Examination of Witnesses (Questions 860
- 874)
WEDNESDAY 12 DECEMBER 2007
Ms Heather Jenkins and Mr Duncan Sinclair
Q860 Lord Plumb:
I think what we are getting at is if you walk into a supermarket
and you see a whole lot of chicken, it may be branded and it may
have the country of origin (although occasionally it has not had
in the past) but supposing that they are Brazilian and Chinese
chickens and they are half the price of the chicken you offer
of the standard that you are describing, what is the consumer
going to take?
Mr Sinclair: For us certainly in our fresh meat
offering the vast majority of that is sourced from within the
United Kingdom.
Q861 Lord Plumb:
So you do not have the problem, you do not import Chinese chickens?
Mr Sinclair: Certainly not on the fresh side.
Q862 Chairman:
Can I put what you are saying in a different way. Do you think
that your customers are prepared to pay almost a general premium
to shop at Waitrose because they are buying into something that
is a package that is quality, environment, animal welfare, and
it is all wrapped up in the total ethos of what Waitrose is?
Ms Jenkins: Not necessarily.
Q863 Chairman:
Well, I have got it wrong!
Ms Jenkins: I think, our customers expect us
to have considered all these issues on their behalf and so they
would expect us to deliver on the environmental strategy although
they probably would not understand it because it is quite difficult
from a consumer to understand how farmers are spending their money
so, as Duncan said, it is a package of credentials that is delivering
the Waitrose brand. If we look at milk for example, we have Select
Farm milk produced to the highest animal welfare standards and
we have been paying as close to the cost of production since 1999
rewarding for the quality standards, which is completely against
what the rest of the market have been doing, and we have been
selling it at the same price as everybody else, so there is a
combination of things that we would do because it is the right
thing to do for our brand and it is the right thing to do for
our customer. Whether it is CAP policy, whether it is UK strategy,
whether it is legal requirements, we are interpreting those all
of the time and translating them into whatever livestock scheme
we are offering, and therefore what it looks like in terms of
an assortment of choice to a customer. We are in a position where
we can add value and we are creating the choice, so the entry
level, if you like, the British standard meat offer that you see
at Waitrose (because we do not sell anything else except New Zealand
lamb in season) is our entry level and that will have high welfare
credentials. We will not necessarily charge any more money for
it because it might not be accepted by the customer or it just
might not be competitive. Coming back to the niche market discussion,
we cannot afford to trade in a vacuum. You could say maybe ten
years ago that Waitrose customers were Waitrose customers, indeed
they were and they are today, but they are more promiscuous and
everybody wants to trade in the premium end of the market so going
back to where do customers pay more for environmental credentials,
the evidence that we have got is that the customers believe that
your credentials should be throughout your business not just an
emblem or a logo on a pack in amongst Chinese chicken or whatever
else imported meat might be in there, I think they have a very
cynical view from that point of view. It does not necessarily
follow that just because you are serving Waitrose that we can
pay a premium, because we have to trade in the open market like
everybody else, and what we try and do, as I said, about trying
to balance a carcass and find differentiation, we try and add
value. There are challenges associated with that but if you are
able to take a long-term view and be innovative, then there is
a long-term benefit for everybody involved in the chain. The most
important thing for customers, whilst we talk about animal welfare
and environmental credentials and what we do on the farm, is that
it tastes good.
Chairman: Can we move on to risk management
and Lord Cameron.
Q864 Lord Cameron of Dillington:
With falling intervention in the EU and falling tariffs, the Commission
has, quite rightly in my view, put forward the proposal that risk
management is something that ought to be looked at and that the
farmers ought to take their share on that. I should declare an
interest before I ask the question, namely a) I am a supplier
of organic milk to Waitrose and b) I am a supplier of non-organic
potatoes to Tesco's.
Baroness Jones of Whitchurch: Promiscuous!
Q865 Lord Cameron of Dillington:
Promiscuous, yes! I was wondering what role the supermarkets for
instance could play in this in terms of supplying their suppliers
with very good market information, perhaps their own forward analysis
of the market-place and, more importantly, and this is the thing
I have struggled to achieve both with potatoes and milk, some
form of long-term contract so that they are sharing the risk?
