ask first about regulation? Can I take it that you agree that businesses such as yours, which have fairly comprehensive pre-payments from the customers, should have some sort of protection and regulation?

  Mr Houghton: We support regulation. We think it needs to be fair and not over burdensome. Having said that, we are actually embedding the FSA principles into our business.

  Q145  John Thurso: That brings me on to my next question, which is in your discussions with the government have you discussed any other forms of regulation or what might be done other than Trust Accounts?

  Mr Houghton: No, we have really only discussed Trust Accounts at this point in time, although we have looked at FSA regulation for certain activities of the business.

  Q146  John Thurso: Do you think you would you be able to continue in business if you were subject to FSA regulation or do you think that would be too burdensome?

  Mr Houghton: Yes. We already sell insurances to the database on a small basis so we operate under a partial FSA regulation. But in terms of the operating structure and the corporate governance associated with it we believe that we could operate.

  Q147  John Thurso: I do not want to put words into your mouth, but would it be fair to say that you need customers who are confident in you—

  Mr Houghton: Absolutely.

  Q148  John Thurso: --- and therefore a good regulatory framework is actually a necessary part of you doing business?

  Mr Houghton: That is why we are keen to get these Trust Accounts in place.

  Q149  John Thurso: Therefore, you are actually pretty relaxed about it being under the FSA ambit?

  Mr Houghton: Fairly relaxed, yes.

  Q150  John Thurso: Okay, that is great; that answers that one. Just on competition, the Office of Fair Trading is now investigating the competition implications of the merger between Park Group and Home Farm Hampers. Do you think you have an unusually dominant position in the market?

  Mr Houghton: I think when you look at our business we actually trade in quite a wide market, and although people have chosen to focus on the fact that we are a savings scheme. When you look at this catalogue the products on sale in the catalogue are available anywhere in the high street; you can buy them by mail order, you can buy them over the Internet, in the majority of cases, or they are easily substitutable. You can also save in banks, building societies, credit unions, you can go to Tesco's and buy stamps—you can buy most of the products that we have in here in Tesco's. We have Sainsbury's, Iceland, Woolworth's, Argos, all with Christmas savings schemes. So the actual market that we are in is quite wide and we really have to be conscious of the products that are out there to make sure that we are offering value for money. Therefore, in terms of Home Farm we do not believe that there has been any impact detrimentally on competition because Home Farm was going to be closed anyway and we did not want that to happen; and people can easily, if they are not satisfied with our product, go elsewhere, and that is evidenced by the fact that our orders this year are 30% just about below what they were last year. Clearly, these customers will celebrate Christmas this year coming and have clearly substituted our offering for something else. We do not know what it is.

  Q151  John Thurso: Do you think that is a follow on from Farepak?

  Mr Houghton: Absolutely. There has been a reduction in confidence in our customer base as a result of that.

  Q152  John Thurso: Can I just ask one last question? Which do you regard as your core competence—the management of the money or the sourcing and supply of goods?

  Mr Houghton: I guess it is both. Gary can speak for himself, but it looks like an easy job and I can assure you that it is not. We manage the relationship with our customers through a customer care team; we have fairly sophisticated computer systems to control and predict what our requirements are for stock and plan the production process; we use probably about 100 carriers to distribute nationwide from the Scottish Islands down to the Channel Islands to Northern Ireland, so it is quite a complicated business. There is a lot of skill associated with choosing the right products, offering the right service to the customers, make sure that our team is trained properly; then we have a treasury function that takes no risk with the money and places it in highly rated banks and building societies for fixed terms to maximise—

  Q153  John Thurso: The point here is that if you regard your core competence as being that as trading in the products the financial side is merely a way that enables you to access the market you have chosen, whereas if your core competence is actually being a saver then the products are there to enable you to take money out. There is quite an important distinction between the two.

  Mr Houghton: We do both because our treasury function, we have gone out and looked at using brokers and professionals to earn interest on the money and benchmark ourselves against those and we actually achieve a comparable if not better rates on occasions than those people, so we are pretty skilled in the managing of cash.

  Chairman: Jim Cousins.

  Q154  Jim Cousins: You have just pointed out to us that the Trust Accounts have been set up this week and the OFT—

  Mr Houghton: I think the Trust Accounts will take time to set up. The Trust vehicle, the Trust company is being established now.

  Q155  Jim Cousins: When do you anticipate the actual accounts themselves will be set up

  Mr Houghton: We are hoping that everything will be up and running by the end of June, but that means that we have to get bank accounts set up, we have to get the legal documentation completed, so as I have said we are aiming to get it done as quickly as possible and we hope that we would be able to get it done by the end of June.

  Q156  Jim Cousins: I am grateful to you for that but the OFT Christmas saving campaign of course will have been launched before that has all been finalised. That is plainly the case, is it not?

  Mr Houghton: We are not party to the OFT campaign.

  Q157  Jim Cousins: No. Have you been consulted about it?

  Mr Houghton: Personally, no.

  Q158  Jim Cousins: How relevant do you think it is to launch a campaign now, in June, in the lead-up to advise people for Christmas 2007 bearing in mind that the Trust Accounts themselves will not be available until the end of June and presumably cannot be referred to in the campaign.

  Mr Houghton: What we did, we created bank accounts in separate subsidiaries outside the group banking pool during December, when this issue first arose, and we are continuing to operate those until the Trust Accounts are actually in place. The relevance of advertising Christmas now I guess most people's minds will not be on Christmas but it will set the seed and start people thinking about what can they do for next Christmas. Timing wise I do not know; I do not know if Gary has any views or not.

  Mr Woods: My view is that we have not been consulted at all so I do not really know what the plans or the time table are for this particular campaign. However, we do start our recruitment campaign in October for Christmas 2008, so anything that restores confidence or helps to restore confidence and gives the general public more awareness we support.

  Q159  Jim Cousins: Just to pick up one point because you do mention it in your submission to the Committee, perfectly properly, which is that the Farepak problem was that the holding company had borrowed against the assets in the Farepak operation, which in itself was a sound operation. Presumably the Trust Accounts are free of any securitisation or loan operation that you operate yourself?

  Mr Houghton: We intend them to be totally separate. In fact, there will be a separate legal entity. That is what we have done with the process that we did in December, which was to put them into separate legal entities, but the Trust Accounts will be controlled and cash released by third party trustees and that will be supervised by the Christmas Pre-payment Association by monitoring and reviewing what actually goes on.

  Chairman: Brooks Newmark.

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