Oral evidence: Farmgate prices, HC 474Wednesday 16 December 2015

Oral evidence, 16 December 2015.

Witnesses

Tim Smith, Tesco Group Quality Director, Tesco, Alex Brown, Fresh Trading Director, Morrisons, and Judith Batchelar, Director of Sainsbury’s Brand, Sainsbury’s, gave evidence.

Chair

Good afternoon. Thank you for coming to our inquiry on farmgate prices. We are delighted to have three major retailers with us. Tim, would you like to start off by introducing yourself? Then we’ll go across the table, please.

Tim Smith

My name is Tim Smith. I am the group quality director for Tesco, so sourcing and selling all our products globally.

Alex Brown

Good afternoon. I am Alex Brown, the fresh trading director of Morrisons; I am responsible for buying all the fresh food.

Judith Batchelar

I am Judith Batchelar. I am director of the Sainsbury’s brand. I am responsible for anything that we sell in our stores that has our name on it, which includes sourcing the agriculture team all the way through to the shelf. I do one other role, which is to co-chair the Government’s agri-tech leadership council, which I have done for the past few years.

Chair

Thank you. Welcome to all of you. I will start with the first question. Is it fair to say that the supermarkets are engaged in a price war to preserve your individual market share? Who wants to start off with that one, a nice, easy question to get you going?

Tim Smith

I would not put it in those terms, you will not be surprised to know. We are all striving to do the best we can for our customers, which is a combination of price, quality and provenance—all the things that they are interested in. The effect of that, as we—Tesco, at least—have built stronger, shorter supply chains, is that the market is working pretty well with most of the farm-based commodities that we deal in.

Chair

But surely all you major retailers want as big a chunk of the cake as you can get. Tesco is the biggest and surely you want to remain the biggest.

Tim Smith

Speaking just for Tesco, I would say that our competitive stance is one of winning the battles that matter most and if market share is one of those, I do not think commercially that we ought to be ashamed of that.

Chair

No, I am not asking you to be ashamed of it. I am just saying, surely, as you fight the corner for a big market share—we will come on to ask how you get to that—surely you must be fighting. What is Morrisons’ or Sainsbury’s attitude?

Alex Brown

It is a very competitive market. We have had declining market share for a number of years now. Not only are we a retailer, but we are the second biggest food manufacturer in the UK, so we have a lot of factories to fill. It is very competitive. We have to operate in that market. We face a rising discount sector, not only Aldi and Lidl, but the high street discounters in our grocery business. We are feeling some strong competition from them, so we are trying to get back to our roots of doing the right thing for our customers. Price is clearly part of that, but it is also about what we do differently as a retailer, supporting British, doing the right thing, great quality products and what we make in our stores as well as in our factories. It is a very competitive marketplace at the moment.

Chair

You see British as not only very good food, but a very good marketing tool as well.

Alex Brown

Absolutely, yes. It is pretty vital to us. For instance, we have got three abattoirs that only process British animals, so that is a big asset for us, which we have to keep running efficiently—a lot of jobs are involved in that—and we have two sites that just pack British vegetables. That is crucial for us, and a very important message for the customer.

Judith Batchelar

I do not disagree that it is obviously a very competitive marketplace, and I would add online retailing to the discounters. Online is obviously a different business model, with different cost structures, which enables them to be very competitive in certain instances. The big thing is that in food retailing, if you look at the UK, it is the second cheapest place to buy food in the world after America, in terms of the percentage of customers’ disposable income spent on food. That is a challenge. The second point is that food retailing is a low-margin, high-volume business. I do not disagree with Tim that it is about market share; the big issue is volume. We would do anything to protect the volume of our business, because that is material to our business model. More importantly, it is material to the business models of the value chains that sit behind our business. If I were to talk to our farmers, they would say, “Absolutely, protect our volume. That is one of the biggest things that you can do to help us in our own businesses.” On British, I absolutely agree from a customer point of view. We have done recent surveys as part of our corporate responsibility work and British comes almost at the top of customers’ priorities—because they see British as shorthand for quality. People believe that British food has not travelled so far, so it is fresher; because it is fresher, it is more nutritious. They also fundamentally believe that British food standards, and the standards within the production systems in Britain, are better than in the rest of the world. Absolutely, it is in our interest to make sure that we have a thriving food and farming sector.

Chair

That leads me neatly on to the other part of my question. Waitrose told us that reducing retail prices is not sustainable; if you talk to the farmers, they say that to keep driving the prices down to them is not sustainable; and the consumers love to have lower prices. When do you expect food prices to rise, rather than to keep falling? Falling prices is ideal for inflation and for the consumer, but not for the retail trade or, in the end, the farmer. It is difficult for you to predict, but what would you all predict on that?

Tim Smith

We have seen sustained deflation in different markets for a host of different reasons, and that prevails. We have to look into our professional crystal balls and make a judgment of when that might turn up, but the best way of doing so is by having the best sort of relationships with our suppliers in the UK and globally. They are telling us that as long as we can keep the volume up—Judith’s point—as long as we can give them the best sort of certainty about what the market will do for their volume and as long as we recognise that all the way through the supply chain there has to be a profitable outcome for each of the players in it, then the deflation-inflation piece they recognise is both a function of demand and—

Chair

Sorry to interrupt, but although there has got to be a profitable outcome, if prices are being driven down by a price war between retailers and there has to be a profit margin, surely ultimately that means you then drive down the price you pay to the farmer—that is the only logic that I can see.

Tim Smith

I do not think we see the evidence for that. We buy, we think, around a quarter of all the agricultural output in the UK, and when we are talking to our UK supply base—take milk, specifically—we know that where necessary, you have to decouple what the market is doing from the price that we need to pay those farmers, effectively to protect the investment they have put into the supply chain and their assets, which are built to supply Tesco. You have to keep doing that. That is why being close to the supply base and understanding the needs of those individual producers, even though some of that is going through processors, is absolutely vital. Being transparent and providing them with certainty about what the market is likely to do, while recognising the volatility caused by the vagaries of currency and world commodity prices—those are an inevitable part of what we do.

Chair

On milk, you buy liquid milk and have a liquid milk contract. You are now offering contracts on processed milk, but I have been asked to ask whether the contracts on processed milk are long term or short term. What are you offering?

Tim Smith

The way we are developing the contract for cheese is very similar to the way we have developed the model for fresh liquid milk, which has been in existence since 2007. None of that works unless the dairy farmer involved knows that that contract is going on well into the distance. For the dairy farmer, that has never been an issue, because the length of the contract—

Chair

I am talking particularly about the contracts that you are now looking to offer for processed milk, rather than liquid milk. Are you looking at long-term contracts for those or what?

Tim Smith

They will pretty much mirror the same situation that we have for the liquid milk contracts. We would not enter into this to have haves and have-nots.

Chair

As for Morrisons and Sainsbury’s, have you got ideas not only on liquid milk, but the milk that goes into processing?

Alex Brown

We are in long-term contracts for liquid milk and cheese. We have two cheddar cheese suppliers with whom we have a long-term deal, and we are just developing how that will work specifically so that both parties benefit and the farmers supplying also benefit. We are supporting quite a small yoghurt and cottage cheese factory up in the Lake District, and we will have our volume in that operation for the foreseeable future. There are no plans to pull out of that at any time, because that is a farmer co-op owned business, and we believe that it is crucial that we have more British yoghurt production staying in the UK. Not just on agriculture, but across the whole piece, we want to get on a much longer term footing with the supply base, because that is where we believe the best results come for both parties.

Chair

When all of you have a price check on when we go to buy, and you say, “You could have saved so much”, or, “You saved so much on your goods”, do you do any sort of price check on what you are paying to the farmer?

Tim Smith

There is a league table published on dairy prices, so it is not difficult to do.

Chair

No, but you bear that in mind when each of you are negotiating contracts.

