Examination of Witnesses (Questions 200
- 219)
WEDNESDAY 21 OCTOBER 2009
MR DAVID
MESSOM AND
MR PHILIP
HARDMAN
Q200 Chairman:
Did they tell you how they were going to pay for it?
Mr Hardman: I think we were privy
to some of their financing, not least because in the closing moments
of the process we conducted with them we had to step into the
frame and provide part of the financing for them in the short-term.
Part of their bank financing, I think, for some reason or other,
was delayed at the eleventh hour and we provided several million
pounds to ensure, effectively, that they could still complete
the transaction as we intended in the middle of August.
Q201 Chairman:
Basically, it was a bank-funded operation.
Mr Hardman: I am sure there was
some member funding in there as well, but there was certainly
a considerable slice of bank funding.
Q202 Mr Cox:
It is clear that you had no real doubts about the long-term viability
of DFB having taken over ACC, because you granted them a new contract
to supply considerable quantities of milk in August 2007, did
you not? Does it follow from that you had no concerns at that
point?
Mr Messom: No, in 2007 they had
demonstrated over the three-year period a very good record in
terms of service and supply, extremely good service and supply,
I would say, and therefore we did an open and honest tender, again,
in 2007 and they won it fairly and squarely in terms of the vast
majority of that milk. The only part of the business they did
not retain was the south-west part of the business, which went
to Robert Wiseman.
Q203 Mr Cox:
On that subject, I understand you gave written contracts to your
dairy suppliers. Is that right?
Mr Messom: Yes.
Q204 Mr Cox:
Is that unusual in the market place, or is it something that is
pretty standard?
Mr Messom: I would have thought
it was fairly standard. In terms of own-brand supply agreements,
I would say the majority of the retail trade would give written
agreements. Certainly it is commonplace.
Q205 Mr Cox:
You were going to brand the milk Co-operative milk, were you?
Mr Messom: Yes.
Q206 Mr Cox:
This was for an own brand.
Mr Messom: It was.
Mr Cox: I see. Thank you.
Chairman: We want to talk in a few minutes
about the tendering process, and we will come on to that. It is
an issue that naturally follows from that, but we will wait until
we get there. I would like my colleague, David Taylor, to take
up the questioning on that subject.
Q207 David Taylor:
I am sorry I am a little late, Chairman. I hope what I am about
to ask has not been covered to any great extent. There was no
public announcement that DFB had been unsuccessful in securing
a new contract with the Co-op Group during the month of March,
and it was in fact April before that happened. Why did that happen?
Mr Messom: It was mainly because
the Co-operative Group acquired the Somerfield business on 28
February, and it was our view that we wanted to have a look at
what Somerfield's cost pricing was and also what their agreements
were, because up until the time we purchased that business we
did not know what contractual arrangements they had with their
milk suppliers. It could have been a situation that when we acquired
the Somerfield business the end of their supply agreement with
their milk suppliers could have well been within a matter of weeks
and, therefore, we may have had to combine the business very quickly.
As a result, it did not. When we got into the Somerfield business
and saw what they were doing, their contract with their suppliers
runs through to 2010. Therefore, having looked at the business,
looked at the pricing to make sure that we had got what we considered
to be a competitive quote versus what Somerfield were currently
paying, then we were able to make the announcement and, obviously,
we discussed it with Dairy Farmers first.
Q208 David Taylor:
At what point did it become absolutely clear to the Co-op Group
that DFB was in significant difficulties?
Mr Messom: Significant difficulties,
I think probably towards the end of March. We had had concerns
and discussions with them towards the end of 2008 because it was
starting to come out in the public domain, on websites and in
various journals, that Dairy Farmers were having some financial
difficulties, and the fact that they then announced towards the
end of 2008, beginning of 2009 that they were going to close their
Fole and Portsmouth dairies started to signal to us that there
could be an issue and certainly security of supply was something
that we were very concerned about.
Q209 David Taylor:
It is difficult for us at this juncture to try and identify which
event was followed by which decision. Were you influenced in your
decision not to award the new contract by the fact that you had
heard of the significant difficulties of DFB, or had you already
come to that conclusion without any knowledge at all of the problems
that it was facing?
Mr Messom: No, obviously we were
aware of the difficulties. In a true commercial tender process
they were not the most competitive. Even forgetting whether they
were having financial difficulties or closing dairies, just on
a straight financial basis they were not the most competitive,
and we gave them every chance to come back and see if they could
improve their offer to retain that business, foregoing the fact
that they were having difficulties in terms of closure of factories,
et cetera.
Q210 David Taylor:
Had they passed that first test about being there, or thereabouts,
in terms of price, are you saying that it is at that point that
media speculation and the industry's reports might then still
have meant that you would not award the contract? They were there
on price but you were unsure about their future. Is that how it
might have panned out?
Mr Messom: If they had been competitive,
I think we would have awarded part of the business to them irrespective
of the situation, and so they could have still continued supplying
some of our milk, but probably we would have split the business.
Q211 Chairman:
I want to pick up on a point you have raised there. This tendering
process: you were talking about the competitive nature of their
prices. Obviously they were competitive up to the time when it
came to renew their contractual arrangements, but what is not
clear from your evidence is how much they were out by. Was it
a significant sum? Was it some pence per litre, or fractions of
pence per litre? In the nicest sense, how hard-ball was the Co-op
at playing with its suppliers? You buy Somerfield, who have got
a reputation for value. You are in the value business, and it
is a highly competitive business for selling liquid milk on the
high street. How hard were you being with them?
