Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Supplementary memorandum submitted by the Director of Communications, Safeway Stores plc (A 61(a))


  1.1  Towards the end of the session with Tesco, JS and Asda, one member of the Committee suggested that it suits the major supermarkets very well to deal, albeit indirectly, with thousands of ill-organised farmers.

  1.2  Although superficially plausible, this view is mistaken. There are solid, practical business reasons why the major supermarkets favour more collective organisation by farmers and a more structured supply chain. Food retailers are interested primarily in securing assured supplies of meat, milk, product and other commodities which are delivered to consistently high quality and safety standards. The existing, highly fragmented structure of the primary production base makes this difficult to achieve.

  1.3  The specific disadvantages include:

    —  Lack of scale economies, leaving too many high cost producers dependent on subsidies for their survival.

    —  Difficulties of on-farm inspection aimed at ensuring that basic hygiene and safety standards are being met, ie the available resources for inspection have traditionally fallen short of the demands imposed by a fragmented producer base.

    —  Continuing over-reliance on speculative production, especially in the sheep and cattle sectors, where 50 per cent and 38 per cent of herds respectively are still sold via open livestock markets.

  1.4  Although gradually declining in importance, open livestock markets represent a continuing potential threat to animal health. Contrary to popular belief, FMD was not spread by transporting animals over long distances. If animals are transported directly from a farm to an abattoir for slaughter, that in itself presents no threat of infection to other animals. The problem arises when animals from a number of farms are mixed together in livestock markets. It will be remembered that at the start of FMD animals from the farm at Heddon-on-the-Wall went through two livestock markets before being sent on to other areas of the UK.

  1.5  My personal vision of the future—one which I believe would be broadly shared by other supermarkets—envisages a much more concentrated production and processing sector, integrated either through cooperative ownership or by dedicated supply relationships based on long-term contracts between farmers, processors and retailers. Such contracts may include guaranteed minimum farmgate prices, where market conditions permit.

  1.6  The claim that the existing balance of power works in favour of the major retailers and that the latter must, therefore, be very happy to keep it that way is based on a very superficial view of how trading relationships are conducted. The major supermarkets are strongly in favour of changes which will:

    —  Enable them to communicate consumer needs up the supply chain very quickly in the expectation of a rapid response.

    —  Secure reliable supplies of quality food at competitive prices from the farming and processing sector.

    —  Ensure that any further threats to consumer confidence arising from health and safety issues in any part of the supply chain are quickly identified and dealt with.

  1.7  These changes will need to be in place before CAP reform becomes a reality. If not, then the reality of reform itself will force them through but at much greater cost to the farming and processing sectors.

  1.8  The overriding need for UK farming—in all sectors—is a sustained recovery in profitability. There are only three ways in which this can be delivered:

    —  More subsidies.

    —  Higher farmgate prices.

    —  Lower costs.

  As subsidies are being gradually phased out, with a cumulative deflationary effect on many farmgate prices (as tariff barriers against non-EU members are reduced and the EU itself is enlarged), the only feasible option is to cut costs. Collaboration and cooperation will be the only way forward for many farmers.

  1.9  How will this be achieved? Sceptics believe it never will be, quoting the tradition of individualism which is said to be inbred in British farmers. I would prefer that we approach this issue along more pragmatic lines by focusing on the motivation to cooperate and the organisation structures required to facilitate it:

    —  The severe reduction in farmers' incomes since 1995 and the prospect of further reductions thanks to CAP reform ought to provide enough motivation for many farmers to think about alternative ways of staying in business.

    —  Continental cooperatives have flourished partly because farmers who invest in them have had the opportunity to make capital gains. French co-operatives, for example, are organised on the same lines as a Société Anonyme, ie a limited company. In the UK, by contrast, we have organised many cooperatives on friendly society principles, ie whatever dividends or payments a farmer gets, his basic investment remains the same.

    —  Continental cooperatives are also supported by an approach to competition, within current EU rules, which allows high levels of concentration and permits state aid to bring these about which would be impossible in the UK. Costs will be substantially reduced only if co-operatives or other collaborative ventures are allowed to achieve sufficient scale economies—which in a declining commodity product may well imply a dominant share of the market.

