Memorandum submitted by Whitbread Group plc (A65)
The purpose of this paper is to provide evidence to the Environment, Food and Rural Affairs Committee's inquiry into the future of UK agriculture. Specifically the inquiry will be considering:
the prospects for production subsidies and quotas, against the backdrop of world trade liberalisation and the mid-term review of the Agenda 2000 reform of the CAP;
how better stewardship of agricultural land can be promoted;
the opportunities and difficulties faced by agriculture as a result of possible reductions in production subsidies.
In this paper we set out to provide background to Whitbread and our food businesses, look at the eating out market and the attitudes and behaviours of our customers, and to explain our offering to customers and the impact this has on our sourcing policy, focussing specifically on red meat.
2. ABOUT WHITBREAD
2.1 The Whitbread Business
The heart of our business strategy is to drive to create brands which customers enjoy, appreciate and consider good value for money and which are their first choice for leisure.
This strategy has resulted in Whitbread owning and operating some of the country's best-known and most popular High Street restaurants, pub restaurants, hotels and active leisure clubs.
Whitbread no longer brews beer.
2.2 Key facts
Employs over 60,000 people and has a turnover of over 2 billion and net assets of around 3 billion
Has a number of well known brands, including
High Street Restaurants: Pizza Hut, TGI Friday's, Costa
Pub Restaurants: Brewers Fayre, Beefeater, Brewsters, Out & Out
Hotels: Marriott, Travel Inn
Leisure: David Lloyd Leisure
Our restaurant businesses:
Whitbread is the largest restaurant operator in the UK
Whitbread is the pub food market leader with c 60 per cent of its sales coming from food
Our menus offer the customer a wide variety of dishes that are exciting, innovative and offer good value for money.
2.3 Whitbread's outlets
67 Active leisure clubs
3. THE CATERING INDUSTRY
Catering and Leisure (Hospitality), which is defined as "the serviced provision of food, beverages, accommodation, leisure and other facilities purchased outside the home" is one of the UK's largest industries.
Cafes, clubs, hotels, public houses, restaurants, etc in the UK number over 300,000 approximately 80 per cent of which are independently owned and operated by SMEs.
The industry employs over 2.5 million people (about 10 per cent of the total UK workforce) and generates revenue of around £50 billion per annum.
The SME nature of the industry is demonstrated by the simple average that less than nine staff are employed per outlet.
Currently some one in five of all new jobs are created in the hospitality sector.
4. THE EATING OUT MARKET
4.1 The eating out market as a whole is valued at £25.2 billion and accounts for some 4.3 billion eating occasions. The market comprises a variety of different offerings. The attached annex breaks down the market into its component parts.
4.2 Going forward the markets in which we operate we believe will grow by around two points of volume per annum. We note that penetration (those who have eaten out in the last week) continues to grow. The drivers of this growth are:
increased economic wealth in the middle market
increase in "casual" eating out
time famine (dual income families etc)
improved quality and choice available locally
branded supply showing highest growth.
4.3 The High Street restaurant sector is valued at c £15.6 billion and accounts for some 2.17 billion eating occasions. Research shows that consumers visit these restaurants for two key activities; for sustenance or as a treat (often as an adjunct to another activity eg shopping or entertainment).
4.4 The Pub Restaurant sector has a market value of c £5.5 billion accounting for some 0.57 billion eating occasions. The average spend per occasion is £9.75. In this sector socialising or treating is the key reason for customer visits where food is the primary focus.
5. CONSUMER ATTITUDES AND BEHAVIOUR
5.1 There are a variety of reasons why consumers are eating out more often:
more grazing/snacking, fewer meals
greater spontaneity driven by time pressure
increase in local provision and less booking
sub groups of consumers becoming deal driven
increased expectation/knowledge of food driven by TV but not matched by consumer's skills
higher food expectations being met
5.2 There is a growing body of research, which confirms that consumers' attitudes and behaviour are very different when eating out than when shopping in a supermarket. Eating out is much more of a social, fun occasion when we treat ourselves. This has been borne out by Food Standards Authority consumer research and was acknowledged by Sir Don Curry in his recent report on Farming and Food. Specifically in relation to food labelling the Report says:
"Consumers in food service outlets should have access to the information they need to make informed decisions. What is put in place should not impose heavy burdens on caterersor destroy the experience of a good meal out".