Let us avoid milk and take potatoes, for instance, where prices
go from £40 a tonne one year to £200 a tonne the next,
as a farmer one would really long to have some sort of consistency
of price but it is almost impossible to achieve.
Ms Jenkins: I do not think it is impossible
but I think there has to be equal risk taken. The two examples
I would give today is the activity that we have had in the beef
and the sheep sector this year in particular. I did say that we
do not have any formal contracts—I think milk is slightly
different—but in the sheep sector, for example, there was
no way that they were going to get the right return for producing
sheep meat so we underpinned the market. We have done that all
season and again we were the only retailer to actually do it in
the way that you are referring to. We have also taken a stance
on beef prices and given a structured approach to the next 18
months. That is quite a risk for one retailer to stick their neck
out when there is no sign at the moment that the market is going
to follow suite. Coming back to why we can do it and others cannot,
I think that fundamentally others do need to look at the base
commodities with some sort of sense of "what is this worth
and where are these people going to be?" otherwise they are
not going to be there in the future. So I think that contracts
can be developed. It is a bit like a marriage; there are good
times and there are bad times and you need to go into it with
your eyes open. I think in the past what we have seen is that
farmers can be fair weather friends and when the market changes
they walk away, so it has equal responsibility in risk-taking
because at the end of the day we are trying to provide the customer
with a consistent quality and a consistent price.
Q866 Lord Cameron of Dillington:
I accept that but again reverting to potatoes, the cost of producing
a potato with cold storage and all the rest of it is about £150
a tonne. To have a contract for £125 a tonne would be quite
good over a five-year period, but it is almost impossible and
supermarkets have got to learn to share the risk and not just
go entirely on spot price.
Ms Jenkins: I think so. It is also about reducing
the variables so it is about having clarity as to what the exposure
is. You would not be the first person to talk to me about Tesco
potato contracts I cannot believe that the UK cannot provide all
the potatoes that every retailer wants. We do not need to be going
abroad to get our potatoes. I think that there is an opportunity
there but again I would also say, as I say to our own producers,
that working together is far more powerful than trying to do it
on an individual basis.
Q867 Lord Cameron of Dillington:
I agree with that.
Mr Sinclair: One area where we have actually
through our suppliers been working as a group is on the organic
cereals side because we have got a significant share of the organic
pig meat supply in the UK, and one of the biggest challenges we
have there is having enough organic cereals. We started some work
in the summer time, long before the cereal prices reached the
high level that they actually did, because we were concerned that
with a poor harvest in the UK and elsewhere in Europe whether
we would have enough organic cereals to be able to maintain our
various livestock supply chains moving forward. Essentially we
took a stand at two organic cereals events in the summer and we
got 35-odd leads to follow up with farmers to discuss a two or
three-year contract price for organic cereals to provide them
with something that they could actually plan for their future,
in the same way as our livestock farmers could plan with some
certainty for the future. The biggest challenge we have had is
because the cereal price increased markedly is trying to say what
would be a level that would be acceptable on a two or three-year
period and that little exercise has essentially been much more
difficult in the way in which the cereal market has actually evolved.
We were taking the view from the integrity of our supply chain
that to have to rely on Eastern European supply, Kazakhstan supply
of organic cereals is something that we would prefer not to have
to rely on. We would much rather that that product was grown in
the UK and we would have much more faith in the quality of the
raw material. That is an example where we have through our suppliers
tried to look at a contract scenario, but it has proven to be
a very challenging exercise.
Chairman: We must move on to biofuels
and climate change.