Tim Smith

The way that our contract works—I will speak first, and others can join in—is that we are solely based on the cost of production. The 650 or so dairy farmers who are part of the sustainable dairy group for us are effectively creating a database of their costs. We are going to pay on that; we are not going to pay on what the market is doing. Customers find this quite difficult, but it is decoupled from the price that they pay in the supermarket.

Chair

Sainsbury’s has got something slightly different, has it not? How do you purchase your liquid milk and your milk for butter and cheese?

Judith Batchelar

On our liquid milk, it is similar to but different from the Tesco model. We have 311 dairy farmers who produce our liquid milk. They have a cost of production model that is slightly different, in that it is calculated annually on their actual costs. They give all their accounts to a third party; we never see the individual farm data, but those are amalgamated and an average cost of production is produced. They voted for that back in 2012. It is reviewed annually, but we then review that price every three months, because 50% of the cost is feed, fuel and fertiliser, and those are extremely volatile, as you will know. Those things are reviewed every three months, and every three months we will change the price that we pay. Some of that milk is then linked to our other dairy development groups—so we have a cheddar cheese development group—and they will use milk because many of them produce milk for us as well as cheese. It is fair to say that that covers just over half of our British cheese production, but not all because a lot is much more fragmented and therefore difficult for us to manage. One of our challenges is how to manage the cost of liquid milk going into other processes that are not part of that group. That is quite difficult for us because clearly we are not allowed to stipulate where people buy their ingredients or what they pay for them under the GSCOP rules. We are thinking carefully around that one.

Chair

Yes, because it is still quite a lot of milk that is out of your protection on price.

Judith Batchelar

Yes.

Q465Chair

But you are looking at that quite seriously.

Judith Batchelar

Yes, but it is a difficult one.

Simon Hart

You have just raised an interesting point about the cost of production. When that calculation is being made, does it factor in an element of profit and, if so, how much?

Judith Batchelar

Yes.

Simon Hart

And does it factor in capital improvements which may be over a 10 or 15-year horizon?

Judith Batchelar

What price is paid is publicly available so I am not saying anything that would be anti-competitive. At the moment we are paying 30.82p a litre. Within that there is a profit element for the farmer and that profit element will vary depending on how efficient those farmers are. They know that because we collect farm-level data from them on 16 different metrics. We pay for that and it is done by a third party, so it is anonymous. We cannot see individual farm-level data. Those 16 metrics are red, amber, green versus their peer group, and they are told where—

Simon Hart

You have answered the question yes, which is all I was keen to ascertain at this stage. My other point is that when you were talking about the importance of British as part of the marketing strategy, I think all three of you mentioned that this was the result of customer research. Does that research go as far as saying, if you had a British product at, say, three quid and a non-British identical product at £2.80, what would happen then? What do the shoppers do then and what do your people do then?

Judith Batchelar

That is a very interesting question, which we have asked our customers as part of our research. One thing that they are very clear about is that very high up the priority list is being fair to our suppliers, whether farmers, growers or indeed manufacturers, so they expect us to pay a fair price, but there is a limit to what premium they are prepared to pay for British, so you need to be within around 20% for it to be considered. If it is more than that, price then becomes the factor. It is not British at any cost, but they are prepared to pay a small premium.

Jim Fitzpatrick

My apologies for not being here from the very beginning. Ms Batchelar, you said that written into the contract you get three months’ assessment of the volatility of factors that affect price. Does that automatically kick in to what you pay the farmers, or does it trigger negotiation? Do they recognise that volatility? You referred to depending on how efficient the farmers are, so they may not have taken into account the volatility in price, but you are monitoring it. Does the price vary automatically or do you then say to the farmers, food stocks have gone down and energy has gone down so we are reducing what we are paying you by 5% or 10%. Is that automatic or is it negotiation?

Judith Batchelar

If I go back a step, they voted for the model that we ended up with. We spent a year looking at alternative, different models and 82% of them voted for this particular model. In that model, they agreed the market indices that we would use to measure feed, fuel and fertiliser. They agreed the figures we would use and they agreed to the fact that basically we would notify them in advance. We would notify them on 1 December—they would be expecting that because they get the letter every three months—that the price we are going to pay based on those indices is 0.45p a litre less than at the moment and that that will kick in in January. They know that. It was agreed up front as part of a model.

Jim Fitzpatrick

Is this a consistent agreement across all of the suppliers?

Tim Smith

There are a lot of parallels. We have just, because of volatility, moved to a three-month cycle. We noticed, because farmers would have told us, that the frequency of changes had gone up over the life of the plans, so since 2007. It does not lead to negotiation; it leads to an agreed price, because the individual accounts, the individual farmers, very much as Judith described, go into one independent source, which turns the handle and produces a price based on the cost of production of our members. It is really worth noting, across the board of people sitting here, that the balance of the price that has been paid over the most recent years has generated substantial income for the farmers who are part of these schemes, as compared with the co-operatives. So in our case, we have invested about £200 million over the life of the scheme, as against what we would have paid had we paid a standard co-op price for milk. So the farmers have seen that this is a fair, transparent and clear method of being fairly rewarded for their product.

Chair

You have talked about 30.8p or 30.4p for liquid milk. Is that the same price that you are paying for contracts for cheese—I know you don’t have all contracts, but those that you have got for cheese? Is that milk going for that sort of price as well?

Judith Batchelar

I am not sure that I can answer that question accurately, but I would say that 50% of what is going in is—

Chair

Will you then furnish that to us in writing?

Judith Batchelar

Yes.

Chair

It is very important for all three of you. It is good to have the liquid contracts, but we are very keen to know what is happening with the processed milk, the milk going into the processed products, especially your own-label products, and what you are paying for the milk going into those. We will move on to Simon and talk about other things.

Simon Hart

It will still be milk actually. It was put to us in a previous evidence session by competitors of yours that there was no relationship between the price that was paid to producers and the price that was charged to retailers. Do you adopt the same principle?

Tim Smith

For clarity, do you mean the retail price and the price that we pay farmers?

Simon Hart

Yes. I think that is correct.

Tim Smith

Yes, that’s right.

Simon Hart

So there is no connection?

Tim Smith

No.

Simon Hart

I find this astounding. It is a basic business principle, isn’t it? Do you do that across all your products, or is it only milk?

Tim Smith

It’s pretty unusual.

Alex Brown

To take fresh produce as an example, one of the dynamics is that Aldi and Lidl were not really in the fresh produce market a decade ago. They have gone hard into that market and are taking more share off us in that sector than anyone else, which is probably the same for my colleagues here. They have clearly decided to price that much more aggressively than was done in the past, so we have had to match that. The fact is that we still have to give a fair price to a potato farmer, for example, otherwise he is unable to continue in business—

Chair

But if you are taking a higher margin than they are, how can you be competitive? Sorry, Simon.

Alex Brown

Well, we were, and we have had to drop prices, but that is decoupled from what we then pay for the product.

Simon Hart

But you put your milk prices up recently and said that that was in order to pay more to your farmers. Is that not a contradiction of what you have just said?

Alex Brown

We were one of the last to drop—Iceland effectively led the milk price down about three years ago; everyone followed, but we did not. We did drop it about a year ago. We did not see any volume benefit and we did not really get any customer benefit. The Milk for Farmers that we launched showed that customers were prepared to pay a bit more, we believe. Putting the price back up to where we did last Monday, again we have seen no volume impact and we have passed some of that benefit back, even though we did not take any cost out when we dropped the retail price.

Simon Hart

I am still not absolutely clear about what you are saying. On the one hand, you are saying that here is no connection and, on the other, you are saying that there is a connection. Which can we record?

Alex Brown

There is no connection, but where we have some scope in a price increase to give back to a farming community in distress, which clearly the dairy farmers are, we have taken that opportunity.

