Examination of Witnesses (Questions 640
- 643)
WEDNESDAY 6 JANUARY 2010
MR ANDREW
COOKSEY, MR
ROB KNIGHT
AND MR
PHILIP MOODY
Q640 Chairman:
For the record, what is CRTG?
Mr Moody: Co-operative Retail
Trading Group—you have had Mr David Messom giving evidence
before this Committee. Like any retailer, of course, they are
always looking to derive the best value for their shareholders
and for their consumers, that is their job, and CRTG did that
job, so that when they put the contract up for renewal, they put
it out to open tender. Clearly, that provided an opportunity to
competitors of Dairy Farmers of Britain to seek to put forward
some very competitive prices. As a result of that, DFB was left
with a choice of whether to renew its contract on what proved
to be the price terms available to it. It was in a kind of a cleft
stick because the prices being offered were materially lower than
was currently being enjoyed. Now, market conditions change and
I am not for one moment suggesting that there was anything improper
about that process, I am merely stating the facts. The facts are
that the contract was renewed at a considerably lower value than
it had been under the old contract. That caused evaporation of
value to DFB, which DFB had to address. The second issue related
to a freak of nature, in that the weather that year caused a shortage
of milk, which meant that processors had to increase significantly
the price that they were prepared to pay per litre to enable them
to secure their milk supplies. There was a very rapid escalation
of milk price over that period. Unfortunately, Dairy Farmers of
Britain did not have significant balance sheet reserves and it
could not afford to pay a price to its members for the milk that
it had not yet secured from its customers. Whereas, some of its
larger competitors had the ability to anticipate future market
moves in order to step in and gain milk supply. DFB's price went
up substantially over that period, but it went up slower than
many of its competitors and that caused a significant degree of
membership concern, believing that this was an indicator of an
underperformance within the business.
Q641 Chairman:
Is that what led eventually to the beginning of the members indicating
that they were going to withdraw?
Mr Moody: Yes, that started the
resignation.
Mr Knight: That was a critical
moment and I think that was the turning point in the confidence
point of the business.
Q642 Chairman:
Was that one of the contributory elements to the loss of the Co-op
business? In evidence to us, they cited four reasons, one of which
was low milk price to members; they felt that you were not looking
after your members properly.
Mr Cooksey: Yes, that would be
one of the elements. The other aspect in terms of the overall
member confidence was that there was a lot of noise in the industry
overall and that raised question marks.
Q643 Chairman:
Would I be right in saying that those of your competitors that
were sniffing around for that Co-op business could afford to be
almost predatory in their pricing, knowing that they had got the
balance sheet strength to sustain a very competitive bid, whereas
you were struggling?
Mr Cooksey: It was a significant
piece of volume, probably one of the last remaining significant
pieces of volume, that was up for renewal within the market place
at that time. Other companies had invested significantly in increasing
capacity and clearly there were marginal benefit opportunities
available to other customers, whereas the Co-op was our primary
customer. It is very difficult to marginally cost your largest
customer.
Chairman: Gentlemen, we could go on,
but I am very conscious that you have been here for the best part
of two and a half hours. I am sure if we had all the farmer members
who have been in touch with us, they would probably have a legion
of questions that they would like us to ask you. We have done
our best to reflect in our questioning the major area of concern,
however, which was the acquisition of ACC, because it is quite
clear from what you said that from that followed the seeds being
sown that ultimately led to the downfall of the business—the
lack of profitability that you have referred to, and the ultimate
loss of a major customer. There is only so much that any business
can take and still continue to trade successfully. As you said,
with the benefit of hindsight and the discovery of certain facts
because of the bidding process, you would argue that there were
things that you discovered that made your acquisition less profitable
than your model that encouraged you to acquire the business had
suggested. Those would be the main bones that I would pick out
of what you have told us. Could I thank you in advance, Mr Moody,
for the information that you will send the Committee, which will
be treated in confidence. I think you can see very clearly what
we are after to get an idea with numbers as to how this process
of acquisition finally worked out. There may be on reflection
some further points that we might want to raise with you in correspondence,
but may I take the opportunity of thanking you for coming here
to assist us with our inquiry. I hope it will not be too long
before we can draw this matter to a conclusion. In fairness, there
were many farmers who wanted to hear what you had to say. You
are now on the record and for that, I am very grateful.
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