Q868 Lord Palmer:
Both my questions are fairly topical with the Renewable Transport
Fuel Obligation, et cetera. What is Waitrose's view on the food
miles debate? Are there alternative strategies for reducing the
impact of the food chain on the emission of greenhouse gases that
should, in your view, receive greater attention? I find this very
difficult because I live next door to one of the largest potato
packing plants in the country. I am told potatoes get shipped
from Lord Cameron's part of the world, all the way to the Scottish
borders, get washed, get packaged and then shipped all the way
back to Lord Cameron's part of the world. Quite a lot of our witnesses
have also expressed great concern about the impact of policies
to encourage bioenergy and renewable energy. How do you think
this might have an effect on the supply and indeed the price of
food and are you worried about this long term?
Mr Sinclair: I think the extra demand for renewable
energy is something that has certainly been one of the major driving
forces behind a significant increase in cereal prices that has
occurred this year, allied to the poor summer weather and so on,
and it has had a major impact. I think the obligations that set
out the aspirations of the EU Commission for different Member
States to achieve different level is going to be a factor that
could mean that we are facing a scenario where livestock production
costs, particularly in the pig and poultry sectors, are going
to be much higher in the future than maybe they have been for
the last five to ten years, so it could be a fundamental difference
in the cost structures of these particular sectors. It is something
that we have had to respond to but we have found it extremely
difficult in the current economic climate to be able to recoup
these extra costs at the retail end of the supply chain. I think
one of the big issues for the industry is how we balance the discussion
between land for providing and producing feed to supply the domestic
industry versus using the land to meet some of these renewable
energy targets that the Government have to meet moving forward.
It is a discussion that is going to intensify in the next couple
of years but it could mean that we are looking at significantly
different cost structures, particularly in those two sectors here
and across Europe, and the fact that set aside may well disappear
as part of the CAP health check, I think it is going to be an
interesting scenario to see when that land is released and cereals
are grown at one end, does that product end up as animal feed
or does it move into the biofuels supply scenarios. I think some
work I have seen that some folk in the EU Commission are suggesting
is that to meet some of the renewable obligations by 2020 we could
be looking at something like 15% of the EU arable land would have
to be used for production on biofuels versus the current ratio
of 3% of the EU arable area. It is a difficult thing to assess
moving forward but I think it could be fundamentally different
cost structures we are looking at in some sectors.
Lord Palmer: Thank you.
Earl of Arron: You have not really answered
the food miles question.
Q869 Lord Palmer:
You have not, no.
Mr Sinclair: I think the food miles is at least
part of the concept. For us it has to be looking at it more on
the entire picture of the carbon life cycle. You start with your
inputs and then the production system. I think one of the things
that might help is if we could have some standard methodology
for assessing the carbon footprint. I understand in spring there
is going to be a BSI standard published. An amalgam of the BSI,
the Carbon Trust and Defra have been working to develop this one
methodology. I think that will actually help the discussion. For
us in working with our supply chain, we have through the main
agricultural commodities virtually plugged our figures into the
Cranfield model to give us an idea on the various livestock sectors,
where are some of the hot spots, where are some of the big issues
in terms of carbon footprint and equally so with the major processors
that we use. They have done a carbon audit of their processing
facilities which I guess is possibly easier than making assumptions
at a farm level with a view again to looking at where the hot
spots are. What are the things that you can do to try and adapt
and mitigate the effect and reduce these factors moving forward.
We have begun the process but I think there is more we could actually
do.
Q870 Lord Palmer:
And this will be in your long-term plans, will it?
Mr Sinclair: Yes, it will be.
Q871 Chairman:
Can I ask on cross-compliance, obviously farmers in receipt of
Single Farm Payments have to observe some basic cross-compliance
conditions. In your judgment, does that improve the quality or
safety of UK-produced farm goods and would you like to see changes
in the requirements incorporated in cross-compliance, so where
are we with cross-compliance and how useful is it?