Simon Hart

Okay, so the most recent price increase was a gesture of Christmas cheer from Morrisons to your producers.

Alex Brown

I think we were listening hard to our farmers through our processes. The amount we passed back has allowed us to get the sustainability stamp from Arla.

Simon Hart

Okay. Last question: to what extent does that all go to British farmers? Do those kind of uplifts go exclusively to British farmers, or to a wider audience?

Alex Brown

We have got two processors—so just speaking for Morrisons, in terms of Dairy Crest: yes, it does; 100% goes straight back. Any supplement we pay goes straight back to them. Arla is a European co-operative.

Simon Hart

So EU farmers are getting the benefit of the marketing, which—let me put it another way: would it be fair to say that customers are paying a higher price for Morrisons milk, which they think will go to UK farmers, and maybe it could be possible that it is actually going to be spread across the whole European Union? Is that a reasonable assertion for us to make?

Alex Brown

Yes, and we have altered the label on the back following two pieces of customer feedback that we were not clear enough.

Simon Hart

Is that similar with Tesco?

Tim Smith

No. The cost of production model—

Chair

You have got a different system, haven’t you. Just on this one to do with Morrisons, how much do you have from Dairy Crest, and how much do you have from Arla?

Alex Brown

In terms of our liquid?

Chair

Yes, just in volume. Not litres, but in percentage terms.

Alex Brown

Two thirds from Arla, a third from Dairy Crest, broadly.

Chair

Right, and so are you finding that your customers are actually expecting that premium to go back to British dairy farmers?

Alex Brown

I think if we asked them they would. We have obviously sat down with Arla and asked them if there is a way for them to just pass that premium back, because it is only British milk that we are selling. The fact of the matter is they are a co-op. They legally cannot do that. They would argue—I am not going to labour on this, because it is their business—that benefits in the past that Swedish farmers have got have come back to British farmers. All of their farmer co-op members are voluntary members and happy with the arrangement.

Chair

The only thing—and I applaud what you have been doing, so I am not trying to catch you out—is that I think certainly the public’s concept is that they go in and pay that extra money on those pints of milk and that goes back to the British farmer. I understand the co-op—there might be other promotions across Europe; but this one is particularly for British farmers and I think that is probably where clarification comes in. But you have done that on the label now, you say.

Alex Brown

We have done that on the label, and on the cheese, because that is Lactalis, and that goes as a supplementary payment direct to their milk field.

Chair

I understand it has been successful. You have good volumes: is that right?

Alex Brown

Yes, we do. We are going to publish the volumes on our website tomorrow: www.morrisons-farming.com.

Chair

You wouldn’t like to publish them a day in advance, would you?

Alex Brown

No, I can tell you. We will pass back, to the end of November, about £900,000 of benefit just on the Milk for Farmers—we also pay a supplement on our core volume as well, but just on that initiative; and our milk is about 10% of our volume and it is five times the volume of organic milk that we sell. So the milk has been very successful.

Chair

So, what, 10% of what you are actually selling at the moment you are selling on the premium.

Alex Brown

Milk for Farmers, yes.

Chair

I have a friend who said to me that when he went to purchase the milk in Morrisons there did not seem to be quite as many different sizes—you know, 2 or 4 pints, 8 pints and 6 pints—in the farmer extra milk, for want of a better expression to describe it.

Alex Brown

Correct.

Chair

I do not know whether you are able to have more choice.

Alex Brown

Because, being honest, we were unsure how successful it was going to be, we launched it in semi-skimmed and whole milk, 4 pints. We are now going to roll it out to skimmed milk, and we are also looking at the other sizes for the new year.

Chair

Okay. What about Sainsbury’s and Tesco? Haven’t Morrisons stolen your thunder? What are you thinking about this? Perhaps that is an unfair question; but I think it is fair enough.

Tim Smith

Obviously we watch the market really closely. We know what is happening with volumes and sales and we look at the price. The three of us happen to be charging across the piece at the moment the same for 4 pints. Alex said it earlier, what you do on milk pricing tends to have little or no effect on demand, so we don’t—we see a bit of footfall change. Without making a comparative point, I think what we rest on is that the decoupling of the cost of production model means our dairy farmers are getting a fair deal, and have since 2007. I am not making a relative point; it is just absolute. On the same side, we try to do the best we can for customers by charging them a price we think is fair in the marketplace. We just kept the two things completely separate.

Chair

The only thing I would say is that Morrisons is now passing back nearly a million pounds—£900,000. On the amount of milk that you would sell, it would be substantially more. Is it a way of getting more back to the farmer?

Tim Smith

I am not going to speak for the dairy farmer, but given that the price we are currently returning to them is 30.6p or thereabouts and it has been sustainably higher than the market for all the years that it has existed, we do not get that clamour from the 650 members. The deal is cost of production, which includes all the things that Judith and us have mentioned, and they are confident with that.

Chair

Coming back to Morrisons, what are you actually paying for the milk that you are not putting the farmer premium on?

Alex Brown

We have a different model. We do not have a cost of production model. Up until the summer, we had a process price only with Arla and Dairy Crest. We were approached by the NFU and Farmers for Action, as I am sure you saw. We got into discussions with them. We were clear; we do not have a milk price set with Arla or—

Chair

What were you paying at that stage? 24p or 25p?

Alex Brown

We were not paying—there was nothing in our contract about a milk price. It was a finished, delivered price.

Chair

You were just sort of buying on spec.

Alex Brown

A delivered four-pint, as an example, to our stores. Obviously, we listened to what was being said. We worked with the NFU and came to a supplement figure that we put in at the end of August, start of September, with a winter supplement on top that guaranteed a floor of 26.5p. We have been paying ahead of that since then, and we have got a further supplement—

Chair

That is on all the milk you sell.

Alex Brown

That is on our core volume.

Chair

Right, and then you have got this system—

Alex Brown

It will be another 10p per litre on top for the “Milk for Farmers” product.

Chair

In reality, that is coming in at about 37p.

Alex Brown

Yes.

Chair

But it is only 10% of the volume that you sell, and it still has a 2% or 3% increase overall. What about Sainsbury’s? Are you considering a similar sort of thing?

Judith Batchelar

No, although we have done something similar a very long time ago, when there was a lack of organic milk. We sold a milk called “Farm Promise”, which was to encourage farmers to move to organic, but we are not considering it at this time. I go back to Tim’s point. We have a cost of production model. We know what that cost of production model costs us. We have tracked over time the difference between what we pay and what the market price of milk is. We know the premium that we have paid our dairy farmers in those eight years that we have been paying above the market price. That is probably why over eight years we have never lost a farmer from our dairy development group and why we have a list of farmers who would like to join it. I think they are very happy with the returns that they are getting. They also get a bonus on that price as well, which can be up to 0.8p a litre for improvements in any of the 16 metrics that we measure. I think they are very happy.

Chair

It is laudable what the big buyers and the big retailers are paying for the liquid milk, but what we are really conscious of, when looking at the whole milk market, is ensuring that that is expanded through the processed sector. You have answered questions on that, but that is something that we would particularly press you on.

Simon Hart

If the retail milk price has no effect on footfall, why do you relentlessly use it as a loss leader—if it makes no difference to the number of people who come into the store? In terms of the relationships between your organisations and producers, one of the things that offends them the most is that you can buy milk cheaper than water. If that does not make any difference, why do you do that?

Alex Brown

Unfortunately, price perception plays a big part in customer behaviour. Iceland dropped, Aldi dropped, Lidl dropped and Asda dropped—you then get into a position where you are 10% uncompetitive on one of the biggest commodities in a household shop, and it is unsustainable from an overall price perception.

Tim Smith

My point was—I may not have been as clear as I should have—that the total fresh milk market does not move when prices are moving up and down. Customers might switch between individual retailers—Alex mentioned that Iceland started a move, and they certainly got some footfall gain, but as it was followed by others, that footfall gain dried up very quickly.