5.3 Whitbread's own customer research confirms this view. In a nationally representative survey of 1,384 people who eat out at least once a month we found the following:
38 per cent of people eat out in restaurants (with waiter/ess service)
they are more concerned about accessing information about food in supermarkets than in restaurants
in supermarkets most people wanted to be given healthy eating information and a full ingredient list
in restaurants people wanted to know whether the meal had been prepared from fresh ingredients
significantly nearly 40 per cent of people expressly did not want any information when eating out.
6. OUR FOOD OPERATIONS
6.1 The success of our food business over the last 20 years has been based on our ability to apply a Branded Retail Model to the UK eating out market.
6.2 Our Branded Retail Model is proven in developing successful food businesses (most notably Brewers Fayre, TGI Friday's, Pizza Hut and Beefeater). These businesses operate with printed menus offering their guests a variety of dishes.
6.3 The retail pricing strategy of these businesses is based on the value of the offering made to the customer, competitive activity and the total cost of delivering the menu item to the guest. The retail prices are communicated via printed menus that, in the main, are fixed for some six months.
6.4 Pricing: the elements which make up the costs of our dishes are as follows:
Cost of property including fuel, rent, rates and depreciation.
Raw material cost prices (including distribution and packaging).
Labour involved in preparation, cooking and serving.
Preparatory materials eg cooking oils, cleaning materials.
Given that retail prices are set for six months, our businesses are exposed to any subsequent cost price fluctuations during the term of the menu.
7. OUR SOURCING REQUIREMENTS
In delivering our promise to our guests, our brand credibility is dependent on the consistency and repeatability of the product offering and the consistency and repeatability of the guest experience. This in turn drives product requirements which are unique to our style of operation:
100 per cent availability: In offering a menu to a guest, we are effectively offering for sale every dish printed on that menu for the duration of that menucontinuity of supply is therefore critical.
Products of a consistent size, shape and eating quality: Our guests expect to receive a consistent offering when they choose one of our branded food businesses. This could mean consistent with the last time they visited a particular restaurant; consistent with the same branded outlet elsewhere in the country; consistent with their dining partner who has chosen an identical dish at the same meal occasion.
Price stability and competitiveness: We require our suppliers to give us price commitments that enable us to hold prices over the life of the menu. Our guests expect those menu prices to provide excellent value for money otherwise they will go elsewhere.
8. SOURCING POLICY
8.1 Our sourcing policy for all our products is driven by our customers' needs. We have a flexible sourcing policy within specified criteria and do choose to source a selection of our offer from the UK. In this paper we look in detail at our sourcing policy for red meat because it has been identified by the Curry Report as of particular significance to UK agriculture going forward.
8.2 The structure of our supply chain varies from the supermarket model but has grown in similarity over the last five years. Traditionally, in the case of meat, the source of product was solely through the catering butcher. But this has now changed with higher volume bulk lines being served directly from abattoirs and processors where viable.
8.3 We agree tight specifications for finished products that we require to be delivered into our supply chain. For example for steaks these would include:
Size, weight and thickness of cut.
8.4 Having agreed tight specifications, we outsource the raw material buying to the supply base (UK catering butchers and abattoirs). The supply base can then look to secure the majority of Whitbread's requirements to ensure continuity of supply of the right quality of product at a contracted price with specified country of origin sourcing by particular brand offering. This can be subject to change with market influences, but only following intensive trials and approval procedures.
