Examination of Witnesses (Questions 220
- 239)
WEDNESDAY 21 OCTOBER 2009
MR DAVID
MESSOM AND
MR PHILIP
HARDMAN
Q220 Mr Cox:
I do not quite understand your evidence. Forgive me, Mr Messom.
You have said one or two things that, on the face of it, may strike
one as contradictory. First, you have told us that you were concerned
that the farmgate price was the lowest and, you appeared to imply,
one of the reasons why you began to think of pulling out of a
relationship with the DFB but, on the face of it, by pulling out,
you were making things far worse for the farming producers, were
you not?
Mr Messom: In hindsight, yes,
that is what has actually happened, but my number one concern,
which I have said earlier, is to ensure that the Co-operative
Group and their societies got a competitive price on milk.
Q221 Mr Cox:
I hear that, and that is really what I was coming to, because
at one point to my colleague Mr Taylor, you were suggesting that
you had made a £4 million decision that was, so to speak,
at least partially influenced by the fact that you were having
solidarity with another co-operative. Yet, on the other hand,
you retracted from that and said the main decision is commercial.
I fully understand that, but do you think it is possible that
the signals that were being received by Dairy Farmers for Britain,
at least for some part of the run-up to the disaster that happened,
was that another co-operative, namely yours, would stand by Dairy
Farmers of Britain and would tend to have solidarity with them
and, therefore, they were likely to be the preferred option?
Mr Messom: No, I think it was
very clear right from the outset of the tender process. We set
it out in very clear terms to every single supplier that was tendering,
that really we were looking at four aspects: price was just one,
security of supply was the second one, service level, whoever
got the contract, to make sure that we had 100 per cent availability,
and the fourth was the farmgate price.
Q222 Mr Cox:
What is the small residual part that is played by the fact that
you were purchasing from another co-operative?
Mr Messom: I think, had we had
all those four factors being met equally between two organisations,
at that point in time our preference in terms of supporting a
fellow co-operative would have come into play.
Q223 Mr Cox:
This gesture you made of £4 million, how was that influenced
by the existence of the fact that DFB was a co-operative?
Mr Messom: As I said, I do not
know, if I had been in the same situation with a commercial organisation,
whether we would have done the same or not, but we felt it prudent
at that moment in time. We recognised that Dairy Farmers of Britain
were in a situation in which they were paying their farmers less
than the market, they were seeking price increases from us above
the market level and we felt it prudent to give them something
towards what they were looking for. They were asking for more
than we gave them.
Q224 Mr Cox:
Do you not think that might have sent the signal that they were
being treated favourably because they were co-operatives and,
thus, they might expect such treatment in future?
Mr Messom: No, I think the signal
we sent was that we wanted them to certainly continue to give
us the service and make sure that our milk supply was retained
right the way through to the end of the contract.
Q225 Chairman:
Could we pursue this. Paragraph 22 of your evidence makes clear
what the tender criteria were—you have just enunciated them—but
up to that time you had a continuing commercial relationship with
Dairy Farmers of Britain, so they must have been doing a reasonably
good job.[2]
I notice that in paragraph 10, for example, you talk about the
award of the contract in 2007.[3]
You observe, however, in November 2007 DFB failed to produce two
of the four lines agreed. I would be interested to know why they
failed on that. Was that the kind of factor that affected this
question of the service level?
Mr Messom: Yes. Clearly, Dairy
Farmers of Britain were looking to widen their customer base and
were wanting to increase the range of products that they sold
to the trade, and we spoke to them about it. We are ever trying
to improve the range of products in our stores and, therefore,
they talked to us. We wanted to move from a branded product to
our own brand in that particular instance, and we tendered for
the business with them, talked to them about it and we developed
those products together. Unfortunately, when we came to the seasonal
period of that year, they were unable to supply two out of those
four products.
Q226 Chairman:
There is regular dialogue between a supermarket and its supply
chain. That is part and parcel of what you do. Did you put a shot
across their bows at any stage during the contract that was running
to say, "Look, if you guys carry on like this, your chances
of renewal aren't going to be very good"?
Mr Messom: We did have what you
would say are commercial discussions on that sort of basis.
Mr Hardman: Might I just add to
that. The report from Pricewaterhouse Coopers in August, who clearly
reviewed the board minutes of Dairy Farmers, says that, I think,
from the end of summer 2008 they were starting to have misgivings
about their ability to retain contracts. I think we can deduce
from that that must have been because the relationship we had
with them was causing them at least to reflect.
Q227 Chairman:
I accept that entirely, because I have read the same thing as
you have, but I was interested from your point of view. Your dairy
buyers are sitting there thinking, "By God, this lot are
a sham. They are not doing what they are supposed to be doing.
We had better have a word with them." My next question is:
what was their reaction when you told them they were not performing
properly? Did they say, "Oops, yes, you are absolutely right",
or did they give you a lot of excuses? Obviously, if we are looking
for the reasons why they went out of business, part of it is not
understanding what the customer wants.
Mr Messom: I think it was on the
lines of, "Yes, we realise we have let you down. These are
new products to us. We have perhaps bitten off more than we can
chew", and, as a result, we did not pursue other areas of
trying to expand the range of products that they could supply
to us.