  1.10  A much more concentrated production and processing base does not, therefore, necessarily mean that cooperatives will be able to lever significantly higher prices out of retailers and, therefore, the final consumer. It does, however, open up the prospect of a much lower cost base. The major retailers would welcome this outcome and will do what they can to encourage it. Further action is required, however, from the Government, the OFT and the Competition Commission. We also require a more rigorous definition of the role, resources, management and success criteria of the Curry Commission's proposed Collaboration Board.


  2.1  There is a good deal of confusion surrounding this term, not least on the part of many consumers. In everyday discussion, the term may cover, or be understood to mean:

    —  Food produced in the UK

    —  Food produced near to the final customer

    —  Food which carries a regional, county or local brand identity

    —  Food which is produced and purchased locally for sale in a supermarket or other retail outlet.

  2.2  As there is no standard or agreed definition of what constitutes "local food", retailers will give widely varying answers to the question of how many such products they sell.

  2.3  In any event, even if there was an agreed definition, merely quoting the bald numbers of products on sale in supermarkets would tell you very little about what is actually happening in the market place. The key issues are:

    —  How much consumer interest in/demand for local/regional products is there at present?

    —  What factors influence consumer demand?

    —  Are there any constraints on the supply side which will inhibit future growth?


  Last month, the IGD conducted 8 focus groups across the UK and a further 1000 consumers were interviewed nationally. The details will be published at the end of March. The provisional conclusions, however, are that:

    —  59 per cent said they were interested in buying these products.

    —  38 per cent said they would always or usually look for such products if their main supermarket stocked them.

    —  57 per cent said they would expect to pay more for a product they would normally buy if it had been produced locally and to the same standards. The IGD warns, however, that this answer should not be interpreted as representing a "willingness to pay". Consumers said that the price they would pay depended on the individual product and the attributes it offered.

  2.5  The overall conclusion of this research is that while a large number of consumers are interested in buying "local" food, they are unlikely to compromise their usual standards of quality, appearance, cost or availability. Local foods need to be able to compete in the market place with the range of products already on offer.


  2.6  Turning to the supply side, there are three potential constraints on growth:

    —  The tendency for local producers to focus on primary products for which consumer demand is static or declining.

    —  The technical and managerial limitations of many small enterprises.

    —  The lack of a local processing infrastructure.

  2.7  Local producers must understand the retail market and, in particular, the underlying trend in consumer demand towards meal solutions which are convenient, innovative, pleasurable and offer good value for money. This implies the capability to deliver a range of added value products, as distinct from those commonly associated with local food such as produce, cheese and fresh meat.

  2.8  Some small producers have major problems in reaching and maintaining the standards of product quality and safety which large retailers require from all suppliers. The current legal framework of due diligence puts the onus very clearly on retailers to ensure that the products they sell achieve high standards of safety and quality. A prospective supplier must therefore be prepared to undergo a factory or premises audit which will establish their fitness for purpose. In some cases this is likely to reveal serious shortfalls which the retailer and the supplier will then have to work together to correct. Given that the big four supermarkets already have hundreds of small suppliers on their books, they will have to be satisfied that additional management time invested in bringing more of them into the supply chain is likely to be cost effective.

  2.9  The weakness of the local infrastructure may also inhibit growth. As Curry points out, raw materials grown locally may well have to be sent some distance for processing and packaging because these facilities are not available close to the point of production. Food processing is a volume-dependent business where scale economies drive profit. Over the past 20 years, processing in all the main commodity markets (meat, milk, product, cereals) has become more concentrated in larger units. This trend will continue and will more than offset any increases in transport costs (or "food miles"), which occur as a result.


  2.10  The long-term growth prospects for "local" food are, therefore, uncertain. The apparent growth of consumer interest reflects the continuing demand for something new and different. Consumers will not, however, tolerate any significant departure from their normal standards of quality, availability and value.

  2.11  There is, of course, a fashion element in "local" food which may not be sustainable. In practice a good deal will depend on the ability of retailers and producers to work together to develop products which reflect consumers' changing lifestyles and do not require advanced cooking skills or a big investment of time in the kitchen. Retailers will therefore continue to develop the market by extending their ranges through trial and error until supply and demand achieve some increase in equilibrium.

8 March 2002

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