8.5 Our beef requirements are considerablewe sell about 2,500 tonnes of beef per year of predominantly hindquarter specific cuts making our requirements very different to those of supermarkets. Supermarkets would typically procure and sell a more balanced offer related to full carcass utilisation with a wider tolerance of carcass specification. This places pressure on our supply base to procure select items at tight specifications to meet our needs and they have therefore found it necessary to procure from a cross section of markets to maintain continuity of supply. That said, Beefeater currently procures approximately 35 per cent of its beef from the home market direct from abattoirs, in the case of Brewers Fayre and TGI Friday's approximately 60 per cent of beef is currently sourced from the UK.
8.6 Whitbread has a dominant need for specific hindquarter cuts. These cuts are not in balance with the whole hindquarter, Whitbread sources some 85 per cent hindquarter and 15 per cent forequarter products. Although we have limited demand for forequarter cuts or products produced from forequarter meat, wherever possible we specify the use of UK forequarter meat.
8.7 Overseas product and UK product are now both an equally important part of our procurement strategy. However, UK producers remain resistant to long-term contracts but are being forced to consider working on three month deals. Seasonality and demand for specific cuts influence this type of producer/supplier commitment, eg rump steak/Roasting Joints at Christmas.
8.8 For product of UK origin we do not differentiate between England, Wales, Scotland and Northern Ireland.
9. WORK TO DATE WITH THE UK AGRICULTURAL INDUSTRY
9.1 In August 1997 we began working with the MLC and a number of UK abattoir groups to source and supply two British steaks onto the Beefeater menu. This was achieved and they were included on the menu from 27 April 1998.
9.2 This process was leading edge at the time and allowed us to explain in detail the needs of our business to leading players in the meat industry, and set out the challenges to the UK meat industry in terms of responding to the needs of our businesses. Our discussions with the MLC will continue when we meet on 9 April. The purpose of the meeting is to get an update on MLC Foodservice Activity in 2002-03 and identify further opportunities within Whitbread.
9.3 We have also liaised with the NFU with the result that a number of NFU committee members spent a day visiting Whitbread businesses and were briefed on procurement requirements. We understand that the NFU valued the event and are considering how to utilise the information.
10.1 Eating out is a growing market. Restaurant customers are enjoying a sociable treat and as a consequence have a very different attitude towards their information needs than when shopping in a supermarket.
10.2 The British beef industry is highly geared to the supermarkets that sell four times more beef than the catering industry. For both beef and lamb we buy only specific cuts and have very limited use for other cuts of the animal. This is fundamentally different to the way that supermarkets purchasethey buy and sell constituents of the whole animal and can retail cuts of varying sizes and catchweight items.
10.3 We sell around 8.2 million steaks a year which has, to date, proved beyond the current UK supply capability in terms of consistency, continuity and price. Customer demand for lamb is limited and where offered, we have a need for specific cuts only.
10.4 To meet our customer requirements for a cooked steak (in terms of size, weight, eating quality, value for money), we must meet our brand standards which, in turn, requires raw material of a consistent size, weight and quality.
10.5 Whitbread has a flexible sourcing policy that provides a tremendous opportunity for the UK meat industry. We will always choose UK produce where our needs can be met.
10.6 We suggest that given the growth in the eating out market over the last five years and the forecast for this trend to continue, there will be a sustained need to offer British meat as part of the overall offering. However, the size of the market will continue to be beyond the UK's total supply capability.
10.7 The UK red meat industry is now working more closely with our businesses and others in the food service sector to understand our requirements and to meet our customers' needs. This has been heavily influenced commercially by Foot and Mouth Disease (FMD) factors, most significantly the demise of export opportunities. However, going forward this trend is likely to reverse as export markets open, cattle numbers shorten and the needs of the retail trade once again dominate UK meat production.
4 April 2002
1 In total, when considering all meat species used within our business eg Beef, Pork, Lamb and Poultry, approximately 30 per cent is sourced from UK producers. This position has been consistent during recent years. Back