Chair

So you do follow one another, then.

Tim Smith

It is for other retailers to speak on their positions, but if what happens, as Alex said, is that you take the total basket and discover that customers are preferring to shop elsewhere just on price on those individual commodities, clearly we are following, yes.

Chair

Going back to Simon’s first question, you are taking notice of the prices that you retail at, aren’t you? You have to, in order to keep people coming into your shop.

Tim Smith

For the benefit of customers. The clear distinction is that in this case, dairy farmers can sleep easy knowing that the cost of their production is influencing their price, and not what is happening in the rather frenetic world of retail competitiveness.

Chair

Right, okay. Let’s move on to red meat—we need some red meat.

Ms Ritchie

Thank you, Chair. Farmgate prices for red meat, particularly lamb and pork, have been affected in the last few years. What are you doing to support the sector?

Alex Brown

We process our own. We process about 1.5 million British pigs a year, 200,000 cattle and about 750,000 lamb.

Chair

Is that direct or outsourced?

Alex Brown

We have a mixture of contracts. We are trying to develop longer contracts. We have schemes where we are putting dairy calves into producers to bring on. We finance that, so that they just effectively look after the animal. We pay them for the weight that the animal gains, and then we take it back and process it. We are looking at longer-term contracts on cattle and lamb. All of our pigs are on at least six-month rolling contracts, if not longer. As I said before, it is absolutely fundamental to our business that we have animals to process—it is absolutely crucial to us. If demand is very high, we might go to the auction markets and buy, occasionally, so we will use all the metrics. We have a big team of livestock buyers who are out in the field talking to and dealing with farmers every day.

Tim Smith

If I start with the agricultural piece, in a very similar way, we have eight agriculture managers across the various different sectors. The people working on beef are working on the relationship with the beef farmers. The intermediaries in this are two processors who we buy most of our red meat from, so they are doing the sourcing. The relationship that we are building—I have to say, it has been a slow burn—is to have as many direct contracts with farmers as possible, but it would be true to say that at the beef end of the market, it is more difficult to attract farmers into the sort of cost of production model than it is on milk or other livestock. Nevertheless, we believe that for long-term contracts, transparency about market pricing and the cost of production are key features. At the moment, we only have a very small scheme of 150 beef farmers who are contracted directly to us for long-term deals. We would like that to be much more—it could be much more—and we would prefer the relationship we have with our farmers on beef to be the same as we have on dairy.

Judith Batchelar

Those three sectors all have very different problems and challenges. We collect farm-level data in the same way we do for our dairy farmers, so we are able to benchmark their performance on certain things. For example, on lamb, one of the big challenges is feed conversion rates and, particularly, improving the amount of forage that lamb is fed. We have done a lot of work with our research and development programmes. In fact, we spend more money on research and development in the lamb sector than we do in any other sector, because it is the one with the most challenges. We have helped farmers with the purchasing of high-sugar grasses, and that high-sugar grass has led to a 20% improvement in forage intake, which in turn means productivity is 20% up and so on, so they are becoming more profitable. The second area is things like parasites, because the health and welfare of the animal—a healthy animal is a more productive one. Again, we helped with that through a research and development project. Twenty per cent of the income is from the fifth quarter in lamb, so that is important, if you have condemned livers and things like that. It is basically a question of trying to make that sector more profitable—there are 850 producers in our lamb group—and of extending the season as well. This season has been very good. We have extended our 100% British lamb all the way through to January, therefore reducing our imports. Pork is basically—[Interruption.] Sitting suspended for a Division in the House. On resuming—

Chair

Judith, you were in mid-stream. Do any of you want to finish off?

Judith Batchelar

Yes. Pork is very different again, because pork is somewhere in a halfway house between chicken and beef and lamb in how it is structured as a value chain and the levels of controls and integration in there. So we have an ability to make a bigger impact on pork than we can do at the moment in the way the beef value chain in particular is structured. So there is a lot going on in pork, and mainly around pork becoming more competitive. All of the fresh pork we sell is 100% British, but at the moment British pork production is not as efficient as European pork production. That is for reasons of feed conversion rates, pig mortality and the price that we pay for animal feed here in the UK versus the price in Europe. Therefore, we have identified something across that group approaching £20 million of productivity savings and our challenge with pork is to make those pork producers as efficient as they can be.

Chair

On pork, are you taking into consideration that some European countries are still not producing to as high a welfare standard as Britain? I hope you are.

Judith Batchelar

Yes. Where we have done the benchmarking, we have benchmarked like-for-like welfare schemes, absolutely.

Ms Ritchie

In relation to that, does the red meat industry need a voluntary code? If so, would you be willing to be part of that code? Further to that, what should that code consist of?

Judith Batchelar

Gosh. I suppose it would be down to what that code consisted of. I think anything that can make the sector more resilient will be a good thing, because it is a sector that continues a long-term decline, whether that is lamb, pork or indeed beef. And when you look at the rise in poultry production and indeed the rise in aquaculture and farmed fish consumption, it is heading in one direction and becoming, particularly in the case of beef, much more fragmented, which makes it really difficult to put anything of scale in as an intervention to drive improvements. Whether that is a voluntary code, I am not necessarily sure that that is the best way. I do think there is a big job to be done to make the sector much more productive, because if I look at what is coming into our value chain, the average beef producer is supplying us with 30 animals a year. Therefore, that is not their main business; it is being done as a sideshow almost. That is part of the challenge. Something much more structural needs to happen that would drive the improvements that we need to see.

Ms Ritchie

Do the other two have a view on a voluntary code?

Alex Brown

An NFU code on cattle is being developed, which we have signed up to. So Woodheads, which is our abattoir business, is signed up to that code.

Ms Ritchie

What about Mr Smith from Tesco?

Tim Smith

I think neutral on the code in itself, but supportive of anything that allows farmer bodies or individual farmers to be better represented in their marketing of their product and their understanding of what best practice might lead to. Judith has already mentioned the way that the pig industry might learn from some of its foreign competitors and I completely agree with that. As we are setting up centres of excellence for each individual protein, we are finding that the gap in the knowledge at the farm base is something that we are going to have to intervene and help with, and I think we are happy to do it.

Ms Ritchie

Do regional price differentials represent retailers taking advantage of areas of the country that are more vulnerable to external shocks in the red meat market? I represent a constituency in Northern Ireland where the price the producer gets is much less than a producer gets in Britain. Obviously, there is then transfer to the consumer as well.

Tim Smith

I saw that you had asked that question previously, so I have had a look at it. I want to be assured that if there is a price differential for any red meat that we are buying in Northern Ireland, there should be a sustainable economic reason for that and it should not be disadvantaging the producer. I have satisfied myself to that extent. I don’t know what evidence I can provide that would help, except that our suppliers talk to our processors and they are very clear about their cost of production and what is impacting on them. There are ups and downs and swings and roundabouts, but I think they are treated fairly on both sides of the water. It is a really challenging question and one that we should be asking ourselves all the time.

Ms Ritchie

And will you continue to do so?

Tim Smith

Yes, of course. If we are setting up a supply group, you would always include farmers, within and without GB, who allow you to best reflect the true costs. You would also consider forward thinking, how to improve yields and utilisation of carcass and how to help farmers. It’s not just about price; it’s about the whole farming regime.

Alex Brown

We slaughter all our own animals in Aberdeenshire, Lancashire and Lincolnshire, so the animals come from the areas surrounding the abattoirs. We don’t take any Northern Irish product for that reason.

Judith Batchelar

We take a mixture, but all of it is British, including, obviously, Northern Ireland. I am not aware that we pay a different price to farmers in Northern Ireland from the rest of the British Isles. I am happy to go away and double-check that, but we pay one transparent price. We also pay a premium of 15p a kilo for our specification on top of that. That is transparent. I am almost 100% that it is one price.

