Memorandum submitted by the Co-operative
Group (DFoB 26)
1. The Co-operative Group is the UK's largest
mutual retailer. It is a family of businesses, most of which are
consumer-facing and range from food retailing to financial services,
and from pharmacy to farms. By far the largest business is The
Co-operative Food which, following the acquisition of Somerfield
in March 2009, now operates around 3,000 stores throughout
the UK with over 21 million customer visits each week.
2. The Co-operative Group fulfils a federal role
for all other consumer-owned co-operative societies through the
Co-operative Retail Trading Group (CRTG). CRTG manages the buying
and promotional function on behalf of those societies.
3. The Co-operative Group welcomes the opportunity
to provide evidence to the Environment, Food and Rural Affairs
Committee as part of its inquiry into the implications of the
collapse of Dairy Farmers of Britain.
4. The information below sets out, chronologically,
key elements of the trading relationship between DFB and the Co-operative
Group from 2004 to 2009.
SALE OF
ACC TO DFB
5. The sale of the Co-operative Group's
Associated Co-operative Creameries (ACC) milk processing business
to Dairy Farmers of Britain (DFB) in the summer of 2004 was
the culmination of an exhaustive nine month process following
a strategic decision by the Board of the Co-operative Group to
exit the dairy processing sector. A number of parties were invited
to acquire the ACC business and the various bids were evaluated
in considerable detail. All potential buyers were offered the
opportunity to undertake due diligence. In its indicative offer
DFB stated that it would undertake due diligence into the following
areas before making an unconditional commitment to buy: commercial;
financial; legal; property; environmental and regulatory; insurance;
pensions and employees. This due diligence was indeed undertaken
by DFB and its consultants and was professionally advised throughout
the negotiations.
6. At the time, the Co-operative Group was
reassured that another Co-operative business was to take ACC forward
into what it hoped would be a prosperous future, as part of an
ambitious and expanding DFB enterprise.
7. On the day that the sale was completed,
DFB issued a brochure, entitled Building a better future,
to a range of stakeholders including members, customers, employees
and suppliers. A copy of the brochure, produced and distributed
by DFB, is attached for information.[1]
8. At the time of the sale of ACC to DFB,
the Co-operative Group agreed a three-year contract (running to
August 2007) with DFB for the supply of 44 million gallons
of fresh milk per annum. The majority of this was delivered direct
to store, as part of the contract, and equated to approximately
80% of CRTG's milk requirement. In addition it was agreed, by
rolling contract, that DFB would supply annually three million
litres of Co-op Fresh Cream.
RENEWAL OF
CONTRACT IN
2007
9. In August 2007, DFB tendered to renew
supply of fresh milk to CRTG and was successful in all lots where
they were the incumbent supplier, with the exception of supply
of some eight million gallons to stores within the South West.
In this one area, the DFB quote for supply was considerably higher
than the quote supplied by Robert Wiseman Dairies, and the contract
for supply in the South West was therefore awarded to Wiseman.
The new supply agreement with DFB was for two years and was due
to expire in August 2009.
10. In early 2007, the Co-operative Group
proposed a number of initiatives to DFB that were designed to
widen the product range and add greater value, as well as to evaluate
supply issues both from a logistics and farmer-member perspective.
Each of these initiatives is detailed below:
Products
(a) DFB was asked to quote for supplying a range
(four lines) of Christmas Brandy Creams. In March 2007, DFB was
awarded the contract to supply. However, in November 2007, DFB
failed to produce two of the four agreed lines.
(b) DFB was asked to quote for supplying an own-brand
flavoured milk product range. In April 2008, following a competitive
tender process, the flavoured milk contract was awarded to Dairy
Crest whose quote was significantly more competitive than that
of DFB.
(c) It was agreed to assess whether it would
be possible to move towards Freedom Food accreditation for liquid
milk. In February 2008, following changes made by the RSPCA to
the Freedom Food criteria, it was recognised by both DFB and the
Co-operative Group that the move towards Freedom Food accreditation
was not possible in the short term.
Supply Chain Issues
Also on the agenda for discussion during 2007 was
The Co-operative Group's desire to explore with DFB the possibility
of moving towards a new form of dedicated supply chain. Under
this model, which has now been adopted by some other retailers,
The Co-operative Group wished to explore whether some of DFB's
farmer-members might wish to supply milk which had been produced
in accordance with a range of specified criteria, in return for
an additional premium above that negotiated by DFB direct with
its members.
11. As a commitment to this The Co-operative
Group set up a 2p per litre accrual with DFB in readiness to develop
a farmer pool and Freedom Food accreditation.
12. In February 2008, DFB management stated
verbally that it had an objection in principle to any notion of
a "farmer pool" because of its co-operative structure
and its rejection of any differentiated contract structure that
moved away from the same treatment of all DFB members. DFB management
stated that a farmer pool model would require the ratification
of the DFB Board and that this was unlikely to be forthcoming.
DFB appears to have been the only large dairy processor that objected
to the option of the "farmer pool" model.
13. The issue of logistics—how a product
gets from its point of production to the customer—is inevitably
an important feature of the supply chain relationship. During
late 2007 and early 2008 the logistics dimension of
DFB's contractual arrangements with The Co-operative Group became
a source of major discussion.
14. When the contract with DFB was renewed
in 2007, two prices were agreed with DFB:
(a) A price for liquid milk delivered by DFB
from its processing plants direct to the store of the Co-operative
Group and other Co-operative Societies across the South East,
South, Midlands, Wales and Eastern England.
(b) A different price for liquid milk delivered
by DFB from its processing plants to various Regional Distribution
Centres, operated by the Co-operative Group, in Blaydon, Osset,
Eccleshall and Alfreton.