Mr Messom: It was a fair and honest
process. It would be remiss of me, seeing as this is a public
hearing, to quote figures, because we have obviously got confidential
prices with our current suppliers, so it would be the wrong thing
for me to say.
Q212 Chairman:
At the risk of upsetting my colleague Mr Taylor, could I pursue
why I am asking this question. The people who were in DFB had
some knowledge of the way that the dairy industry was going. There
are lots of charts that are published in the public prints about
the price of milk that is being paid to farmers, and I presume
those things are accurate. You would think that a company that
was already supplying you, and indeed others in the high street,
would have had some idea of what a competitive bid was. I appreciate
that publicly you may not be able to tell me the difference, but
was it a question of fractions of a pence per litre or was it
a question of some big difference? I am trying to establish why
it is that they were so far out in pricing to secure the contract
for what effectively was one of their most important customers
and one where, as a result of losing that business, they went
out of business.
Mr Messom: We are talking in terms
of millions of pounds difference. One of the concerns we had and,
as part of the tender process, was we were trying to recognise
that the farmgate price—and Dairy Farmers of Britain during
the tender process made it very clear that, were they to retain
the business and almost having to match their cheapest competitor,
that money would have had to have come from the farmer. They were
already paying at that moment in time their member farmers one
of the lowest prices in the industry. That would have driven it
even further down, and that was a concern to us, because effectively
we would then have contributed to farmers probably going into
a loss situation themselves.
Q213 David Taylor:
That leads me into the penultimate question I have to put. You
said that, effectively, and I paraphrase, DFB was offering the
lowest farmgate prices. Why then, in your assessment, were they
not able to put in the lowest bid for the contract? What was the
problem?
Mr Messom: Because the situation
was they were not as efficient a processor of milk as their competitors.
Q214 David Taylor:
That was an inefficiency to an extent that the advantages of having
the lowest price were lost entirely, and you said to the Chairman,
I think, that the gap was pretty significant. We are not talking
about fractions of a penny here, are we?
Mr Messom: No, we are not talking
of that at all.
Chairman: I would like, Mr Messom, to
request you to write in confidence to the Committee with that
information. We would like to know what it is. Obviously, we respect
the confidence you share with us, but I think we need to get some
clear steer of what the order of magnitude was between where DFB
ended up, because, obviously, it is a fairly fundamental decision
that they were not able to be competitive in your terms compared
with others.
Q215 Mr Cox:
There has been a public comment, has there not, that there was
£2.9 million difference?
Mr Messom: Yes, that is on the
record.
Q216 David Taylor:
My final question then. I am a Co-op MP and I take it as part
of my basic attitude that I want other Co-op MPs and other Co-op
elected members of local authorities and, indeed, social and the
commercial co-operatives to succeed. I want them to be important
and to have an expanding role within communities within society.
The Co-op Group have said that it is "proud of its co-operative
ownership, structure and identity". How do you square that
with the fact that you then pulled the plug on a fellow co-op,
which might have survived had you had faith in them, rather than
what some people would see as abandoning them at too early a stage?
Mr Messom: I take you back to
November 2007 when in actual fact we talked to Dairy Farmers of
Britain wanting to get into farmer pools and wanting to form a
long-term relationship with this organisation. They would not
do that, they did not want to do it because they wanted to be
fair to all members and they felt that the Co-operative Group,
wishing to pay more to those dedicated farmer pools, would disadvantage
certain of their members. It is not as if we had not tried to,
if you like, form a longer-term relationship, and at one stage
we actually gave them an addition of two pence per litre more
than we needed to have done over and above the price increase,
which was to the cost of over £4 million to the Co-operative
Group, to assist them in their continued trading with us.
Q217 David Taylor:
Are you saying you did that because they were a co-operative;
if it was a commercial organisation that you would not have given
that extra two pence?
Mr Messom: I cannot possibly comment
on what we would have done at that particular time.
Q218 David Taylor:
No-one is expecting you to take wholly uncommercial decisions,
but the fact that someone bidding for a contract from you is a
co-operative, are you suggesting that might play a small part
in the final decision as to whether they were allocated that contract?
Mr Messom: It may play a small
part, but at the end of the day I have a responsibility to the
Co-operative Group, and to the CRTG or the Co-operative societies,
to ensure that they are getting a price on Co-operative brand
milk at a commercial price, enabling them to compete in the market
and continue to keep their employees in business and Co-operative
shops open throughout the country.
Q219 Chairman:
Mr Messom, the two pence you talked to, is that the two pence
that is mentioned in paragraph 11 of your written submission?
Mr Messom: No, that is a separate
one. At the time we were starting to talk to them about a farmers'
pool as a gesture of our commitment to want to do this and we
started to pay them two pence extra, which they were then accruing
if we started it, because certain farmer members would need some
funding up front to bring their farms and processing places up
to the standard that would be required and, therefore, it was
really our responsibility to ensure that that money was in place
before we started it. That was a gesture from us to make that
happen, but that is not the two pence that I was talking about.
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