Ms Ritchie

It may be that we have received information on that, because that point is contested by the unions representing producers.

Chair

Referring not only to white meat or chicken, how do the three of you deal with the types of meat that you are promoting when people come into the shop? Naturally, it could be pork, chicken, beef or lamb. How do you deal with that? Is it about making sure that people have a choice and that there is lamb or chicken there if they want it? How do you access your markets to chicken? Is it all British?

Tim Smith

All our fresh chicken is British. Promotion depends on a whole raft of thought processes that go behind seasonality. When there is plenty of product, it should be available at the right price so that customers can buy it, such as during British lamb season. The way that we would typically do this is that we will have a marketing approach such as, “This is a good time to be promoting something.” Burgers in the summer, for example, is really quite obvious. Then we line up all of our supply base to ensure that they are prepared and that there are no shocks to the system—up or down. The promotional activity is to give our customers the best possible value and the best possible choice, with quality tied in. It’s about what the quality of individual proteins will be like at any particular time.

Chair

And poultry is probably uniform for the whole year, is it?

Tim Smith

It is easier to predict, yes.

Chair

What sort of percentage of poultry would you sell compared with other meats? Is it the biggest amount of meat that you sell?

Alex Brown

It’s number two for—well, it depends. Pork including bacon and sausage would be the biggest, but in terms of fresh meat, it would be beef, poultry, pork and then lamb.

Chair

Beef first and then poultry. Would that be the same for Tesco?

Tim Smith

Yes.

Chair

Interesting. What about Sainsbury’s?

Judith Batchelar

Exactly the same. Chicken breast fillets will always be a top 10 line in our business. Our view is slightly different because we are trying to move away from price-promoting products to what we are calling “value simplicity” so that we can provide more certainty in terms of supply and demand. There are many things that drive volatility in the marketplace; some are within our control and some—China, Russia, what is happening with commodity food prices—are not. One of the big things is evening out the supply and demand curve. Clearly, when you promote things that causes peaks and troughs in supply and demand, which have knock-on effects and create uncertainty, so we are trying to move to the point where we have more consistent pricing and fewer promotions. If you look in our produce section now, only 8% of everything we sell is on promotion; the rest is at the everyday, consistent price. That has driven up volumes but provided certainty for growers. We are doing the same in meat, fish and poultry. It is interesting to see what that is doing to the relative volumes, because customers are now buying what they want to buy, rather than what you are persuading them to buy through price. We call it democratising choice, but basically it is about creating a much more level playing field. The other interesting thing is that it is increasing the repertoire of what customers are buying, which from a health perspective is a good thing, because we want customers to eat from a wider repertoire of foods.

Chair

I recently went to a large processing plant in Tiverton that has 750,000 chickens going through a week, and they are bringing that up to 1 million. It was fascinating to see the various chickens come through and disappear into different cellophane bags for Tesco and various other major retailers. How do you buy that? Do you buy directly from the processor? Do you have a contract with the farmers—the growers? Or is it a mixture? How do you buy your poultry?

Tim Smith

Directly from the supplier—from three direct suppliers, in our case. This is one of the parts of the industry that is pretty well consolidated, so each of those three has two forms of vertical integration: they have farms that they own and operate themselves through a normal management system, and farms that they contract. The farmer-owned ones are very like Alex’s Morrisons model, which is vertically integrated.

Chair

But your deal is with the processor, basically.

Tim Smith

Yes, but we still think that the opportunity to help out in the agricultural sector by having sustainable farming groups has genuine merit and value. We can talk to the processor about genetics, breeding regimes and feed regimes—all those issues—so we are actually talking to the farmer representatives, sometimes from the companies concerned and sometimes direct farmer groups.

Angela Smith

My question is for you all but arises from the written evidence from Tesco, which says: “We source 100% British chicken on fresh cuts”. I assume from that that Tesco’s processed chicken products—ready meals, chicken kievs, et cetera—will not be 100% British. Is that the case for all of you?

Tim Smith

Some of our poultry is sourced from overseas for ready meals. It is increasingly moving back to being all British, but currently it is not.

Angela Smith

What are the percentages, broadly?

Tim Smith

Of the processed, probably half is still overseas, but all our fresh poultry is British.

Angela Smith

And for Morrisons?

Alex Brown

We are in a very similar position: all our fresh is British, but ready meals and cooked is a mixture of British and imported. Where it is imported, it is clearly labelled which country it comes from.

Angela Smith

That’s the next question. Sainsbury’s?

Judith Batchelar

Everything is British: chicken in ready meals, cooked chicken, breaded chicken goujons—things like that.

Angela Smith

It’s all British.

Judith Batchelar

All British, and has been for a long time.

Angela Smith

So where it is not totally British, Morrisons make that clear on the labels?

Alex Brown

Absolutely.

Angela Smith

And Tesco?

Tim Smith

Yes, country of origin is there. If I can add a supplementary answer, one important point is that, even now, if we signalled that we wanted all our chicken to be British, we could not buy it; there would not be enough in the marketplace. Even if we paid a substantial premium, that would then move some volume overseas. There is a big planning issue around farmers who want to understand the market signals that there is going to be more British poultry, whether it is for us or the competition. There is a big planning issue with farmers being able to put up chicken sheds. When we said, as we did in 2013, that we want all our poultry to be British—bringing it closer to home—I don’t think we had anticipated the kind of resistance we would meet from planners and others to achieving what I think ultimately we all wanted.

Angela Smith

Morrisons, do you have a similar issue or experience similar problems?

Alex Brown

I used to work at Tesco, so I am very familiar with those issues. The other point I would make on top of Tim’s—I agree with everything he said—is that the British consumer eats white meat massively out of balance with dark meat. We would have a huge surplus of dark meat which would effectively get dumped on the market if we were 100% self-sufficient as a country. We import from countries where it is almost the opposite: the local population eat the dark meat but do not—

Chair

I actually think that the dark meat on a chicken is much tastier on a chicken than the white meat, so should we promote the dark meat more so that we do not have to buy in so much breast meat and export the other? Are you doing anything about that?

Alex Brown

We are almost constantly trying to promote dark meat because our major processor would be selling a big chunk of that frozen to the Middle East for very little money, so anything we can do to add some value is of benefit to the chain, but the consumer behaviour does not quite stack up. Almost no matter what you do with the dark meat, particularly through the winter months, you cannot move the volume that you need to balance out the bird.

Tim Smith

I am optimistic that we can do a bit more of what we have seen others do, but we are nudging towards it. There has not been a sort of seismic shift away from white meat. We have trained customers to buy and want white meat and that is where they are sitting for the time being.

Angela Smith

Sainsbury’s, you have managed to use 100% British meat, so the issues of dark and white and everything else, and planning issues, have been successfully overcome. Could you explain why?

Judith Batchelar

We have been doing it for a long time, so we have worked out how to finesse that balance, but because a lot of the suppliers that are supplying our whole birds and portions are also supplying our ready meal suppliers, we have an avenue for particularly thigh meat—the dark meat—for those further processed options. We have almost created that and, indeed, where we do see some of those carcass balance problems—not just in poultry, but in other species—obviously the further processed is a route to take that. The other route for those kind of things is also food service, but clearly what you want to do is maximise the income that you get from the whole bird, rather than to downgrade it. I say that because quite often Sainsbury’s will be covering the total overhead. For example, when we sell woodland eggs, where the chickens are in farms that have trees planted, we carry the cost of that extra tree cover; or if we are growing things in a higher welfare system, which is great for the animals and actually great for productivity, we are carrying the cost for the whole animal. When we do not use the whole animal, we are effectively subsidising those eggs, or those chickens or that pork being downgraded.

Angela Smith

This is something we heard from Waitrose the other week—the value of the whole carcass approach—so that is really interesting to hear. The key here is long-term planning and relationships.

