Dairy Farmers of Britain - Environment, Food and Rural Affairs Committee Contents


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

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