17. This dual pricing to reflect two different
logistics and distribution networks and associated differences
in the cost of supplying to stores is not uncommon between suppliers
and retailers. It was agreed as part of the 2007 tender process
that a differential would be paid to DFB of 15p per gallon more
for the milk delivered direct to store.
18. During the course of 2007, DFB would
have been aware that the Co-operative Group was developing a major
regional distribution centre in Thurrock, servicing stores across
the South East.
19. In May 2008, at a formal meeting with
managers of the Co-operative Group, DFB issued an ultimatum regarding
the future supply of milk within the South East. Two of the proposals
set out by DFB would have resulted in a significant cost increase
for the Co-operative Group, and were rejected. The third proposal
offered by DFB was that the Group seek an alternative supplier
from the start of October 2008.
20. This move prompted a tender process
for supply to the South East on a direct to store basis, and Wiseman
put forward a quote that represented a significant saving compared
with the price being demanded by DFB. This move was confirmed
to DFB in June 2008. A meeting was scheduled to agree an handover
strategy and this was implemented from 28 September 2008 onwards.
THE 2009 TENDER
PROCESS
21. In 2009 the Co-operative Group
initiated a tender process for the supply of milk to societies
within the Co-operative Retail Trading Group. A clear process,
transparent to all potential bidders, was established with tender
documentation sent out to five dairy processing businesses, including
DFB.
22. Four clear objectives were set out as
part of the tender process and the Co-operative Group was clear
that it would make an assessment against each. The supply contract
was also broken down into a number of elements or "lots"
that covered different geographic areas within the UK and also
a "lot" for the supply of organic element. The four
objectives in the tender documentation were:
23. DFB confirmed that they were interested
in only two of the five available "lots"; namely the
supply of milk to the Co-operative's RDC network (circa 34% of
total volume) and the supply of organic milk (circa 2%). DFB was
the incumbent supplier in both these lots.
24. On the issue of service level, DFB was
informed that they were held in high regard. However, security
of supply was raised with DFB as a concern, following months of
media speculation regarding its long term viability.
25. On the issue of price, DFB was aware
that it had not placed a leading bid in either of the two lots
being considered by the farmer-owned co-operative. For reasons
of commercial confidentiality, the Co-operative Group does not
wish to state the different prices being proposed by the leading
bid compared with DFB. In both cases, the difference by percentage
is less than single figures; however, the overall benefit to the
Co-operative Group (and the other societies which form CRTG) of
selecting a supplier other than DFB is approximately £2.9 million
between 2009 and 2010.
26. Of particular concern to the Co-operative
Group, during these negotiations was DFB's attitude to farmgate
price. It was already public knowledge that DFB was offering the
lowest farmgate price compared to other processors. When the issue
of cost price was raised, DFB was both clear and categoric that
any downward movement would automatically be funded by a reduction
in farmgate price. It was further stated that this had been agreed
by the farmer-members of DFB.
27. Two issues that emerged during the tender
process of earlier this year were, therefore, paramount in the
decision not to award a further contract to DFB. The first was
the assertion that any price reductions would be met automatically
by a lowering by DFB of its farmgate price to its farmer-members.
The second was the final price being offered by DFB that was significantly
higher than at least one rival bid.
28. In mid-March 2009, at a meeting held
at the Co-operative Group's Manchester head offices, DFB was informed
that they had not been successful in securing any contracts to
supply fresh milk to CRTG from August 2009 onwards. Although
disappointed that its bid had not been successful, the DFB account
team commented on the professional manner in which the tender
process had operated. It was agreed at that meeting to delay any
public announcement indicating that DFB had not been successful
in securing any of the milk supply contracts.
29. In mid-April at the request of DFB,
Peter Marks, Group Chief Executive of the Co-operative Group,
met with Lord Grantchester who chaired DFB. No explanation was
given about why Andrew Cooksey, Chief Executive of DFB, was not
at the meeting, despite curiosity about his absence. During the
meeting Lord Grantchester accepted that the tender process had
run its course and that DFB had been unsuccessful. Instead, the
meeting focused on how the two businesses could work together
to ensure that DFB was able to communicate effectively and in
a timely fashion with its farmer-members and with the media. As
part of this transition process, the Co-operative Group confirmed
that it would engage with other processors to encourage as smooth
a transfer as possible from DFB to rival processors.
30. On 23 April, a joint statement
was issued on behalf of the Co-operative Group, DFB, Robert Wiseman
Dairies and Yeo Valley, confirming that the Group had awarded
contracts to supply fresh milk to its stores to Wiseman, Dairy
Crest and Yeo Valley and that both the Group and DFB were working
with the new suppliers to ensure that the migration of milk supply
was managed with customers' and farmers' interests in mind.
GENERAL OBSERVATIONS
31. It is a matter of regret that the ambitions
of DFB in 2004 have not been realised, and that increasingly
it had become uncompetitive within its peer group of national
milk processors.
32. The Co-operative Group is proud of its
co-operative ownership, structure and identity. We believe passionately
that co-operative enterprises are both a viable and credible alternative
to the proprietary business model.
33. However, strong corporate governance
within any co-operative business is essential with open and honest
communication to stakeholders, including members, about the organisation's
business plan delivery and market place position. Furthermore,
in a market-economy such as exists in the UK, the same commercial
disciplines apply to co-operatives as to any other type of business.
The Co-operative Group cannot promote "co-operation amongst
co-operatives" at the expense of taking wholly uncommercial
decisions; a decision to renew further DFB's contract in the summer
of 2009 would have been just that: an uncommercial decision,
potentially harmful to the interests of the Co-operative Group
and its members, and indeed those of DFB's farmer-members.
Co-Operative Group
October 2009
1 Not printed. Back
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