Judith Batchelar

Particularly with something like beef or salmon, you might be talking about a two or three-year cycle. We are thinking about how much salmon we want to sell in two Christmases’ time, because to produce a salmon that is big enough to produce smoked salmon is a two-and-a-half-year cycle.

Chair

Tesco and Morrisons, when you are buying in a processed product that is not British chicken, are you conscious of the welfare standards, the way those chickens may have been produced and where they have come from?

Tim Smith

The standard of production and the checks and balances that are applied, wherever that poultry is from, are exactly the same, whether it is the UK or a third country. I have to say, having visited the sites, a lot of the standards—simply because of where else they are exporting to—are extremely high, unimpeachably so. We do not worry so much about the quality or the safety. We do worry about the balance, as Judith has just described it, where our customers are buying so much breast meat that it simply would not be possible to utilise all that dark meat in our ready meals; we just don’t sell enough of them.

Chair

Is it the same for the others?

Alex Brown

Exactly the same, yes. We will buy off similar export at very high standards.

Chair

Well, we look forward to you promoting more dark meat and making sure you have nearly all British chicken for processed as well.

Rishi Sunak

Turning back to red meat, it would be helpful to hear from each of you, for the key red meats, your sourcing policy with regard to British versus non-British, and whether that varies through the year. Tim, do you want to kick off? Just run through the three key meats and the policy for each.

Tim Smith

On beef, when we are talking about our fresh beef, it is British and Irish; that is our proposition to customers. The process we follow for that pretty much assumes that British and Irish are the same source, so the same standards and the same pricing mechanisms are applied. That gives us that mix. On lamb, we are currently just over half British and half New Zealand, and we are working really hard with British lamb producers. When we are buying meat, we are buying 20% of all the UK’s output, so little changes for us are big levers for the industry. I anticipate that as we work with those lamb supply groups, that percentage of British will go up. It is always there in season, obviously. Chicken we talked about. On pork, we are just over half British right now, and again we are working with the suppliers and the supply groups to try to bring much of that meat closer to home.

Rishi Sunak

Just a point of clarification: for the others, when you say British, you mean British, not Irish.

Tim Smith

Yes.

Chair

And when you refer to Irish, you mean the Republic of Ireland.

Tim Smith

I do.

Rishi Sunak

And that is just for beef. For lamb especially, is it seasonal or is that 50:50 mix reasonably constant through the year?

Tim Smith

There is a constant through the year but, yes, it peaks in the season.

Rishi Sunak

Is there any period when there would be, for both pork and lamb, no British?

Tim Smith

No.

Alex Brown

On beef, we are 100% British. On pork, we are 100% British. On lamb, everything under the Morrisons brand is 100% British. We bring in a small amount of leg meat at Christmas and at Easter, purely because we sell so much on offer, which we have got on right now.

Chair

That would be New Zealand?

Alex Brown

New Zealand and Australia. But it is sold under a different label; it is called “Market Deals”. It is clearly country-of-origin badged, and it is purely that we cannot get the availability of legs to satisfy the customers. So we will sell it for probably three or four weeks a year, and it is only bone-in legs.

Judith Batchelar

At Sainsbury’s, it is the same as at Tesco: British and Republic of Ireland—about 75% British and 25% Irish. Again, cooked meats would be British and meat in our ready meals would be British. Fresh pork is 100% British and cooked meats 100%, apart from cooked meats, obviously, like Parma ham and salami and things, which obviously come from places like Italy and Spain. We offer 100% British lamb on our counters in our top tier all year round. In season, we have 100% British lamb, and we are working hard to extend that season. Outside the season, we import New Zealand lamb. The whole split is around 60:40 on lamb, so 60% British and 40% New Zealand, but we expect that New Zealand proportion to decline.

Chair

Is it 60:40 over the whole year?

Judith Batchelar

Across the whole year. In season, it would be 100% British lamb.

Chair

So 60% British, 40% New Zealand.

Rishi Sunak

And then out of season?

Judith Batchelar

It is sort of 55:45, and then at certain points—again, because of the promotions on lamb around Christmas and Easter—we bring in large volumes of New Zealand lamb. But we are moving away from that, because we are moving away from those big promotions to try to reduce the volatility.

Rishi Sunak

This question is for both you and Tim. On the beef side, it seems both of you use Republic of Ireland beef. Is there a price difference to the consumer or a cost difference to you between British and Irish?

Judith Batchelar

They are the same price.

Chair

The same price in the shop?

Tim Smith

Yes.

Chair

But not the same price as what you buy it for.

Tim Smith

I think the price depends on a range of things—how the agricultural inputs have altered across the seasons. Sometimes we pay more for Irish than we for British because we are contracting. We are not just going to move about willy-nilly; the process we use depends on a certainty of supply, and they are contracting down through the market for their animals to be brought to slaughter. We are working a long time ahead and taking some risk with the price between here and the Republic.

Chair

I think I am right in saying that the Irish wholesale price of beef is usually lower than the British price. I suggest it is probably an advantage to you to sell Irish beef.

Tim Smith

Yes, that’s right. If we could get all of our volume in the format that we want it—British—at the same price as the average, logistically it would make more sense.

Chair

So are you not using the fact that you are getting quite a lot of your beef from the Republic of Ireland as a reason to drive the price down for the UK or British element of beef that you buy?

Tim Smith

No, I think they—the Irish market—probably are the price setters because of their conditions and the way that their price seems to work through. From our point of view, if that gives our customers great value for a product and they almost do not differentiate whether it is British or Irish, that makes sense for customers.

Rishi Sunak

Tim, there were some reports about protests in Wales over the summer with regard to lamb. It would be helpful to understand what was behind that. My understanding from the media reports is that there was no British lamb available at all.

Tim Smith

That wasn’t the case. If I might, I suggest you discount the headlines about somebody going into a store and not finding any. The conversation with lamb farmers—I am sure my colleagues will agree—is much more complex because of the number of farming unions and bodies that one deals with. Gathering together the people who actually supply Tesco with lamb is pretty difficult to organise. In comparison, dairy is quite straightforward. With the lamb model, if we move, as we will do, to a system that involves giving them the same certainty as we do on dairy, it is quite difficult to get the group of people together who would supply you. You get lots of mixed messages, even between ourselves and the head guy that runs this particular part of the NFU. He’s on the phone saying, “I’ve just heard that you said that this product is no longer in season,” but actually, dive below the surface and it is usually not the case. The substantive bit of this is that we want to buy more British lamb. We want the British lamb product to be better promoted by us and others. I do not mean in the price sense; I just mean extolling the virtues of a fantastic protein.

Rishi Sunak

Just to understand specifically, what is stopping you all from having 100% British lamb?

Tim Smith

Mostly supply and quality.

Rishi Sunak

We could have the sheep farming union here and say, “Here are the biggest supermarkets in the country. They want to buy more from you. You have lots of farmers who obviously want to make more money. Produce more.” What is the issue? Why is this not happening?

Tim Smith

When we talked to farmers, we just could not buy at the right quality that volume sustainably across the year. It just is not there. We cannot have gaps on our shelves. Our customers have a strong affection for New Zealand lamb. It is a very strong alternative to British.

Chair

Ah, so does the affection for New Zealand lamb mean that you are promoting that more than the British? Is that the case?

Tim Smith

No.

Chair

That is what a lot of British farmers believe; they really do. It was in August that this happened in Bangor. That is not out of season—I’m a farmer and I know that there are plenty of lambs around in August. Where were they? There was obviously a lack of them. There may have been some British, but there must have been some case to hear. I don’t think you can dismiss it as a load of farming unions causing trouble.

Tim Smith

I don’t think that is what I said.

Chair

Well, as I interpreted it as roughly what you said.

