Examination of Witnesses (Questions 190a
- 199)
WEDNESDAY 21 OCTOBER 2009
MR DAVID
MESSOM AND
MR PHILIP
HARDMAN
Q190a Chairman:
Good afternoon, ladies and gentlemen. Welcome to our further evidence
session on our inquiry into Dairy Farmers of Britain. At the outset
may I start with an apology. Occasionally, with the vagaries of
Parliament we suddenly find ourselves bereft of a quorum. For
example, Dan Rogerson, one of our members, is in the debate on
Equitable Life; another colleague is also on another select committee
and they have another urgent meeting this afternoon. Currently
we have a quorum, and so I have taken the decision that we should
start with evidence from the Co-operative Group, but I am afraid
we will have to postpone the evidence of Lord Grantchester and
Mr Gerry Smith. Could I apologise publicly for the disruption
this has caused. Mr Smith, if I might be so bold as to acknowledge,
as this is your birthday, perhaps this was not the present you
were hoping for, but we would very much like to hear from you
again and we will invite you to come and join us, but I do not
want to start an evidence session which, effectively, we cannot
conclude. Without further ado, let us welcome Mr David Messom,
the Director of Food Retail for the Co-op. You must be going to
say some very controversial things, Mr Messom, because I see you
are accompanied by the Group Counsel, Mr Philip Hardman. You are
both extremely welcome. The demise of Dairy Farmers of Britain
was obviously a very sad event, particularly for the members.
Part of it, obviously, was associated with the relationship they
had and then did not have with your good selves, and we will explore
that in a little bit more detail, but perhaps we could start,
Mr Messom, with your own overview as to why you thought DFB failed.
Your organisation has very considerable experience in the dairy
industry both, at one time, as a supplier and processor and as
a very significant retailer of dairy products. You are in an ideal
position to give us some commentary on why you thought DFB failed.
Mr Messom: My personal view is
that you could argue that they paid too much for the Associated
Co-operative Creameries (ACC) business originally which they acquired
from the Co-operative Group. I think there was a lack of investment
between 2004 and 2009 to make the business more efficient and
they were, effectively, competing in a market that had some very
efficient processors of milk, and I think that is exemplified
by the fact that effectively they were paying their farmer members
one of the lowest farmgate prices and yet were struggling to remain
competitive with competitive cost prices in that market. Therefore,
effectively they were an inefficient processor in a very competitive
market.
Q191 Chairman:
I am right in saying that Associated Co-operative Creameries,
to which you have just referred, was your business before you
sold it? Just refresh my memory: why did you get out of dairy?
Why did you stop being a dairy producer and processor?
Mr Messom: To correct the record,
I am the Director of Trading, if you like, the buying side of
the Co-operative Group. It was not my personal decision. The only
dealings I had with ACC was as a supplier to me, but it was the
Group's intention to get out of production generally. Over a number
of years the business had systematically removed itself from production.
It used to have a tea factory and a canned goods producing factory
and the Board's decision at the Co-operative Group was that its
future lay, as far as food was concerned, in retailing and not
actual production and, therefore, that was part of an on-going
process over a number of years.
Q192 Chairman:
The reason I am asking the question is to try to establish whether
or not it was a viable, profitable, processing business. In other
words, you did not get out because you could not make it pay.
Mr Messom: No, it was a profitable
business at the point in time that we got out of it, but it was,
if you like, one of the last production businesses that the Group
was exiting from.
Q193 Chairman:
Bluntly, your exit from dairy was because it was not a core function
of your business.
Mr Messom: Correct.
Q194 Chairman:
When you came to sell ACC was Dairy Farmers of Britain the only
serious bidder, or did it attract attention from a wider group
of people within the industry?
Mr Messom: As a customer of ACC—
Q195 Chairman:
Mr Hardman is obviously warning you about something.
Mr Messom: No, I can answer the
question, but I think Philip Hardman would be better to answer
that.
Q196 Chairman:
Carry on, Mr Hardman.
Mr Hardman: Thank you, Chairman.
I was directly involved at the time, and we conducted, I think,
what you would loosely describe as a controlled auction. Most
of the major players at that time expressed a degree of interest
in acquiring it. As the process matured, Dairy Farmers of Britain,
who were, I think, the most competitive of the bidders from the
start, pretty well became the preferred bidder and we proceeded
to consummate a transaction with them in the summer of 2004, but
they were by no means the only party who expressed what we took
to be a genuine interest in the business we had to sell.
Q197 Chairman:
I do not expect you to disclose confidential financial matters
about others who are not the subject of this inquiry, but when
you talk about Dairy Farmers of Britain being the most competitive,
is that a polite way of saying they were the ones that offered
the most?
Mr Hardman: Yes, they did.
Q198 Chairman:
Was their margin, over the others, a significant one? When you
saw the price they were offering, did you go, "Wow, what
a deal. We can't say no to that", or was it that they just
crossed the line a little bit ahead? Just give me a feel.
Mr Hardman: No, I do not think
we were ever saying, "Wow, we can't say no to that."
They certainly led the field from the start. There was certainly
one other player in the market that moved into, internally, what
we regarded as a sort of shortlisting phase, though I do not think
either that party or Dairy Farmers of Britain were ever aware
we had that internal shortlist, and Dairy Farmers of Britain bid
the most.
Q199 Chairman:
By a significant amount? Was it another ten million more or something?
As I say, I do not want you to break the confidences of what others
bid.
Mr Hardman: In selecting Dairy
Farmers of Britain at the end of the day, they had clearly won
the competition that we had run. There were a number of reasons
for that than purely the money on the table. We thought they had
the safest harbour for all our employees, or all bar a very small
number of them at the most senior management levels, and the fact
that they were a co-operative business clearly, from our point
of view, was reassuring.
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