Mr Sinclair: I think it was a concept that many
farmers were very nervous about in terms of when it was discussed,
when it was agreed, exactly how that would affect how they do
things on the farm. What I detect is that it has not been as intrusive
as they maybe felt it would have been. It was originally perceived
that it might not to be able to do not a lot of the general activities
that they actually did. I think it has been positive in terms
of it certainly raised the awareness of environmental issues on
farm. On things like increased legislation in this area, it has
probably encouraged people to think about best practice, the sort
of things like the new legislation that is about to come in and
extend potentially nitrate-vulnerable zones and extra Framework
Directive legislation probably and because we have raised the
awareness then I think it will probably help in possibly being
able to achieve some of these things moving forward. It is difficult
sitting here to know whether the way in which we have been able
to address some of the measures here in the UK are the least cost
options and is there any work being done across Europe on other
ways in which to address some of these issues in other Member
States and could we learn from that, because I think we have got
to make sure that from a competitive point of view we do not saddle
our industry with an extra burden of cost relative to our European
counterparts. I think that is an important part that we are able
to deliver against the EU frameworks but we have got to have some
flexibility in there and I think at some point we have got to
take stock to make sure that the measures we have got are actually
delivering what was expected of them.
Chairman: Trade liberalisation and Baroness
Jones.
Q872 Lord Palmer:
So if the outcome of the Doha negotiations is that it opens up
markets so that there are more imports coming here from third
countries, would you envisage taking up that opportunity to import
more is or is your ethos committed to British products at all
costs?
Ms Jenkins: We have been involved in developing
British production schemes for many, many years and our belief
at the moment is that providing the UK can provide the indigenous
resources to do it effectively, then that is where we will continue
to place our emphasis. It is true to say that part of the reforms
is creating awareness with farmer suppliers in terms of if you
see that you cannot produce what we need you to produce at the
prices that we can retrieve from the market-place, then we are
going to seriously have to think about where else we go in the
world, and certainly our specifications are transferable; we have
no issue with that. For us it is about if we can produce it indigenously
then we should, in the interests of everything, whether it is
animal welfare or environment or food miles or all of these things
taken into consideration, and if we cannot, then we have to look
elsewhere like any other buyer, but that is certainly our strategy.
Q873 Baroness Jones of Whitchurch:
And are there opportunities for you in terms of greater exports,
the quid pro quo of opening up some of these markets. I do not
know what proportion of your product you export, presumably a
relatively small amount?
Ms Jenkins: We have an interesting export business.
We do not have any bricks and mortar but we do have a developing
export business and, yes, we are looking at all those opportunities
to grow that in the future.
Q874 Baroness Jones of Whitchurch:
So then lastly you have talked very persuasively about the health
and animal welfare standards that you have—and you are probably
a leading example of it—do you look forward to extending
those principles out beyond the EU to wider international levels?
Do you think that they should be taken up as part of the Doha
negotiations or beyond?
Mr Sinclair: I think it would be a very difficult
issue to try and achieve an agreement, and certainly when this
was discussed the last time around in the context of the Uruguay
Round they ended up being cast aside to actually achieve that
Framework Agreement. I think the big issue moving forward is the
mechanism and if we cannot actually see them include it in the
Doha Agreement, whenever that may come, I think the challenge
will be does the EU try to differentiate EU-produced product versus
non-EU produced product out there in the market-place. I think
that is an important thing and I think the animal welfare aspect,
as Heather mentioned, is one aspect because our experience has
been essentially to translate our UK production standards into
other European Member States and also to non-EU Member States,
so they are virtual equivalents across the world in terms of where
we are actually sourcing. I think we are probably unique in that,
but I think the challenge will be if we cannot see that incorporated
into the next agreement can the EU try in some way to differentiate.
I know there has been some discussion about an EU project looking
at welfare labelling. That may be a potential mechanism to try
and differentiate in consumers' minds between product produced
in the EU meeting the EU's standards versus imported third country
product that does not. I think that is one of the confusing issues
out there at the moment. I think many consumers expect imported
product to reach the exact same standards as we would have within
the European Union and in a whole range of different sectors that
is not the case.
Chairman: What is quite interesting is
in the defence and security world how some of those people are
now talking in terms of building environmental requirements into
trade negotiations because they see environmental issues as being
real security threats, and that is one way of dealing with it.
I think it is impossible to deliver them, but never mind. Thank
you very much indeed. It has been of very great help.
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