Tim Smith

The balance that we are trying to strike, as a mass market retailer, is to get the best quality price and the best quality product for customers for whom provenance really matters. But talking to our customers about provenance for lamb, we find they are as comfortable with British as they are with New Zealand. Disconnect that. We would then like to have a stronger relationship with our lamb producers and to have more of them produce more lamb for us across the longest possible season—as Judith has already referred to, we would like to extend the season—so the overarching principle that we are trying to follow is how we find a way of persuading lamb producers to understand what it is that we particularly want and to produce it economically so that we can sell it at the right price.

Chair

Isn’t the issue more that you can buy the New Zealand lamb cheaper, you can promote it equally as much as British lamb—it sells well in your supermarket—and you can probably make more profit on New Zealand lamb than you can on British lamb? This is what we have got to get to the bottom of. You retailers—it is all great charity, and I know you are all lovely people, but in the end you have got to make a profit, to go back to what Simon Hart said earlier. Are you not making more profit on New Zealand lamb, so you are stocking more New Zealand lamb than you should?

Tim Smith

My understanding of the history of the New Zealand lamb trade, which is pretty much true now, is that they offer consistent quality and, because of the shipping time, a volume which we decide together and prescribe. Effectively, they are filling a gap where the British market is not able to produce at the right price for our customers—

Chair

Not in August.

Tim Smith

As I said, with respect, that is a red herring. We are trying to produce or have our lamb farmers give us the lamb we want for our customers—Alex was partly right as well, that you have the issue that you cannot have too many legs, which will always be the case—and the essence of it is that we need a consolidated lamb production concept that works better in an organised way to produce lamb for the whole of the British market, not just for Tesco.

Chair

I am conscious that I am holding it. Angela and then Jim.

Angela Smith

Thank you, Neil. You will be pleased to know that I only eat British lamb. May I be seasonal for a moment, as in Christmas seasonal? May I ask the panel whether all their turkey and goose is British? It is the time of year when large quantities of turkey and goose are being sold off the shelves—is it all British? All witnesses: Yes.

Angela Smith

All of it?

Chair

You can stake your lives on that, can you? We will search your shops to make sure that is right. You are absolutely certain of that? All witnesses: Yes.

Jim Fitzpatrick

Some of the most graphic pictures of the summer were of the demonstrations in north Wales and of dairy cows being led through supermarkets. Do you have a view of those protests? Were they very localised? Were they focused on just one retailer, or did all the retailers get a hit? Is there a reaction of saying that you understand, you sympathise, but—? Do you have any comment on those demonstrations?

Tim Smith

The dairy protests are a little bit controversial for us, because the UK produces 14 billion litres of milk—you know that—and we buy just under 10% of that volume. Probably 80% to 90% of that is going to fresh. I have already described what we have done on our milk pricing. So to the farmers who are protesting on dairy, the question that I would ask them, one at a time, calmly over a cup of tea, would be: have you ever supplied Tesco? Because if they had the opportunity to, they might want to take it. The vast majority of the people who are protesting are not protesting about the milk price that comes from a retail source; effectively, they are protesting about the price that the co-ops are able to pay them based on commodity and currency exchange rates around the globe. It would be wise of me to say that dialogue with farmers is always sensible, but sometimes it can be slightly frustrating if their objective is to get attention for their cause and they are aiming slightly in the wrong place.

Simon Hart

What I find confusing about the line of questioning at the moment is two things. First, there are other competitors who can stock British lamb 100% of the time. It may be a volume issue, but I think, as others have mentioned, that if there were representatives of UK farming here, they would be giving you a much harder time than we are. One reason is that you referred to quality on a number of occasions, giving the very firm impression that UK lamb cannot match the quality of New Zealand lamb at certain times of year. Is it Tesco’s official position that our farmers cannot produce lamb of the right quality?

Tim Smith

That isn’t what I said either. The market for different cuts and parts of the lamb changes through the year, as does the quality. It is the consistency that we are looking for—we are buying something like 56% British. We want to extend where the tail comes, because it is mostly about volume. It would be deeply confusing to have some stores with a lamb chop from New Zealand and some from the UK. We must try to level that demand and supply.

Simon Hart

Do you not have stores with both New Zealand lamb and British lamb?

Tim Smith

We do. We have to do that for that very reason. But I would not want to give the impression that British lamb is not the best quality lamb.

Simon Hart

That is what I was concerned about. You were fairly specific in saying that it was about not being able to match quality. I just wanted to understand what you meant by that.

Chair

And not promoting British lamb enough. Chris, do you want to come in with a point?

Chris Davies

I do, and it is primarily directed to Mr Smith. I apologise, Chairman; I have been on a Public Bill Committee, which is why I was late.

Chair

We’ll let you off.

Chris Davies

I’d much rather have been here, that’s for sure. Mr Smith, you seem to change what you say. You say something in your statement, and then when someone picks you up on it you say, “Well, I didn’t actually say that, I said something else.” That worries me slightly. There were two points that I did not hear you give an answer to. One was made by the Chairman, relating to New Zealand lamb. The answer is simple. Is there not more profit for Tesco from selling New Zealand lamb than British lamb? You did not answer that. You went on about quality, etc., etc. A simple yes or no answer—is there more profit for Tesco from selling New Zealand lamb?

Tim Smith

No.

Chris Davies

There isn’t.

Tim Smith

No.

Chair

So why aren’t you promoting British lamb?

Tim Smith

It is largely a question of availability.

Chair

There are 14 million breeding ewes. With a lamb and a half each, that is about 22 million lambs according to my arithmetic, and there is not much wrong with my arithmetic. You tell me that there are 22 million lambs in this country and not enough British lamb for you to go from 50% to 60%, 70% or 80%. I accept that there are certain times of the year, but I still think you could do a lot better with British lamb. The deadweight price for retail lamb in this country is something like £3.70 a kilo, and on average it retails at £14. I accept that there will be some wastage, but there is a really big gap between what you pay the farmer and what you put it in the shop at. I don’t think you are supplying enough British lamb. You try to be 100% with chicken, why can’t you be 100% with lamb? I think it is because you are making more money, as Chris said, from selling New Zealand lamb and you are pushing the price of British lamb down by selling cheaper New Zealand lamb. That is what you are doing.

Judith Batchelar

May I respond to that? I think I know what Tim is trying to say. It does require foresight and planning, so when we can offer 100% British lamb, which we do on our counters and in our “Taste the Difference”, it is because we have phased production from the south-west all the way through up to Scotland.

Chair

At different times of year.

Judith Batchelar

At different times of year, so that we can cover 12 months. That requires some pretty intricate planning and forecasting on our part. If you do not do that, you cannot guarantee the right amount of lamb at the right time at the right quality. I think that is what Tim is trying to say.

Chair

So then Tesco could do the same, couldn’t it? You don’t want to be outdone by Sainsbury’s, do you? Why can’t you do the same?

Tim Smith

The extent to which it is possible depends on the relationship that we have with both the processor and the farmer. What I have been trying to say is that as we build those relationships with the farmer unions and others, we are talking constantly about our annual plan for lamb. Our annual plan does exactly what Jude said: it has got a demand part to it and then it has got a supply part, which will vary over the months. In the same way that we would follow the sun for produce, we follow the way that lamb comes on to the market. All of that happens, and we take all of that product that we commit to. What we want to do—let’s say the curve is upwards—is get all of that up so that more of our lamb is British and following that same availability. So there is not much wrong with our planning; our ability to get that product in is something that we are talking to the farmer unions and farmers about.

Chair

But take the period now—lambs start quite slowly in the spring, build up through the summer and you will have a lot of lambs finishing now into the autumn, so there is a lot of meat there. Just as the New Zealand lamb comes in at the start of their summer in December and January, there is still a lot of British meat around, and that is where there is a problem: you have got too much New Zealand in the shops and you have not got enough British. What are you going to do about it?