Q228 Chairman:
To sum up, they would have been very aware of your misgivings
during the first contractual period and, if they had had anything
about them, they would have been perceptive enough to have recognised
that was going to affect their chances in the next contractual
negotiation?
Mr Messom: But I would also say
that, in terms of standard liquid milk, they gave us an exceptionally
good service. It did not affect the core of the business; it was
only these new products that we were trying to develop with them
that they let us down.
Q229 Chairman:
Coming back to the question I started with, it was the level of
service agreement on the core products which influenced your perception
of the company, not their service on liquid milk.
Mr Messom: Correct, and on service
level from Dairy Farmers of Britain, throughout the contracts
they have been exceptionally good.
Q230 David Taylor:
You opened a new distribution centre at Thurrock, I think.
Mr Messom: We did.
Q231 David Taylor:
Was it an unfortunate coincidence that at the very same time you
lowered the price to DFB for supplying milk in the South East?
Was it linked to the opening of Thurrock?
Mr Messom: That we lowered the
price?
Q232 David Taylor:
Yes?
Mr Messom: They bid on the contract
tender process in 2007. The specific South East was one of our
lots and we asked for quotes from all of the parties that tendered
for it for both direct-to-store delivery and through the distribution
centre, and they put that price in, but there were no promises
made that any supplier for the South East would go through our
distribution centre. There was nothing in any of the documentation
and there was nothing in any of the discussions that we had with
any of the suppliers that there was a guarantee that we would
move that direct-to-store product into our new Thurrock warehouse.
Q233 David Taylor:
How much notice was there given to DFB of the change, or how long
a period was it before the reduced price came into effect?
Mr Messom: I am not quite sure
I understand in terms of the reduced price. We did a new contract
in 2007, which they secured, and they continued to supply our
stores in the South East on a direct-to-store basis from the start
of that contract in August 2007.
Q234 David Taylor:
I think the Receiver's report said that, according to DFB board
minutes in July 2008, DFB pulled out of the South East Co-op stores,
comprising about 50 million litres of milk, as a cost increase
that they were seeking was not accepted. Is that true?
Mr Messom: Yes. Effectively they
came to us and said that, by and large, they were losing money
supplying our stores in the South East on a direct-to-store basis.
Q235 David Taylor:
And they were paid 15 pence a gallon more to do that, or thereabouts?
Mr Messom: Yes, that is the deal
that was done. If they supply product into one of our distribution
centres, then there is a 15 pence differential versus delivery
direct-to-store, and they came to see us and said, effectively,
they were losing money on our South East business and they really
gave us three options. One was would we put them into Thurrock
into our distribution centre in the South East or, effectively,
they needed a price increase, which we could not afford to give
them because it was totally out of line with where the market
was, or would we find another supplier to supply the South East
stores with milk. We considered it. We could not put them into
Thurrock—we had capacity issues in our Thurrock warehouse—so
we could not put them in there and, effectively, we were left
with no alternative but to say, "We will actually seek another
supplier". Having said that, though, to assist them, we did
let them continue to supply our stores on the south coast very
near to Portsmouth at least to retain some of their volume through
the Portsmouth warehouse, and the rest of the business was tendered
and Wiseman won the contract.
Q236 David Taylor:
Is it unusual to have written an overall contract for supply which
allowed DFB to pull out of supplying the South East Co-op stores?
Mr Hardman: I am not sure that
is the contract. We did write. I think, to be clear here—
Q237 David Taylor:
Clearly the opt-out was allowable.
Mr Hardman: David, I am sure,
will correct me if I am wrong, but I think the position here is
that a contract that DFB had entered into in 2007 they were finding,
in respect of some of the deliveries, was becoming unsustainable
from their point of view. They approached us with a number of
proposals that they felt would make it sustainable. I doubt whether
any of that was anticipated by the contract. This was not a question
where we were asking them to lower a price that they had previously
agreed; this was the opposite to that: "Can we have a higher
price to the one that has previously been agreed because, otherwise,
this is an unsustainable part of the country for us." I think
we would have been able to hold them at the contract price to
the full two-year contract life, but from the proposals they put
to us we accepted that they could walk away, as they saw it, to
cut their losses.
Q238 David Taylor:
It was not that the contract allowed an opt-out, it was just that
you conceded a contract variation.
Mr Hardman: We were happy to assist
them in this way.
Mr Messom: In the interests of
continuity of supply of milk to our stores. That was the fundamental
problem.
Q239 Chairman:
I notice in paragraph 33 of your evidence you say, "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."[4]
Because you have a close relationship with all your suppliers,
you will gain a view, as you have just given us an indication,
in commercial terms about your view of Dairy Farmers. Did you
make any assessment about their strengths in the context of paragraph
33 in terms of deciding whether or not they were a well organised
body that had good communications with members? Did you ever look
at any of those aspects?
Mr Messom: We looked at the aspects
of how they did business with us and how they serviced our stores.
We did not go into the detail of how they communicated to their
farmers or how they particularly ran their business, and we tend
not to do that. I am aware, for instance, that previously you
have had experience in Northern Foods. I would not presume to
understand how Northern Foods work internally; I am more concerned
about our relationship with Northern Foods and how they would
supply us. I do not think it is our remit to get involved in the
internal workings of each supplier.
2 Ev 47 Back
3
Ev 46 Back
4
Ev 48 Back
| 