Tim Smith

The answer is actually in giving customers the best possible deal with the best quality lamb. So none of us is selling enough lamb. When we start our conversations with farmers, we always say, “Lamb seems to be losing out by comparison to all the other proteins. We might like it as customers and experts in meat, but how do we persuade British customers to return to their love affair with lamb?” That is the first thing. So let’s get the demand up, and then let’s have a relationship with the farmers that is pretty much as we see in other parts of the farming world, where they are very clear and we have a very transparent plan about what we are going to need in January, February and all the way through, and then we can fill the gaps where they say that they can produce to the same standard and specification that we demand. The standard does not change; the Tesco spec is the Tesco spec. So it is sometimes British and sometimes New Zealand, but we need to increase the demand and the transparency of what we actually need so that lamb producers know what they are targeting and what we are trying to do.

Chair

So as a Select Committee we need to say to the farmers, “You need to sit down more with the big retailers, and then you can expand the season and have more British lamb in there,” because that is what you are prepared to do.

Tim Smith

With respect, you do not need to say that to them, because that is exactly what we have been saying in meetings with lamb farmers for the last three or four months. We sat with Meurig Raymond round the corner not very long ago and said exactly this: “What is it in our planning that you would like to see? What transparency would give your members confidence that they can produce more British lamb and know that it is going to go to Tesco?” That is the plan that we are working on.

Chair

So when you come back here in a year or two’s time, you will have 75% or 80% British lamb and only about 20% from New Zealand.

Tim Smith

It will be more if farmers are able to respond to those market signals, and I do not doubt that they will. I am sure they will be able to do it.

Chair

As long as those market signals are not being driven down by all of you putting a lot of New Zealand lamb in your stores at a lower price to keep the price of British lamb down. Will you assure us that that will not be the case?

Tim Smith

That is not the role of New Zealand lamb import. That is not what it is there for.

Chair

It may not be its role, but it may be what happens in practice.

Angela Smith

I do not want to prolong this, but I am fascinated by the point about quality that Simon raised earlier. Mr Smith, you mentioned the Tesco spec. Can you briefly tell us what the spec is, because this is quite instrumental to the issue of quality? Is the same spec used for British lamb as for New Zealand lamb?

Tim Smith

The first thing to say is that there is no difference in the specification. Whether that is animal welfare or what happens to the animal in the process of slaughter and beyond, it is exactly the same. We buy from three lamb processors in New Zealand, and every one of those would have specifications and standards from us, and they would exceed them—as would the British ones, obviously. What you are really thinking about, in terms of the finished product and its specification and design, is the eating quality. What is it about specific cuts of the lamb? What is it about the breed? What is it about the feeding regime? It is all of that. What we are actually measuring with the farmers and processors is the outputs that we need for our customers to be satisfied that buying lamb versus chicken, pork or beef is the right thing to do. That is what specification is about.

Angela Smith

On that basis, are you suggesting that the New Zealand producers are better at producing the spec than British producers?

Tim Smith

No. From our point of view, the availability and the volume is the trigger. If we could get, at the same specification, the quantity of lamb that we are buying from New Zealand, more would come from Britain.

Angela Smith

Is it just that it’s cheaper and that Tesco can buy more in bulk?

Tim Smith

No.

Angela Smith

I must admit that I’m struggling with this, because the British lamb I buy is local and is absolutely superb. I would never buy New Zealand lamb, because the lamb I buy is absolutely brilliant. I just don’t get it. I think we are all struggling to understand why it is so difficult to transition. If it is about increasing demand, surely you will end up buying more New Zealand lamb to fill the gap. I am really struggling here.

Tim Smith

There are two things that have to happen in parallel. One is that we would prefer lamb to be more attractive to customers because we can sell the attributes of it. That is the market; it is not just a Tesco proposition. If you take the specification across the year, it should not alter. What we want is lamb that has a certain fat composition, has a certain appearance and is cut a particular way, and the specification that we have—our customers are the ones who make the determination—means that, with the same availability, we could not buy all that across the 12 months. The Chair has already said it, and Judith said it, too: the way that the cycle works means that we have to lift up the edges of that supply curve. That is what has to happen, because with the type of lamb that comes into the market at the beginning, there isn’t very much of it and it doesn’t always meet the specification that we need for our customers.

Angela Smith

So in other words, it has too much fat on it?

Tim Smith

No, I didn’t say too much fat. It is not about a specific plus or minus; it is eating quality and the whole piece that leads you to make those buying decisions.

Chair

I accept your arguments for the beginning of the season, but at the end of the season there is a lot of British lamb around. That is where the New Zealand lamb is used to depress the price from now on—November, December, January, February. Are you saying that there isn’t enough British lamb around at that stage?

Tim Smith

That meets the specification. I would have to look at the detail weeks at a time, but the dialogue we are having with farmers is, “Are we misreading the quality and the availability?” If we are, it will allow us to make some very quick change.

Chair

We have laboured this, so perhaps give us some written evidence on it as well, please.

Chris Davies

To go back to some previous points, something got missed in translation. Could you give clarity on the fact that you were definitely offering British lamb, as well as New Zealand lamb, in your stores earlier this year and that those demonstrations and so on were incorrect?

Tim Smith

Honestly, we went back and looked at that, and in my reading of it there always seemed to be British lamb available. I would be interested to see the evidence coming the other way. I am not saying that I am going to be 100% right, but I am pretty certain that we always had some British lamb on sale.

Chair

I think you need to present us with a written statement on that, because somebody was wrong. If you can guarantee that there was British lamb, and say how much British lamb there was compared with New Zealand lamb, it would be interesting, because this point is very valid. It is no good throwing around that it was all the fault of the farming unions, or whatever, and that they misrepresented what was happening in Tesco. We need to know what did actually happen there and what you are going to do about it in future—that is more important.

Tim Smith

Sure.

Rebecca Pow

I know that I have only just come in, but I have often thought about this. We have such an innovative farming industry in this country, and we can do almost anything. One assumes that Tesco and the other stores do negotiate with the farmers to say, “This is where we have a gap. This is what we need. Could you produce it?” Do you do that?

Tim Smith

That is exactly what we’ve told you.

Chair

That is what we’ve been talking about, Rebecca.

Rebecca Pow

Okay, apologies; because I am sure with all the powers that be in innovation and science they could fill the gap.

Chair

In fairness, Sainsbury’s are saying that on lamb they have managed to do this. I think we would like to see other big retailers do it.

Alex Brown

We are in a slightly different position. We only buy in for three weeks of the year purely on one cut, clearly labelled, purely because we put it on a deal that we cannot sustain the volume at, of our own abattoirs; for 48 weeks of the year it is 100% British—and even in those weeks every other cut is British. It is purely bone-in leg, which is in store—

Rebecca Pow

So it is possible.

Alex Brown

For us—

Chair

That’s right; I am sorry, Tim, to get at you in particular, but you are the largest retailer in the country, and what you do with the stocking of British lamb would really make a difference to the overall market of lamb in the country, because of the sheer volumes, and that is key, really.

Rishi Sunak

Just to check, so that we make sure we have Sainsbury’s position clear, I thought on average you were at 60:40 British-New Zealand. Obviously, Tim, you are about 50:50, so it is not that—

Chair

Well, it is going in the right direction.

Rishi Sunak

It is not massively dissimilar; so you are 100% in season, I think is how you started.

Judith Batchelar

And we always have fresh British—

Rishi Sunak

I think a lot of you do.

Judith Batchelar

But not in great quantities because it is what we put on our counters and in our top-tier offer.

Rishi Sunak

But the right way to think about it is 60:40, 50:50, and essentially—

Alex Brown

95%-plus.

Rishi Sunak

There are a few weeks at the end.

Alex Brown

And if it’s got Morrisons on it it’s 100%.

Rishi Sunak

Just so we are clear about the range here.

Tim Smith

My precise number is 56:44.